Experts advise to revise estate plans due to Canada's new tax rules for all trusts

Canadian estate planning experts, many of them present at STEP Canada's 17th National Conference in Toronto last week, advise that estate plans should be revised to avoid unintended tax consequences (and to make the most of planning opportunities) that may result from Bill C-43 (Economic Action Plan 2014 Act, No2).

Speaking at the National Conference, Pamela Cross TEP said that these are "the most significant changes we have seen in trust and estate planning in decades."

Under the Bill, from January 1, 2016 all trusts in Canada will be subject to the highest marginal tax rates with the exception of trusts that qualify as graduated rate estates (GREs), and qualified disability trusts (QDT). Both of these must meet certain criteria to benefit from graduated rates of taxation (GRTs), however GREs will only benefit from GRTs for the first 36 months after death to allow for the administration of the estate. The new rules create a planning opportunity when the plans involve a disabled beneficiary, and an expert at Clark Wilson LLP advises practitioners to review estate plans to make the most of it.

Alter Ego trusts, joint partner trusts, self-benefit trusts and spousal trusts will all be affected. According to Margaret Rintoul TEP, due to the new rules coming into effect "many of the reasons for spousal trusts [...] are no longer effective" and she strongly recommends that anyone with a will that creates a spousal trust reviews it to make sure that "it does not create new, unanticipated and unintended implications." She analyses a case where a husband and wife, both previously divorced, set up a spousal trust the unintended consequences of which, under the new rules, are to reduce or deplete the inheritance of the wife's beneficiaries.

According to Rintoul, to make the result fairer, changes to the wills that establish the spousal trusts should be considered while "for trusts that are already being administered, it may not be possible to vary them in a way that will avoid this consequence."

• Experts at STEP Canada’s National Conference also discussed the use of trust protectors, highlighting that while their use is not common in Canada and they increase the cost of administering a trust, they act as objective third parties, watching over trustees to make sure that they act in the best interests of beneficiaries.
• Also at the National Conference, a Canada Revenue Agency spokesperson confirmed that only one estate can be created on the death of an individual. Wording under subsection 248(1) of the Income Tax Act had reportedly created confusion on this matter.

Sources

• Lexology (login required)
• Clark Wilson (via Mondaq, login required)
• Investment Executive
• Advisor.ca
• Investment Executive (2)