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New Legislation Will Affect Traditional Estate Planning (Part I)
New tax rules that received Royal Assent on December 17, 2014 will significantly impact past, present and future estate planning. This week we will address one change and next week, another, just to ring in the holidays on a cheerful note!
The new rules will significantly change the taxation of alter ego trusts, joint partner trusts and testamentary spousal / common law partner trusts, after 2015 (even if they were created prior to 2016). We last discussed alter ego trusts in Tax Tip 10-29 and previously discussed the tax implications upon death of the spouse or the last to die spouse in Tax Tip 10-16.
The current rules deem these trusts to have disposed of their assets on the date of the death of:
Currently, each of these types of trusts report the deemed disposition and include such income or loss at the end of the affected taxation year. The new rules will deem the affected trust(s) to have a new taxation year end at the end of the day of death.
In addition, the affected trust will be deemed to have paid out the income (including the deemed dispositions referred to above) to the deceased individual. Accordingly, instead of being taxed in the trust, the income from the deemed disposition and other items will be included in the deceased’s final income tax return instead of the trust’s.
What does this mean? Most notably, it means the deceased’s estate will be required to pay the tax instead of the trust (although the trust will be jointly and severally liable for the payment of the tax).
These changes are significant and traditional estate planning will now have to be reconsidered. For example:
The Joint Committee on Taxation (of the Chartered Professional Accountants of Canada and the Canadian Bar Association) as well as STEP Canada raised these issues with the Department of Finance when the new rules were first proposed. At the Canadian Tax Foundation’s recent Annual Conference, the Department of Finance acknowledged the concerns but stated that no changes will be forthcoming. With the granting of Royal Assent to the unadjusted rules, this statement has been confirmed.
Stay tuned. There’s more to come next week.
TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.
The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.