The Canadian government is looking to end the preferential tax treatment of testamentary trusts, exposing these entities to the same top-rate taxation rates that currently apply to inter vivos trusts.
The Department of Finance released a consultation paper earlier this week outlining in detail its proposals for the elimination of graduated rate taxation of testamentary trusts and certain estates, and sought submissions from interested parties.
The government had indicated in the March federal budget that it was interested in reviewing the use of graduated rates for testamentary trusts. It noted its concern with what it felt was the tax-motivated use of multiple testamentary trusts to take advantage of multiple sets of graduated rates.
Feds to review testamentary trusts
According to the paper, Finance is proposing to apply flat top-rate taxation to trusts created by will — i.e. testamentary trusts — and certain grandfathered inter vivos trusts – specifically, those created before June 18, 1971. Inter vivos trusts created after 1971 are currently taxed at the top taxation rate.
In addition, the government is proposing to apply flat top-rate taxation to a deceased individual’s estate, which is itself a testamentary trust created on death, after a reasonable period of administration. The government is defining this as the 36-month period following 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,” the consultation paper outlines.
The government is proposing to apply the new rules to existing and new arrangements for the 2016 and later taxation years.
Michael Friedman, a tax lawyer and partner with Toronto-based McMillan LLP, says that the proposed changes show that the government is intent on scaling back significantly taxpayers’ access to multiple graduated rates through the use of testamentary trusts.
“The government has basically said, ‘We don’t like the tax planning that involves people creating multiple trusts on their death and we want to tax those immediately at the top rate. And with respect to base estates, we want there to be an incentive for estates to be administered and wound up fairly quickly’, ” Friedman says.
Testamentary trusts are trusts that are created as a result of the death of an individual, as opposed to inter vivos trusts, which are created during an individual’s life.
The government’s consultation period will end December 2.