Significant changes to the taxation of trusts and estates

Significant changes have been made to the taxation of trusts and estates that may have a major impact on your tax and estate planning. This bulletin highlights the main tax planning considerations now required to deal with these recent changes.

1. Only an estate which meets the definition of a “Graduated Rate Estate” will be eligible for graduated income tax rates starting January 1, 2016. A “Graduated Rate Estate” is a testamentary trust (i.e. a trust arising as a consequence of death) that is specifically designated and that has not been in existence for more than 36 months. If an estate qualifies as a “Graduated Rate Estate,” it can save you up to $32,000 in taxes per year. The wording in your will may need to be amended to ensure that your estate can benefit from these tax savings.
2. Testamentary trusts that arise out of your estate will generally be subject to the highest rate of income tax on every dollar earned. If your sole objective in establishing testamentary trusts in your will was to multiply the potential tax savings by creating many trusts eligible for graduated income tax rates, you may wish to reconsider and provide outright bequests instead. There still remain many valid nontax reasons for the creation of testamentary trusts and these may need to be reviewed.
3. Alter ego, joint partner and spousal trusts generate a deemed disposition of their assets when you or the second spouse dies. Under the previous rules, the income tax on any gain realized at that time was paid by the trust. Now any capital gains will be attributed to your or your spouse’s final tax return, and the responsibility for the tax will generally belong to the deceased’s estate and not the trust. Adequate plans for funding this tax need to be put in place. This can be of particular concern for second marriages and blended families to ensure that the tax is borne by the appropriate beneficiaries.
4. Donations of marketable securities to public charities can eliminate capital gains tax for your estate. New changes restrict this benefit to “Graduated Rate Estates” only. Therefore, you need to review your will(s) to ensure your post-mortem donation plans will still be effective.
5. The donation rules have become more flexible but also more complex starting January 1, 2016. Donations specified in your will can be claimable only when the gift is completed by your estate. The tax benefit will generally be claimed on your final return, the return for the year before your death, or any of your estate’s tax returns if made by a “Graduated Rate Estate”. However, there are situations now where the donation tax credit may go unused based on the new rules. A review of your donation planning is vital to ensure that the maximum desired tax savings will still be achieved.
6. If you own shares of private corporations, tax planning is usually undertaken after death to avoid double taxation. Typically this may involve a redemption of shares or a wind-up of your corporation. The new rules can eliminate the effectiveness of these strategies unless you structure your will appropriately. As your corporation may be your largest asset, thousands of dollars of tax could be at stake.
7. You may have previously filed a tax election to tax income in your trust at lower tax rates in another jurisdiction or in a testamentary trust. This election is effectively eliminated unless your trust has losses. You will need to plan for the additional tax that will apply.
8. The new rules allow for a “Qualifying Disability Trust” to be established for a disabled beneficiary. This type of trust will still be able to benefit from lower graduated income tax rates during the lifetime of the disabled beneficiary. Ensuring that your will contains appropriate provisions to establish one of these trusts should now be considered if you plan to make a bequest to a disabled beneficiary.
9. The Ontario Estate Administration Act now requires an executor to file a tax return disclosing the assets subject to Estate Administration Tax (i.e. probate fees) and their fair market value. Assets put into joint names may no longer escape the tax. Alternative arrangements, such as alter ego trusts or corporate bare trustee arrangements, may need to be considered.

Please note that this publication should not be considered a substitute for personalized tax advice related to your particular situation. We strongly recommend that you discuss these changes with your Crowe Soberman advisor to ensure that your existing planning continues to be appropriate.

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This article was prepared by Karen Slezak and Aaron Schechter who are both partners in Crowe Soberman's Tax Group. If you have any questions relating to this article, we encourage you to contact them.

This article has been prepared for the general information of our clients. Specific professional advice should be obtained prior to the implementation of any suggestion contained in this article.