Department of Finance’s Response to Tax Amendment Concerns
In just over a month, starting on January 1, 2016, a number of amendments to the Income Tax Act will be coming into effect. These changes have been discussed on this blog before. On November 16, 2015, the Department of Finance issued a letter addressed to the Joint Committee on Taxation of the Canadian Bar Association and Chartered Professional Accountants of Canada, the Conference for Advanced Life Underwriting, and the Technical Tax Committee of STEP Canada. The purpose of the letter was to address the submissions of these organizations regarding certain amendments to the income taxation of trusts and estates, particularly concerns with respect to the income tax treatment of certain trusts subject to deemed realization on the death of a beneficiary.
With respect to tax deferral for alter ego trusts and spousal trusts, the new rules in subsection 104(13.4) provide that, upon death of the beneficiary, all the trust’s income for the trust’s taxation year must be included in computing the beneficiary’s income for the beneficiary’s final taxation year when the trust’s year ends (which will be the end of the day on which the beneficiary dies). Subsection 160(1.4) then makes the trust jointly and severally liable with the beneficiary for the portion of the beneficiary’s income tax payable due to inclusion of the trusts’ income.
There was an issue raised with respect to concerns that the amendments may apply in some cases with unfair and unintended results, within which were two sub-issues.
The first issue was the possibility that the income tax liability falling to the beneficiary will be ultimately borne by the beneficiary’s estate, even though the trust’s property, including any income, will be enjoyed by the trust’s beneficiaries, in some cases to the exclusion of the estate’s beneficiaries.
The second issue was the possibility that charitable donation tax credits could become stranded in the trust. If a trust makes a charitable gift of property after the death of the beneficiary, and the trust’s income is then deemed to be included in the beneficiary’s income, the trust will have no income against which to deduct any donation tax credit.
The Department of Finance, in discussions with the organizations to whom the letter was addressed, came up with an option to respond to these concerns. It was noted in the letter that the suggested solution would involve amending paragraph 104(13.4)(b) so that it would not apply to a trust in respect of the death of a particular beneficiary unless several factors are met, including that the beneficiary’s graduated rate estate and the trust jointly elect to have the paragraph apply. Accordingly, if no election is made, the tax liability for the trust’s income would remain with the trust.
With respect to the “stranding” of donation tax credits, the Department of Finance noted that the option above would include provision for a trust to be permitted to allocate the eligible amount of a donation made by the trust after the beneficiary’s death to its taxation year in which the death occurs.
Nothing has been implemented with respect to these issues or suggested options yet, nor is there a guarantee that the amendments will be implemented. However, the Department of Finance appears open to discussion and to working toward a solution that addresses the concerns raised.
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