Tag: taxation of 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

13 Nov

A Day in the Life of an Income Trust Deconverter

Hull & Hull LLP Estate & Trust Tags: , , , , 0 Comments

Regardless of the wisdom of the federal government’s fateful decision to tax income trusts, its impact on the trust sector has been profound.  Retail investors, corporate managers, lawyers and accountants, government tax departments: all are affected by this policy decision.  Trust lawyers, for instance, have certainly seen a vast potential pool of future work relating to the conversion to and operation of income trusts disappear.  

On the bright side, there will be a great deal of work relating to the restructuring (re-converting? de-converting? re-incorporating?) from income trusts back to business corporations.  This seems to be a trend, since the tax exemption that makes operating as an income trust more tax-efficient than a traditional corporation disappears in 2011.  A contemporary example is CI Financial Income Fund, which announced plans last month to return to a tradional corporate business structure (it converted to an income trust in 2006).  Other recent examples of de-conversions are Newalta Income Fund, which converted to a trust in 2003 and BFI Canada Ltd., listed on the TSX on Oct. 2, 2008, formerly BFI Canada Income Fund.

CI Financial also says that operating as a trust constrained its ability to make acquisitions, and it has just announced an ambitious plan to raise funds to that end.  It will not surprise any lawyer with experience in both corporate law and trust law that operating as a trust is more constraining than as a corporation.  According to a newspaper article, CI incurred $11 million in costs relating to its plan as well as restructuring costs. 

Keep your eyes off the stock ticker and enjoy the day,

Chris Graham 




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