As part of the federal budget, the Canadian government enacted significant changes to the taxation of estates and trusts, which will come into force on January 1, 2016. The biggest change is the elimination of the graduated rate taxation that these trusts have enjoyed since 1971. All income retained in a testamentary trust will be taxed at the highest tax rate applicable in its province of residence.

Historically, the Canadian tax regime has classified trust into two general categories; testamentary trusts and intervivos trusts. Intervivos trusts are trust created during someone’s lifetime, and they are not affected by these changes. Testamentary trust are created upon someone’s death. Accordingly, all estates are classified as testamentary trusts.

Starting January 1, 2016, the tax rules concerning trusts will change. All testamentary trust will be subject to tax at the top federal rate of tax of 29% and deemed to have a December 31st year end, other than certain graduated rate estates (“GRE”) and Qualified Disability Trusts (“QDT”). This change greatly impacts the benefit of using testamentary trusts; for example, on $140,000 of earned income the removal of the gradual tax rate will result in approximately $11,000 of additional federal taxes alone. In addition starting January 1, 2016, all existing testamentary trusts will be required to have a December 31st year-end. This is a significant change in tax policy in Canada, and will certainly lead to changes in current and future planning.

A GRE will enjoy the benefits of graduated tax rates for up to 36 months from the taxpayer’s death and a QDT may enjoy graduated rated indefinitely. Only after the 36 month period, the GRE will have a deemed year-end of December 31st and will be subject to tax at the highest marginal rate.

To qualify as a GRE, the estate must arise on the individual’s death and be a testamentary trust, no more than 36 months can have passed from the date of death and there can be no other graduated rate estates for the deceased individual. This effectively means the elimination of spousal trusts as GRE. Furthermore, to qualify as a GRE, the trustees of the estate must make an election in the estate’s first tax return after the date of death

Accordingly, all existing testamentary trust that have existed for more than 36 months will be deemed to have a year‐end on December 31, 2015. As a significant amount of trusts do not currently have a December 31st year end, these new laws will result in testamentary trusts filing an additional tax return in 2015.

Your RSW adviser can help you assess the effect of the changes in the legislation, and point out ways to take advantage of any benefits or help mitigate the impact of these changes. For more details on this legislation and its potential impact, contact your RSW adviser.