Understanding the Impact of 2016 Tax Changes on Trusts

In 2016, the Canadian government introduced significant changes to the taxation of testamentary trusts, which are trusts created upon the death of an individual, typically through a Will. These changes primarily affected the taxation of testamentary trusts at the federal level and had implications for trusts across Canada, including those in Alberta. Here are the key tax changes related to trusts in Canada in 2016:.

#1 - Elimination of Graduated Tax Rates

Prior to 2016, testamentary trusts could access graduated tax rates similar to those available to individuals. However, starting in 2016, testamentary trusts were subject to flat top marginal tax rates, which meant that they no longer benefited from the lower tax rates available to individuals. This change resulted in potentially higher tax liabilities for some testamentary trusts.

#2 - Exception for Graduated Rate Estates (GREs)

While most testamentary trusts were subject to the new flat top marginal tax rates, an exception was made for Graduated Rate Estates (GREs). A GRE is a testamentary trust that arises as a consequence of an individual's death and that is a "qualifying estate" for a period of up to 36 months after the individual's death.

#3 - Changes to Taxation of Trusts with Non-Resident Beneficiaries

The 2016 tax changes also affected the taxation of trusts with non-resident beneficiaries. These trusts were subject to additional reporting requirements and withholding tax obligations to ensure compliance with Canadian tax laws.

#4 - Anti-Avoidance Measures

The federal government introduced anti-avoidance measures targeting certain types of trusts, such as spousal or common-law partner trusts, alter ego trusts, and joint partner trusts. These measures were designed to prevent the use of trusts for tax planning purposes and to ensure that trusts were being used for genuine estate planning and testamentary purposes.

These tax changes had significant implications for the taxation of trusts in Canada, including those in Alberta. Trust planners and trustees needed to review their existing trust structures and estate plans to assess the impact of the changes and to ensure compliance with the new tax rules.

It's important to note that tax laws and regulations can change over time, and it's advisable to consult with a tax professional or legal advisor for the most up-to-date information on tax changes affecting trusts in Canada.