On December 16, 2014, Bill C-43, Economic Action Plan 2014 Act, No. 2, received royal assent. This Bill implements certain tax measures that were in the 2014 federal budget, as well as a few additional amendments to the Income Tax Act that were not previously announced in the budget. Some of the significant changes that will impact estate planning going forward are discussed below.
- Testamentary trusts will no longer have access to graduated rates of taxation and instead will be subject to tax at the highest marginal tax rate. An exception will be made for “graduated rate estates” (essentially, most estates for the first 36 months) and “qualified disability trusts”. These proposals were first announced in the federal government’s 2013 budget, and were discussed in an earlier post.
- There will be increased flexibility that will allow donation tax credits to be used by either the deceased (in the year of death or the prior year) or the estate (in the year the charitable gift is made, an earlier year or the following five years). We discussed these changes in an earlier post here.
- The income or gain arising from the deemed disposition of the assets of an alter ego trust, spousal trust or joint spousal trust (which occurs on either the death of the settlor, spouse or surviving spouse, depending on the type of trust) will now be taxed in the deceased beneficiary’s terminal tax return, rather than in the trust. The trust and the deceased beneficiary’s estate will be jointly and severally liable for the payment of the tax, but it is unclear whether the Canada Revenue Agency will assess the trust in all cases, or only where the estate is unable to pay the tax. These changes may be problematic where the deceased’s estate has insufficient assets to pay the tax liability (since the estate will have no right to the assets of the trust) or where the beneficiaries of the deceased’s estate are different than the beneficiaries of the trust (since the beneficiaries of the estate may be liable for the tax without getting any benefit from the assets in the trust).
The above changes will apply starting in the 2016 taxation year.