Proposed Legislation Could Affect Traditional Estate Planning

On August 29, 2014, the Department of Finance released a package of draft legislative proposals that it stated would implement tax measures from the February 2014 Federal Budget.  The legislative proposals were 104 pages with 128 pages of Explanatory Notes.  Light reading indeed!

Included in the draft proposals were a few unexpected surprises.  One of them was a proposal that would affect traditional estate planning involving testamentary spousal / common law partner trusts, alter ego trusts and joint partner trusts.   We last discussed alter ego trusts in Tax Tip 10-29 and previously discussed the tax implications upon death of the spouse or the last to die spouse in Tax Tip 10-16.

The current rule is that the affected trust will be deemed to have disposed of its assets on the date of the death of:

  1. The spouse beneficiary for a testamentary spousal trust;
  2. The sole beneficiary for an alter ego trust; and
  3. The last to die spouse or common law partner for a joint partner trust.

Accordingly, the trust will report the deemed disposition and include such income or loss in its affected taxation year.  New proposals, however, will change this.  Proposed subsection 104(13.4) will deem the affected trust(s) to have a new taxation year end at the end of the day of death.  In addition, the affected trust will be deemed to have paid out the income (including the deemed dispositions referred to above) to the deceased individual and thus it will be included in the deceased’s final income tax return.  New subsection 160(1.4) will deem the estate of the deceased individual and the affected trust to be jointly and severally liable for the payment of the tax.

The above is a significant change and traditional estate planning will need to be reconsidered if the above proposals are passed into law.  For example:

  1. What if the beneficiaries of the affected trust(s) are different than the beneficiaries of the estate of the deceased?  How will such joint and several liability for the payment of the tax be reconciled amongst all of the beneficiaries?
  2. What if the province of residency of the deceased individual is different than the affected trust(s) and such disparity increases the overall tax liability that was previously planned for?  How will the beneficiaries as a whole reconcile such disparity?
  3. In some cases, the affected trusts may own private corporation shares.  Traditional planning involving such cases would ensure that the deemed disposition upon death of the trust assets would not result in double taxation when the corporation ultimately distributed funds to its trust shareholder.  Will such traditional planning still work?  This will need to be carefully reviewed on a case by case basis.

There are certainly more implications to the draft legislation.  We understand that the Joint Committee on Taxation (of the Canadian Tax Foundation and the Canadian Bar Association)  may be making a submission to the Department of Finance regarding these proposals.  Keep your ears to the ground on these important proposals…..they could affect many Canadians’ estate planning.

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The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.

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