Tuesday, January 19, 2016

A Better Sense of Timing


Recent 2016 legislative proposals (described in greater detail in our previous article) fix a timing problem that could have arisen in respect of charitable donations made by the trustees of alter-ego trusts, joint spousal trusts and testamentary spousal trusts (“Life Interest Trusts”).

As described in our previous article, the assets of those trusts are subject to a deemed disposition on the death of the initial beneficiary or beneficiaries (the person who established the trust in the case of an alter-ego trust or the surviving spouse in the case of a joint or testamentary spousal trust).  I will call this individual the “Relevant Beneficiary”.  If the trust document authorizes the trustee to make charitable donations, the trustees can use the donation tax credit in order to reduce the tax payable as a result of that deemed disposition.

The 2015 changes introduced a deemed taxation year-end at the end of the day on which the Relevant Beneficiary died.  This deemed year-end created a problem.  In order for the trust to use the donation tax credit against capital gains triggered by the deemed disposition, any charitable donation had to be made before the end of the day of death.  Even if death occurred first thing in the morning, this would not give the trustee much time to make the donation.

The 2016 proposals alleviate this timing problem by providing the trustee with 90 days from the end of the year of death to make the donation.  If the Relevant Beneficiary dies on the last day of a calendar year, the trustee has 90 days in which to make the donation.  If the beneficiary dies earlier in a calendar year, the trustee has additional time because the trustee  has the rest of the calendar year in question plus the 90 days after the end of the calendar year.

As long as the trustee makes the donation within 90 days of the end of the calendar year in which the death occurs, the trustee can decide how to use the donation tax credit from among several options.  The trustee can use the credit in the taxation year in which the gift is made, in any of the following five taxation years or in the trust taxation year that is deemed to end on the death of the Relevant Beneficiary (the most likely choice).  By choosing this last option, the trustee can use the donation tax credit to reduce tax triggered by Relevant Beneficiary’s death.

The legislation does not address a second timing issue that arises in respect of donations made by a Life Interest Trust:  the time of the donation itself.  In order for the trust to use the donation credit at all, the donation must be made by the trustee pursuant to a power to make donations.  If the trust deed requires that the trustee pay money to a charity on the death of the individual, the trustee is legally obliged to transfer funds to the charity and is not making a gift.  In this case, the gift would have been made at the time that the trust was first established.  But if the gift depends on a future date of death and on the amount of property left in the trust at the time of that future death, it is impossible to quantify the amount of the gift at the time that the trust is established and no donation tax credit can be given at that earlier time.

So the 2016 proposal addresses one timing issue but not the other.  In order for the trust to be able to use the donation tax credit against tax triggered by the deemed disposition, the trustee has to make the donation pursuant to a power to make donations and has to do so within 90 days of the end of the calendar year in which the death occurs.  Usually, the trustee will honor the expressed wishes of the deceased individual when exercising this power but has no legal obligation to do so.  The trustee will follow the expressed wishes purely as a matter of honor – the trustee cannot be legally obliged to make the donation.

The Department of Finance is aware of this remaining anomaly.  I hope that a future amendment will fix this issue so that generous Canadians have some legal assurance that their charitable wishes will be legally enforceable if they choose to leave assets to charity through a Life Interest Trust.


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The above article provides general commentary of an educational nature. It does not constitute advice for any specific person or any specific set of circumstances. Because circumstances vary, readers should consult professional advisers in order to obtain advice that is applicable to their specific circumstances.

Monday, January 18, 2016

The Way We Were (Almost)

On January 15, 2016, the federal government released proposals that will fix some of the problems created by its earlier 2015 legislation on the taxation of trusts.

The earlier 2015 legislation changed the taxation rules for alter-ego trusts, joint spousal trusts and testamentary spousal trusts (collectively, “Life Interest Trusts”).  In these Life Interest Trusts, the trust assets are held solely for the benefit of the initial beneficiary or beneficiaries (the person who established the trust in the case of an alter-ego trust and the surviving spouse in the case of a joint spousal trust or a testamentary spousal trust).  On the death of the last of those initial beneficiaries, the assets in the Life Interest Trust are subject to a deemed disposition.  This results in the taxation of any previously-untaxed increase in asset value.  Prior to 2015, that deemed disposition occurred inside the Life Interest Trust so that the trust assets could be used to pay any resulting tax.

The 2015 legislation would have changed this starting in 2016.  Instead of the deemed disposition occurring inside the Life Interest Trust, the deemed disposition would have occurred outside of the Life Interest Trust and would have become a liability of the personal estate of the deceased individual (as if the individual had personally owned the assets in the trust).  This rule would have created a host of problems, especially if the will and the Life Interest Trust had different beneficiaries – as can happen in blended family situations.

The 2016 fix reverses that aspect of the 2015 legislation and returns us back to way things used to be.  As a result, any tax triggered by the deemed disposition of trust assets will be paid by the Life Interest Trust rather than by the personal estate.  Big sigh of relief.

For those who may have altered their estate plans based on the 2015 legislation, there is an elective procedure under which the trustees of the Life Interest Trust and the executors of the estate can jointly choose to have the deemed disposition tax paid by the personal estate.  In order to do so, however, the specified individual must die before 2017.  So this elective rule merely provides time for someone who altered an estate plan in an attempt to comply with the 2015 legislation to once again alter the estate plan based on the fix to the 2015 legislation.

The death of the initial beneficiary will still trigger a deemed taxation year-end for the Life Interest Trust – so we are not fully back to the way we were – but at least the tax liability will be in the proper place.

The 2016 proposals also fix a problem that could have arisen in respect of charitable donations made by a Life Interest Trust.  That fix will be the subject of a future blog.


Visit the Dwyer Tax Law web site
for information about our services and lawyers' profiles.

The above article provides general commentary of an educational nature. It does not constitute advice for any specific person or any specific set of circumstances. Because circumstances vary, readers should consult professional advisers in order to obtain advice that is applicable to their specific circumstances.