Changes to the Taxation of Testamentary Trusts

Written by:
John Grummett, CPA, CA, Tax Partner, Taylor Leibow, DFK Affiliate Firm

Changes to the taxation of testamentary trusts become effective January 1, 2016. One of the significant changes relates to the taxation of life interest trusts.

Where this life interest trust is a spousal trust, a deemed disposition would occur upon the death of the spouse. Under the original changes to the trust rules, the gain resulting from the deemed disposition of trust assets would be taxed on the spouse’s final tax return rather than on the trust tax return.

This would result in the beneficiaries of the spouse’s estate paying the tax on assets that would flow to beneficiaries of the trust. Where those beneficiaries are different, it would create issues. Also, if the beneficiaries of the trust were charities, the donation credits would not be able to be applied against the gain resulting from the deemed disposition of the assets, thereby suspending the donation credits.

After representations from the Canadian Bar Association, the Chartered Professional Accountants of Canada, the Conference for Advanced Life Underwriting, and STEP Canada, the Department of Finance issued a letter on November 16, 2015, outlining possible changes to the trust rules.

These changes will allow donations made by the trust after the beneficiary’s death, but during the calendar year in which the death occurs, to be claimed by the trust. Also, the letter proposed to allow the taxation of the gain on the assets of the spousal trust at the time of the spouse’s death to be taxed on the trust tax return. This will match the trust assets with the tax associated with the deemed disposition of these assets.

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