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Trust Graduated Tax Rates - Beginning of the End 

Canadian Tax Adviser

June 04, 2013

 

Brian Mustard
Montreal, International Corporate Tax

 

Tonia Jones
Kingston, East

 

The Department of Finance has invited interested parties to submit their comments on its proposals to eliminate the tax benefits that arise from among other things, taxing testamentary trusts and certain estates at graduated tax rates. Finance proposes to tax estates at a top marginal tax rate starting 36 months after the relevant individual's death. Finance proposes that these changes take effect for the 2016 and later taxation years.

The proposals will also make other technical changes including, among other things, to:

 

  • Require that certain trusts make instalment payments
  • Remove the $40,000 basic AMT exemption from calculating certain trust's AMT payable
  • Restrict personal trust status.

 

Finance's consultation paper was released on June 3, 2013. The closing date for comments is December 2, 2013.

 

Background
In the 2013 federal budget, the government announced its intention to consult with stakeholders on possible measures to eliminate the tax benefits that arise from taxing at graduated rates trusts created by wills and estates (after a reasonable period of administration) and grandfathered inter vivos trusts.

 

Finance noted that the graduated tax treatment creates issues about tax fairness and neutrality when compared to the tax treatment received by beneficiaries of ordinary inter vivos trusts and taxpayers receiving equivalent income directly. Finance also noted that tax planning opportunities associated with the availability of trust-level graduated rates include the use of multiple testamentary trusts, tax-motivated delays in completing the administration of estates, and avoidance of the Old Age Security Recovery Tax (i.e., clawback).

 

See TaxNewsFlash-Canada 2013-10 "2013 Federal Budget Highlights" for details on the 2013 federal budget.

 

Proposed measures

 

Graduated rates - Finance will amend the income tax rules to apply flat top-rate taxation to trusts created by will and grandfathered inter vivos trusts. In addition, Finance proposes a flat top-rate taxation to apply to estates ("flat top-rate estates") after a reasonable period of administration. In particular, a deceased individual's estate would be considered a flat top-rate estate starting immediately after the 36-month period that follows the individual's death. Estates of deceased individuals would therefore be eligible to retain, as testamentary trusts, access to graduated rates for up to the first 36 months of the estate's administration. These measures would apply to existing and new arrangements for the 2016 and later taxation years.

 

Trusts not affected by proposed measures

 

Trusts for the disabled and for minor children - The proposed measures would not change the preferred beneficiary election rules or the rules that apply to trusts for minor children.

 

Spousal trusts and common-law partner trusts - The proposed measures on graduated rates would not change the rollover rules that apply on the death of a spouse or common-law partner.

 

Related income tax rules
In addition to proposing a top marginal tax rate on certain testamentary trusts and grandfathered inter vivos trusts, Finance also proposes changes to how other tax rules should apply to trusts. In particular:

 

  • Income tax instalments
  • Alternative minimum tax (AMT)
  • Taxation year and fiscal period
  • Personal trust status
  • Investment tax credits
  • Tax administration rules
  • Part XII.2 tax.

 

For more information, contact your KPMG adviser.

 

 

 

 

Information is current to June 04, 2013. The information contained in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's National Tax Centre at 416.777.8500

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