2014 New Testamentary Trust Rules

Transcription

1 2014 New Testamentary Trust Rules September 13, CCPAA Annual Conference Armando Minicucci Principal, Succession and Estate Planning Grant Thornton LLP t Grant Thornton International Ltd. All rights reserved.

2 2014 Federal Budget Proposed Changes June 3, 2013 Finance commenced a consultation process: "some taxpayers are using estates and trusts to obtain unintended tax advantages. Eliminating the tax benefits of graduated rate taxation for trusts and certain estates would ensure increased fairness and neutrality in the federal income tax system." 2

3 2014 Federal Budget Taxation of Trusts New rules seek to: Eliminate the graduated tax rates for testamentary trusts with the exception of estates that are within the first 36 months of the individual's death (the new "graduated rate estates"); a qualified disability trust (a beneficiary is eligible for the disability tax credit). Eliminate the graduated tax rates for grandfathered (June 18, 1971) inter-vivos trusts. Eliminate the application of graduated tax rates to multiple testamentary trusts created by the deceased's will. 3

4 2014 Federal Budget Taxation of Trusts New rules seek to: Loss of certain special tax treatments for non-graduated rate estates: exemption from instalment rules [para (2)(c)]; an exemption from calendar taxation year [ss. 249(4.1)]; basic alternative minimum tax exemption ($40,000) [s ]; classification as a personal trust regardless how beneficial interest in trust acquired [s. 248(1)]; and making ITCs available to beneficiaries [s ]; 4

5 Graduated Rate Estate Defined [s.248(1)]: An estate that arose on the consequence of an individual's death, if that time is no more than 36 months after the death and the estate is at that time a testamentary trust. There can only be one graduated rate estate in respect of a deceased individual. The estate must designate itself, in its T3 return for its first tax year as the deceased's graduated rate estate; No other estate can have been designated; The estate must include the deceased's social insurance number it its T3 filings for each year that ends after

6 Qualified Disability Trust Defined [ss.122(3)]: A testamentary trust created by a deceased's will. The trustees jointly elect with one or more of the beneficiaries in its first T3 filing to be a qualified disability trust. The election must include each electing beneficiary's social insurance number. Electing beneficiaries can not elect with any other trust to be a qualified beneficiary trust. Trust must be resident in Canada. The trust must not be subject to the Recovery Tax in paragraph 122(1)(c). Recovery Tax applies to an earlier tax year if: Trust ceases to have an electing beneficiary. Trust ceases to be resident in Canada, and Trust distributes capital to a non-electing beneficiary. 6

7 2014 Federal Budget Tax Rates Non-Graduated Rate Estates A resident of Ontario can save approximately $26,000 on the first $220,000 of income by having access to the graduated tax rates. In fact, $25,000 of the savings comes from the first $150,000 of taxable income. Tax bracket: 0 - $32,910 $32,911 to $42,120 Over $42,120 Other income 42.16% 44.79% 49.53% Eligible dividends 23.65% 27.29% 33.82% Non-eligible dividends 31.44% 34.54% 40.13% 7

8 2014 Federal Budget Loss of Non-Calendar Taxation Year Only a graduated rate estate may continue to have a non-calendar taxation year. New subsection 249(4.1) will: Deem all existing trusts created by will to have a year-end on December 31, 2015; except estates in existence where the deceased died less than 36 months prior to December 31, 2015 (i.e. the deceased died in either 2013, 2014 or 2015). All estates created after 2015, will have a deemed taxation year at the first time that it is no longer a graduated rate estate (36 months following the date of death). 8

9 2014 Federal Budget Loss of Non-Calendar Taxation Year Example: Individual passes away on May 5, 2016 Taxation Year # Start End 1 May 6, 2016 May 5, May 6, 2017 May 5, May 6, 2018 May 5, May 6, 2019 December 31,

10 2014 Federal Budget New Testamentary Trust Rules Effective Dates Instalment requirement for all non-graduated rate estates applies to the 2016 and subsequent taxation years. Testamentary trusts without calendar year end - deemed taxation year end on Dec 31, Graduated rate estates come into effect on December 31, The loss of graduated rates for existing testamentary trusts is effective for the 2016 and subsequent taxation years. 10

11 2014 Federal Budget Existing Testamentary Trusts Benefits of keeping testamentary trusts alive: Maximize access to income tested benefits, i.e. Old Age Security, sales and property tax credits. Provide support for disabled beneficiaries without jeopardizing provincial social assistance benefits. Benefit from the savings of the Ontario surtax. Maintain control of trust assets; manage the spendthrift beneficiary. Shield trust assets from the beneficiary's creditors. Capital growth for minor beneficiaries while sprinkling of income to beneficiaries with lower tax rates. 11

12 Tax planning New Testamentary Trust Rules The objective Select a year-end for a new estate to get one additional year at graduated tax rates. 12

13 Tax planning New Testamentary Trust Rules The solution: Select initial first year-end of estate to be less than one year - for example: Date of death Taxation year-end on Taxation year-end on December 6, 2013 anniversary of death Dec 31, 2013 First tax year Dec 7, 2013 to Dec 6, 2014 Dec 7, 2013 to Dec 31, 2013 Second tax year Dec 7, 2014 to Dec 6, 2015 Jan 1, 2014 to Dec 31, 2014 Third tax year Dec 7, 2015 to Dec 6, 2016 Jan 1, 2015 to Dec 31, 2015 Fourth tax year Dec 7, 2016 to Dec 6, 2017 Jan 1, 2016 to Dec 31,

14 Tax planning New Testamentary Trust Rules The benefits One extra year at graduated rates Why this works? The definition of graduated rate estate defines such a trust to exist for the 36 months after the death of the individual. In both examples the period after death does not exceed 36 months. In the solution, we have permitted one additional tax year, i.e. one additional access to graduated tax rates. 14

15 Questions 15

16 Disclaimer: The information contained herein is prepared by Grant Thornton LLP for information purposes only and is not intended to be either a complete description of any tax issue or the opinion of our firm. Changes in tax laws or other factors could affect, on a prospective or retroactive basis, the information contained herein. You should consult your tax adviser to obtain additional details and to discuss whether the information in this presentation applies to your specific situation. 16