More Changes to the Taxation of Testamentary Trusts
Traditionally, inter vivos trusts (those created by an individual during their lifetime) have paid tax at the highest individual income tax rates, whereas testamentary trusts (which are created by a will) have enjoyed taxation at marginal rates. The income earned with respect to testamentary trusts has traditionally been taxed on a separate tax return, and as such, many have used testamentary trust as a means to income split, significantly minimizing their overall taxes payable.
The Federal Government in its 2014 Budget was the first to propose changes to the taxation of testamentary trusts. Specifically, the 2014 Budget announced the elimination of the favourable tax treatment enjoyed by testamentary trusts, such that all trust income would be taxed at the highest marginal rates, and in a similar manner to the taxation of inter vivos trusts.
Draft Federal legislation was subsequently proposed in August, 2014 and was formally enacted in December, 2014, such that the changes would be effective at the Federal level as of January, 2016.
The 2015 Ontario Budget now proposes the implementation of these Federal legislative changes to the taxation of testamentary trusts at the Provincial level.
The changes would mean that testamentary trusts will be taxed at the highest marginal rate with only two exceptions:
a) Graduated Rate Estates (trusts arising as a consequence of the death of a testator rather than because expressly provided for by the terms of a will) would still be taxable at marginal rates, for the first 36 months after the testator’s death; and
b) A Qualified Disability Trust, i.e. a testamentary trust with a beneficiary who qualifies for the disability tax credit, would still be eligible for marginal rates.
In addition, the 2015 Ontario Budget proposes that Ontario tax credit for charitable donations over $200 would be raised to 17.41% for trusts that pay the top marginal personal tax rate.
The government will introduce legislative amendments to implement these measures which, if passed, will take effect January, 2016.
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