Taxation of Trusts and Estates in Canada: Tutorial May, 2016

Transcription

1 Taxation of Trusts and Estates in Canada: Tutorial May, 2016 Wendy D. Templeton, B.A., J.D., CFP, TEP BASMAN SMITH LLP 1 Dundas Street West, Suite 2400, Box 37 Toronto, ON M5G 1Z3 Phone: wtempleton@basmansmith.com Society of Trust and Estate Practitioners (Canada) Page 1

2 Agenda May 2016 Updates: US Estate and Gift Tax 2016 January 15, 2016 Proposals charities and life interest trusts Example of application of new trust rules Navigating the materials: Organisation Examples: capital gains and losses, compliance, non-resident beneficiaries, foreign law, charitable donations New Sample Exam Posted Tips for Exams and Conclusion Society of Trust and Estate Practitioners (Canada) Page 2

3 US Estate Tax US Gift Tax US ESTATE TAX THRESHOLDS $60,000US of US situs property must file US Estate Tax Return Even if no liability Must file to get Treaty Benefits, including Annual Exemption Amount and Marital Credit US Estate Tax Exemption Amount $5,450,000US US GIFT TAX THRESHOLDS Annual Exclusion Amount for gift to spouse: $148,000US Annual Exclusion Amount for other recipients: $14,000US Society of Trust and Estate Practitioners (Canada) Page 3

4 Proposed Changes January 15, 2016 LIFE TENANT S ESTATE NO LONGER PAYS TRUST TAX Changes to 2016 regime for Life Interest Trusts NEW Rules 2016 Applicable to Life Interest Trusts ONLY apply to AET, JPT, and QST On death of life tenant Deemed year end on death of life tenant AND All income for resulting stub period deemed payable to estate of life tenant PROBLEM shifting tax liability to a different taxpayer January 15, 2016 propose to abandon this latter change except upon election available only for death of life tenant in Still have deemed year end Society of Trust and Estate Practitioners (Canada) Page 4

5 Proposed Changes January 15, 2016 EXTEND WILL DONATIONS DEADLINE FROM 36 TO 60 MONTHS Charity Rule changes 2016 to Gifts in Will Pre 2016 deemed made by deceased prior to death and available only in terminal return, or if not fully exhausted in prior year Post deemed made by GRE when estate transfers property to charity Rules for use year made, prior year of GRE, terminal return, or if exhaust tax in terminal return, prior year Regular 5 year carry-forward also applies Because must be GRE, and only GRE for 36 months, this gave a 36 month deadline after date of death for estate to pay the donation Proposal if estate was a GRE, 36 month period for completing the gift by will extended to 60 months Society of Trust and Estate Practitioners (Canada) Page 5

6 Proposed Changes January 15, 2016 Problem with deemed year end AET, JPT, QST These life interest trusts now have a year end on death of life tenant Gift to charity in trust on death of life tenant cannot be made until after death Before 2016 if made gift in same tax year could use Charitable Donation Tax Credit to reduce tax on deemed disposition With deemed year end, could never match the CDTC to the tax Proposed changes gift can be made within 90 days after end of calendar year in which life tenant died Society of Trust and Estate Practitioners (Canada) Page 6

7 Testamentary Spousal Trust for Emily George dies $4million of preference shares in Widgets ($4million unrealised gain) Investments worth $2million $1.5million ACB Emily: gets home (joint wros) and the RRIF (beneficiary designation) Will provides a trust for Emily for her lifetime All income payable to Emily Right to encroach on capital for Emily only with restrictions On Emily s death gift over to children and children s family trusts Society of Trust and Estate Practitioners (Canada) Page 7

8 Tax Treatment of Trusts in George s Will All Three Trusts Testamentary as a result of death of an individual Only Estate is Graduated Rate Estate GRE - GRADUATED RATES Marginal rates, choice of year end YE YE - within first 12 months of George s death - deferral advantages Trust for Emily is a Qualifying Spousal Trust ss. 70(6) HIGH RATES Rollover on George s death - capital gains deferred 21 year rule does not apply during Emily s lifetime Deemed disposition on Emily s death shift tax liability on Emily s death ABORTED Jan 15, 2016 NEW deemed year end on Emily s death, 104(13.1/2) election limited Children s Family Trusts HIGH RATES Effective to income split with other family members not with trusts Society of Trust and Estate Practitioners (Canada) Page 8

9 Requirements for QST? During lifetime of spouse ss. 70(6) or 73(1)(1.01): Spouse must be entitled to receive all income and no one other than the spouse can receive or otherwise obtain the use of any of the income or capital of the trust For Testamentary QST Trust must be created in the Will Property must vest in the trust within 36 months NOTE RE AET s, JPT s and QST s These are the life interest trusts referred to and are unique Death of life tenant - deemed year end and deemed disposition Income and capital requirements repeat for all Qualifying Life Interest Trusts re the life tenant Society of Trust and Estate Practitioners (Canada) Page 9

10 Tax Treatment 2016 Trust for Emily is a Qualifying Spousal Trust Still get rollover on George s death deemed disposition on Emily s death Death of spouse creates a tax year end for the trust NEW BUT ABORTED: All income for year of death including that from the deemed disposition taxable in the terminal return of the spouse January 15, 2016 proposed to make this treatment elective for 2016 only Otherwise just a bad dream Consequences were draconian disrupt planning esp. blended families funding to pay tax shifted joint and several liability not a sufficient remedy What if 2 nd marriage and trust already in place? Society of Trust and Estate Practitioners (Canada) Page 10

11 New Tax Consequences 2016 Estate is a Graduated Rate Estate for 36 months Lasts for 36 months after date of death choice of any year end within first 12 months of George s death Entitled to marginal rates Deemed year end 36 months after death All Trusts No election to pay beneficiary estate ant tax income in trust except to absorb losses - only impacts estate where graduated rates Spousal Trust and Children s Trusts No marginal rates Year end is calendar year Income sprinkling with children s family trusts still effective tax planning Society of Trust and Estate Practitioners (Canada) Page 11

12 Anatomy of George s Estate Plan George dies July 1, 2014, Estate choses April 30, 2015 as first year end. Estate, as GRE will have marginal rates and year ends on April 30, 2015, 2016, and on April 30, It will have a deemed year end on July 1, 2017 when it ceases to be a GRE. It will then revert to calendar year ends and have marginal rates. So in 2017 it will have 3 year ends! But Emily s trust will have calendar year end, whenever it is established. No access to marginal rates for Emily s trust All income payable to Emily No election to tax trust Important, for the first time, to distinguish between the estate, and a trust created in the Will. May delay establishing the spousal trust during GRE period. Society of Trust and Estate Practitioners (Canada) Page 12

13 Navigating the Materials Course materials are organised by chapter headings One topic may fall into many different chapters Outline of Chapters: 1-3 are introductions 1. Tax law general principles, 2. Individuals, 3. Capital Gains basics to be expanded later 4, and 6 introduction to tax rules for Trusts and Estates 5 and 7 specific rules relating to terminal return, and trust return 7, 8, 9, and 10 - tax planning 11 compliance 12 foreign law Society of Trust and Estate Practitioners (Canada) Page 13

14 Navigating the Materials Taxation of Non-Residents non-resident beneficiaries of Canadian trusts or estates Section 6.7 DISTRIBUTIONS TO NON-RESIDENT BENEFICIARIES But also see the Neverland Trust return Lost Boy 2 is a non-resident Appendix to Chapter 5 T3 Trust return Also referred to in exceptions to rollover on trust distributions Capital Gains Chapter 3 provides only the basics Chapter 4: rollovers and deemed dispositions relating to transfers to trusts and distributions of capital property; flow through rules re capital gains and CGE; Ch. 7 deemed dispositions on death Ch. 10 using the CGE, estate freezing Society of Trust and Estate Practitioners (Canada) Page 14

15 Navigating the Materials Charitable Donations Chapter 2 general rules for individuals under Non-Refundable Tax Credits refers to Chapter Charitable donations by Trusts and Estates Chapter charitable donations in the year of death and new 2016 rules Chapter 7 - also contains rules for donations of shares even though these rules are not unique to trusts and estates here as a planning point to consider donations in kind of securities to get zero rated capital gains Compliance Chapters 5, 7, and 11 deal with filing and tax payable deadlines Society of Trust and Estate Practitioners (Canada) Page 15

16 New Rules 2016 Text has been updated, but still reflects transition Pay special regard to 2016 changes in text these are examinable. Tax Tutorials November 2014, May 7, 2015, Nov 2015 should review MAIN HEADINGS FOR CHANGES Testamentary Trusts Graduated Rate Estates Spousal and Common Law Partner Trusts Qualifying Spousal Trusts (QST), Alter Ego Trusts (AET), Joint Partner Trusts (JPTs) ANY TRUST new 104(13.3) use of the 104(13.1)(13.2) election to tax income in the trust - restricted to loss utilization Charitable Donations Society of Trust and Estate Practitioners (Canada) Page 16

17 Tax Tips for Exams and Conclusion Exam Tips and Review - See prior tutorials starting with most recent You will not be examined on the Jan. 15, 2016 proposals New Practice Exam represents exam style 10 True/False Shorter answer questions Some long fact situations with multiple questions Exam writing tutorial Allocate time wisely Please answer the question and all its parts review and reread the question to check you haven t missed something Questions can be submitted Good Luck Society of Trust and Estate Practitioners (Canada) Page 17