Trusts and Estates Proposals: Little Consultation but More Information

The consultation paper on graduated taxation for trusts and estates, which was promised in the 2013 budget, was released on June 3. It contains several new details on the budget proposals. Comments are invited until December 2, 2013. However, there is no list of questions or any indication of the topics on which Finance is seeking comments; the measures seem clearly defined as they stand.

Certain estates and trusts created by will (testamentary trusts) and inter vivos trusts created before June 18, 1971 (grandfathered inter vivos trusts) compute federal income tax on taxable income using the graduated tax rates applicable to individuals (subsection 104(2)). Other trusts (ordinary inter vivos trusts) are subject to flat top-rate taxation--that is, they pay federal tax at a flat rate of 29 percent, which is the highest federal tax rate for individuals (subsection 122(1)). The budget proposed eliminating the tax benefits that arise from taxing at graduated rates grandfathered inter vivos trusts, trusts created by will, and estates (after a reasonable period).

The consultation paper provides several new details:

  • The new rules will apply to existing and new arrangements for the 2016 and later taxation years. This unexpected delay for new arrangements is taxpayer-favourable, but the lack of full grandfathering of existing arrangements is a surprise.

  • There will be no changes to the preferred beneficiary election, the trust rules for minor children, or the rollover on the death of a spouse or common-law partner.

  • The "reasonable period" after which estates will be subject to flat top-rate taxation is 36 months after the individual's death. A deemed year-end occurs at that time. An estate in existence after that time will be called a flat top-rate estate.

  • Quarterly tax instalments are required for testamentary trusts and flat top-rate estates, where applicable.

  • The basic exemption of $40,000 for alternative minimum tax afforded to grandfathered inter vivos trusts, trusts created by will, and flat top-rate estates is eliminated.

  • Trusts created by will and flat top-rate estates are no longer allowed to have off-calendar year-ends.

  • Trusts created by will and flat top-rate estates are no longer exempt from part XII.2 tax under subsection 210(2).

  • Trusts created by will and flat top-rate estates are no longer able to flow out investment tax credits to their beneficiaries.

  • Changes are proposed to current administrative policies that ordinarily would apply only to individuals but administratively were extended to testamentary trusts.

As was apparent from the budget, the intention of the proposed measures is twofold: (1) to discourage the use of testamentary trusts for tax planning and (2) to remove any legislative or administrative advantages that were previously extended to testamentary trusts. Specific plans targeted by this measure, as reported in the budget, are the settling of multiple testamentary trusts on the death of an individual, delaying the windup of the administration of an estate, and avoiding the Old Age Security Recovery Tax. The consultation paper provides no further details about these perceived abuses.

One would have hoped for more details on why Finance wants to remove the grandfathering of the 40-year-old group of grandfathered inter vivos trusts created in 1971 and previous years. Ironically, the present tax treatment of trusts stems from that time; the 1966 report of the Royal Commission on Taxation (vol. 4, ch. 21, p. 157) proposed measures "to impose tax on trusts at equitable rates and to prevent the use of trusts to avoid or defer payment of tax," a project that seems to be continuing today.

Riaz S. Mohamed
Moodys LLP, Calgary

Canadian Tax Focus
Volume 3, Number 3, August 2013
©2013, Canadian Tax Foundation