Last week, Finance Minister Jim Flaherty unveiled the Harper Government’s 2013 federal budget in a speech to the House of Commons. The budget touches on a wide array of economic issues facing Canadians, from job growth to the cost of sporting equipment and baby clothes. Particularly interesting for estates and trusts lawyers, however, is the announcement that the Government intends to consult on the issue of graduated tax rates associated with trusts and estates.
Currently, testamentary trusts and inter vivos trusts created before June 18, 1971 (“Grandfathered Inter Vivos Trusts”) are taxed federally using the graduated tax rates that are applied to individuals. Inter vivos trusts created after June 18, 1971 (“Ordinary Inter Vivos Trusts”) are taxed at a flat rate of 29 per cent, being the highest federal tax rate for individuals.
The Government appears to be concerned about the differential tax treatment between Grandfathered and testamentary trusts and Ordinary Inter Vivos Trusts; specifically, the ability of beneficiaries of testamentary and Grandfathered Inter Vivos Trusts to access multiple sets of tax rates. The Government states that this discrepancy “raises questions of both tax fairness and neutrality[…]”.
The 2013 budget also speaks to the Government’s concern over an increase in tax-motivated estate planning and administration, including the “use of multiple testamentary trusts, tax-motivated delays in completing the administration of estates, and avoidance of the OAS [Old Age Security] Recovery Tax.”
The budget promises to release a consultation paper that will consider possible ways to eliminate the tax benefits associated with the graduated rates applied to Grandfathered Inter Vivos Trusts, testamentary trusts, and estates that have passed the threshold of a reasonable period of estate administration.
Imposing a high flat tax rate to trusts currently taxed at graduated rates would undoubtedly change current estate planning and administration strategies. Estates and trusts practitioners would be well advised to study the Government’s consultation paper upon its release and consider how the proposed legislative changes contained therein will affect their practices moving forward. The paper will also provide a valuable opportunity for stakeholders to provide their comments on these possible changes.
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