STEP Tax Tutorial Taxation of Trusts & Estates in Canada November 5, 2014 Wendy D. Templeton, B.A., LLb., CFP, TEP Barrister & Solicitor 480 University Avenue Suite 700 Toronto, ON M5G 1V2 Phone: 416 551-0442 Cell: 647 388-3224 wtempleton@templetonlaw.ca Society of Trust and Estate Practitioners (Canada) Page 1
Agenda Budget 2014: Update on Testamentary Trusts Update on Gifts made by Will Changes to IV Qualifying Spousal trusts, AET s JPT s Evil Trusts and 75(2) Exam Tips Questions Society of Trust and Estate Practitioners (Canada) Page 2
Testamentary Trusts New regime commencing 2016 Testamentary trusts lose their unique tax benefits Become Flat Rate Trusts and all IV rules apply Society of Trust and Estate Practitioners (Canada) Page 3
IV Trust Rules now apply after 36 months No marginal rates Tax installments Calendar year end No $40,000 exemption for ATM Part XII.2 Tax applies (relevant where certain distributions to non-residents) Society of Trust and Estate Practitioners (Canada) Page 4
Testamentary Trusts - Grandfathered 1. GRE graduated rate estate for 36 months after death of individual Only GRE one per deceased individual Might affect filing optional returns Questions about using multiple wills Applies to estate, not trusts created under Will 2. Trusts for disabled beneficiary One beneficiary must be entitled to disability tax credit Society of Trust and Estate Practitioners (Canada) Page 5
Transitional Rules Existing testamentary trusts beyond 36 months will have deemed year end on December 31, 2015 Trusts with 36 months after 2015 will have deemed year end on 36 month anniversary and next December 31 resulting in two year ends and two tax returns for that year Important to distinguish between estate and trust created in Will Society of Trust and Estate Practitioners (Canada) Page 6
Are Testamentary Trusts Dead? Most tax benefits have been eliminated BUT NEED TO PROTECT continues succession of property after death of a life tenant Provide financial control over inheritance Preserve provincial disability benefits Manage an asset for a group of beneficiaries Society of Trust and Estate Practitioners (Canada) Page 7
Effect on Testamentary Spousal Trusts Income splitting motivation with spousal testamentary trusts is eliminated 36 month estate rules not sufficient benefit and new s. 104(13.4) may preclude But other benefits of spousal trusts Controlling succession, second marriage remarriage Vulnerable spouse Defer Tax Rollover - Control shares of corporation passing to children but deferring tax until death of last to die Society of Trust and Estate Practitioners (Canada) Page 8
Effect on Discretionary Testamentary Trust Planning Alive and Well! Use trusts to sprinkle income or allocate income to low rate beneficiaries Don t get marginal rates in trust, but use marginal rates of beneficiaries Family trusts still good income splitting Children, other issue, their spouse or CL partner Society of Trust and Estate Practitioners (Canada) Page 9
Effect on Multiple Trusts Minister discretion to treat multiple trusts as one under 104(2) if same settlor and same beneficiaries Rule limited access to multiple trusts getting access to multiple marginal rates No longer need to segregate beneficiaries in separate trusts in estate planning Society of Trust and Estate Practitioners (Canada) Page 10
Effect on use of AET s and JPT s May become more popular as Will substitutes Ongoing trusts after death of settlor (or last death spouse if JPT) were IV trusts No longer a factor Use these trusts to Avoid probate and its costs including probate tax Provide seamless transition through old age, incapacity, death and ongoing administration Society of Trust and Estate Practitioners (Canada) Page 11
Effect on Estate Practice Opportunity to discuss estate planning review and/or update with clients Dismantle spousal trusts Review existing family trusts to see if still appropriate Is the income splitting only with the trust Or, is there income sprinkling? Opportunity to introduce AET or JPT as Will alternate Society of Trust and Estate Practitioners (Canada) Page 12
New Rules for QST, AET, JPT New ss. 104(13.4) Deemed year end on death or later death of individual who is settlor or spouse last to die AND Income is deemed to be payable to the individual who was the last to die Society of Trust and Estate Practitioners (Canada) Page 13
New Rules for QST, AET, JPT Problems of funding tax liability Cannot make 104(13.1)(13.2) election to match funding and assets Collection 160 amended to create joint and several liability with estate and trust How does this affect the responsibility of the trustee of the trust and the personal representative? Drafting for new trusts but existing? Society of Trust and Estate Practitioners (Canada) Page 14
New Rules for QST, AET, JPT Problems with charitable donations at the end of a life interest? If no trust income, how to get benefit of credit? Problem: Donation would be made in a subsequent year Existing problem not solved: donations at end of life interest that are not discretionary as opposed to distributions of residue satisfaction of capital interest in a trust Society of Trust and Estate Practitioners (Canada) Page 15
New Rules for QST, AET, JPT May be able to get CGE if trust holds qualifying property? May be able to soak up income previously in trust to use losses of deceased? Collection 160 amended to create joint and several liability with estate and trust How does this affect the responsibility of the trustee of the trust and the personal representative? Society of Trust and Estate Practitioners (Canada) Page 16
New Donation Tax Credit Rules Commencing 2016 Gifts by Will can be used by Deceased in Year of Death YOD Preceding year if YOD income exhausted The GRE of the deceased Gift must be actually paid by GRE (i.e. 36 months) Estate gets 5 year carry forward Society of Trust and Estate Practitioners (Canada) Page 17
New Donation Tax Credit Rules Flexibility to match donation credit with income in deceased or GRE Unresolved: Donation credit may not be available if donation is upon the termination of a testamentary trust If from residue - considered a distribution in satisfaction of a capital interest in a trust Currently must have discretion to make the donation in order for it to qualify as a gift and get DTC Society of Trust and Estate Practitioners (Canada) Page 18
Evil Trusts, s. 75(2), and Sommerer Tax planning strategy Trust acquires shares from Corp A Trust uses funds contributed to trust by Corp B (or Corp B contributes shares directly) Corp B is beneficiary of trust Corp A declares dividend Dividend paid to individual beneficiary tax free Attributed back to Corp B tax free Conduit principle permitted Corp B to s. 112 deduction (inter-corporate dividends not taxable) Society of Trust and Estate Practitioners (Canada) Page 19
Evil Trusts, s. 75(2), and Sommerer FCA 75(2) does not apply to FMV sale of property to a trust by a beneficiary CRA has confirmed this at the Step 16 th National Conference CRA Roundtable Question 5 GAAR may apply to like schemes Society of Trust and Estate Practitioners (Canada) Page 20
Exam Tips tax changes There are two updates First came with materials chapters 5, 9 and 12 Second with chapters 4 and 12. Second updates the first chapter 12 update You are responsible for these Budget 2014 updates If any questions the new rules will be given Society of Trust and Estate Practitioners (Canada) Page 21
Exam Tips Don t panic Read the question Be methodical Answer each question Answer each part of every question Budget your time you have 180 minutes 1.8 minutes for every mark! A ten mark question deserves 18 minutes not an hour. Society of Trust and Estate Practitioners (Canada) Page 22
Exam Tips For the Nov 2014 exam May be questions with a lot of facts But questions are broken up Most information is there for a reason Remember this is a tax exam - not the trust exam Don t re-phrase the question give the answer and usually you need the reason or explanation i.e. the WHY as well as the WHAT Society of Trust and Estate Practitioners (Canada) Page 23
Conclusion Questions??? GOOD LUCK!! Society of Trust and Estate Practitioners (Canada) Page 24