February 9 2016
Testamentary Trusts Lost Some of Their Shine on January 1, 2016
On January 1, 2016, several new rules applicable to trusts came into force. Can any of these new rules affect you?
If you had planned one or several trusts in your will, they have now lost a major advantage: instead of the graduated tax rates, applicable to personal income and – in the past – trusts, trusts shall now be taxed at the top marginal tax rate. The combined federal and provincial rate goes up to 53.31%. Only estates, which are also a type of testamentary trust, can benefit from graduated rates, but only for a 36-month period. After this period, the estate’s income is taxable at the top marginal rate, like any other trust.
If your estate planning included a spousal trust, be advised that this type of trust has also lost its graduated tax rate advantage.
Established spousal trusts should be reviewed, as any income is now deemed payable to the deceased in the year of his or her death. What this new rule means for the beneficiary of the spousal trust is that he/she could have to bear the tax burden in his/her last tax return. For example, if the trust capital is allocated to the children of a first marriage, the spouse’s estate will have to pay the taxes applicable to this capital that he/she did not receive. In the case of blended families, it may be advisable to have the trust bear the tax burden. In that case, a specific statement in the will could be a solution.
- The $40,000 basic exemption from the alternative minimum tax is no longer available to trusts since January 1, 2016;
- Trusts can no longer allocate investment tax credits to their beneficiaries; and
- Tax instalments are now required of trusts as of January 1, 2016.
Although trusts still offer benefits for tax planning as well as protection from a civil perspective (asset and heir protection), the changes in effect since January 1, 2016, will have an impact on the role trusts play, particularly in estate planning. Do not hesitate to contact one of our tax experts to know more about these rules and assess the possibility of reviewing your tax and estate planning.
Note 1:Rate applicable to interest, business and other income. For capital gains, the combined top marginal tax rate is 26.65%: 43.84% for non-eligible dividends and 39.83% for eligible dividends.