Tag: qualified disability trust

11 Mar

Planning Considerations for Qualified Disability Trusts

Lisa-Renee Estate & Trust, Estate Planning, RRSPs/Insurance Policies, Trustees, Wills Tags: , , , , , , , , 0 Comments

Earlier this week I blogged about planning considerations for establishing a testamentary trust that may qualify as a graduated rate estate.  To continue on the topic of planning consideration in light of the recent changes to the Income Tax Act, I thought it would be fitting to highlight some considerations regarding the newly introduced Qualified Disability Trust (the “QDT”).

moneyOne planning technique that is commonly used when disabled beneficiaries are involved is a Henson Trust.  It is important that testators understand that the creation of a Henson Trust does not automatically qualify as a QDT since the disabled beneficiary must be a recipient of the Disability Tax Credit.  Accordingly, it would be prudent to highlight that it is possible that the income earned from the Henson Trust may be subject to top-rate taxation.

It is also quite common for a testator to identify the beneficiaries of a testamentary trust as a class of beneficiaries such as children or issue.  However, given that testamentary trusts are now taxed at the highest rates, a testator may wish to specifically name the beneficiaries of the Trust in the event that the named beneficiary becomes disabled during the length of the testamentary trust.  In doing so, the testator will have satisfied one of the requirements for the Trust to be designated as a QDT.

The limit of one QDT election per beneficiary also raises some estate planning challenges.  It may be necessary to explore planning solutions in situations where the named beneficiary of an insurance trust and a testamentary trust is disabled. In this case, the testator may want to consider whether both trusts are necessary.

It is extremely important that clients understand the estate planning challenges that arise when attempting to take advantage of the graduated rate of taxation, and should discuss any estate planning options with a tax professional before a final decision is made.

Thanks for reading!

Lisa Haseley

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Qualified Disability Trusts
Graduated Rates and Changes to the Income Tax Act
More Changes to the Taxation of Testamentary Trusts

04 Jan

Qualified Disability Trusts

Ian Hull Estate & Trust, Estate Planning Tags: , , , , , , , , , 0 Comments

Now that the 2016 year has begun, there are several amendments to the Income Tax Act, R.S.C., 1985, c. 1 (5th Supp) (the “ITA”) that have come into force. Some of these amendments have been discussed on this blog before. Among these amendments is the introduction of the “qualified disability trust” (the “QDT”).

The requirements for a QDT can be found in s. 122(3) of the ITA, and are as follows:

i. At the end of the trust year, a QDT must be a testamentary trust that arose on and as a consequence of an individual’s death;
ii. The trust must be resident in Canada for the trust year; and
iii. The trust and the named beneficiary or beneficiaries must have made a joint election for the trust to be a QDT.

Section 122(3) now also includes requirements for the beneficiary of a QDT:

i. Section 118.3(1)(a) to (b) must apply to the beneficiary for the individual’s taxation year in which the trust year ends, meaning that the beneficiary must be eligible for the disability tax credit; and
ii. The beneficiary can only jointly elect for one trust to be a QDT.

If a trust meets the requirements for a QDT, it will not be subject to the new rules with respect to flat top rate taxation that are now applicable to testamentary trusts. This is an important qualification, because prior to the amendments that came into force January 1, 2016, all testamentary trusts were subject to graduated rates of taxation. Now, however, trusts will only have the benefit of the graduated rates for the first 36 months following the death of a testator, during which period they will be called “Graduated Rate Estates” (“GREs”). Therefore, the QDT has significant benefits with respect to taxation of trusts.

As noted above, however, the requirements for a QDT are far from simple. With respect to the disability tax credit, there are particular requirements and limitations for eligibility. The assessment of whether a particular individual will be eligible for the disability tax credit is done by a doctor, not a financial advisor, and it can be difficult to predict whether or not someone will qualify.

There are also some elements of the QDT which may raise planning challenges, including the limit of one QDT per beneficiary. For example, if the grandparents of a disabled grandchild have chosen to create a testamentary trust for the benefit of their grandchild, only one grandparent is able to have the trust qualify as a QDT. Furthermore, the joint election for the trust to be a QDT must be made each year, and each year the beneficiary must qualify for the disability tax credit. As such, the status of the trust may change from year to year, and must accordingly adapt to the changing application of the tax rules.

Thanks for reading.

Ian Hull

29 Apr

More Changes to the Taxation of Testamentary Trusts

Hull & Hull LLP Estate & Trust, In the News Tags: , , , 0 Comments

On April 23, 2015, the Ontario Government released its 2015 Budget.  Among other things, the Budget proposes 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.

Thank you for reading.

Suzana Popovic-Montag

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