October 2016 Newsletter

The 2016 taxation year saw some significant changes to the taxation of testamentary trusts.

A testamentary trust is generally one that results as a consequence of your death, including your estate and a trust created under your will. On the other hand, an “inter-vivos” trust is generally a trust created during your lifetime.

Before 2016, testamentary trusts enjoyed several income tax benefits not available to inter-vivos trusts, including:

  • They were subject to the same graduated tax rates as individuals, as opposed to a flat tax at the highest marginal rate that applies to inter-vivos trusts.
  • They were not required to make tax instalments.
  • They could have an off-calendar year taxation year.
  • They were not subject to the alternative minimum tax.
  • They could flow out investment tax credits to their beneficiaries.

Starting in 2016, the only trusts that continue to enjoy all of these benefits are “graduated rate estates”. Basically, a graduated rate estate is the estate of an individual for up to 36 months after death (certain other conditions must be met). An individual can have only one graduated rate estate. If the estate remains in existence beyond the 36-month period, it will no longer enjoy these tax benefits.

In addition, a “qualified disability trust” is subject to graduated tax rates, although it does not enjoy the other tax benefits listed above. In general terms, a qualified disability trust is a testamentary trust (i.e. set up by a taxpayer’s will) for a beneficiary who is eligible for the disability tax credit (again, there are certain other conditions).

Last modified on October 13, 2016 12:00 am
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