If you are an executor, you have a pretty heavy job ahead of you. Working with an Estate and Trust planner, can you navigate and eliminate some of the pitfalls.
Recent amendments to the Income Tax Act have made fundamental changes to the tax rules for estates and wills. Lawyer’s , trustees, and financial estate planners should familiarize themselves with the new rules.
A general rule, all income from trusts is taxed at the tip individual tax rate of about 54%. There are a few exceptions to the top tax rate rules. Currently, the new legislation shifts the tax burden of a spousal trust to the estates of the surviving spouse. Fortunately, however, it appears that these provisions will be cancelled, as discussed later in this update.
TOP TAX RATE FOR TRUSTS
Formerly, testamentary trusts were taxed at a graduated rate, the first $40,000 of income was taxed at about 20 percent the next $30,000 at about 32%, and increasing to about 50%when income exceeded $220,000. Effective January 1,2016 , all trusts will be taxed at the top rate of about 54%.
TWO EXCEPTIONS
- The deceased estate for the first 36 months (this is called the GRE) or Graduated Rate Estate
- One trust per year for an individual who qualifies for the Disability tax credit (this is called the Qualified Disability Trust , or QDT)
QDT Rules
These rules are complex. Simplification for the purposes of this piece, means, the accumulated tax savings enjoyed during the QDT qualification period are in essence clawed back, when the disabled individual dies or ceases to quality for the DTC. In order to realize the savings , the income must be distributed to the disabled beneficiary before the year of death. Without the assistance of a qualified planner, this could damage the relationship with provincial benefits. There are some new tax planning tools that can elevate this situation, but in order to be able to take advantage, very detailed planning must take place.
GRE Rules
The graduated estate tax rules are also some what complex.
Firstly, the estate must designate itself as a GRE. If the estate ceases to qualify as GRE, it losses it status for tax filing purposes. Consequently, charitable donation credits and deductions for losses of the estate may be lost and the top tax rate will apply. This can have serious consequences for the estate and in some cases can result in double tax, in particular where shares of a private corporation ae held by an estate.
A GRE, can lose it status before the 36 months if the estate received contributions from persons other than the deceased, including certain loans or loan guarantees made by non-arm’s length persons.
Dual Wills
Dual wills for owners of private corporations are now common. The CRA has indicated that it intends to treat what are often referred to as a primary and secondary estates in these dual wills, as on graduated rate estate. As a precaution, it is advisable to address this issue specifically in the will to indicate the intention to direct the estate trustee to designate both estates as being one graduated rate estate. It is also prudent to name the same person as estate trustees of both estates.
Possible Cancellation of Taxation Shifting Provisions
In January the Department of Finance introduced draft legislation that effectively cancels new provisions shifting the tax burden on the death of a surviving spouse from a spousal trust to the surviving spouse’s estate. This in effect , leaves the beneficiaries of the spousal trust with the tax burden.
There are some very interesting estate and tax regimes that can help with the complexity set out in the different issues. There is no getting away from paying tax, but there are good planning strategies that can defer and minimize the burden on the surviving executors and trustees.
Debbie Hartzman.CFP.CLU.CDFA.TEP.RRC
Professional Investments