Federal government moves to eliminate value of testamentary trusts
Starting in 2016, the federal government wants to effectively abolish testamentary trusts, a common estate planning technique that allows Canadians to reduce tax on the investment income earned from their assets, by their beneficiaries, after their death.
This type of arrangement allows one person, typically known as the estate trustee, to hold and manages the deceased's property for the benefit of someone else, known as the beneficiary, explains Jamie Golombek, who runs CIBC's estate planning unit.
Right now, testamentary trusts and estates pay federal tax at graduated tax rates starting at 15% federally for income under $43,561 (in 2013) and ultimately rising to 29% once income reaches about $135,000. Each province then takes its own proportional cut.
But it's still a great deal, since trusts are not that dificult to establish and are used extensively by advisors.
Allowing testamentary trusts to pay tax at graduated rates effectively allows the beneficiaries of those trusts to access more than one set of graduated rates - their own and that of the trust.
The tax savings can exceed $20,000 annually, depending on the province, when income is taxed in a testamentary trust instead of perhaps in the hands of a high-income beneficiary had they inherited the funds directly and subsequently invested them, Golombek explains.
But that's likely to come to an end. The government is concerned “taxpayers are using estates and trusts to obtain unintended tax advantages.”
“Eliminating the tax benefits of graduated rate taxation for trusts and certain estates would ensure increased fairness and neutrality in the federal income tax system. The proposed measures would also address the potential growth in tax planning involving existing rules and the associated impact on the tax base,” says the Department of Finance.
Not sure you agree? Comments on the proposals may be submitted to the Department of Finance at firstname.lastname@example.org. The closing date for comments is December 2, 2013.
By Gordon Powers, MSN Money