Department of Finance Provides Receptive Response on January 1, 2016 Rules for the Taxation of Spousal and Similar Trusts

November 20, 2015 | Amanda J. Stacey, Martin J. Rochwerg, Rahul Sharma


On November 16, 2015, the Department of Finance issued a letter (the “Letter”) to representative leadership organizations forming part of the Canadian tax and private client services industry in response to their earlier submissions regarding changes to the taxation of spousal, alter ego and joint partner trusts (collectively, the “Trusts”).  These organizations include the Joint Committee on Taxation of the Canadian Bar Association and Chartered Professional Accountants of Canada, the Conference for Advanced Life Underwriting (CALU) and the Canadian arm of the Society of Trust and Estate Practitioners (STEP Canada) (collectively, the “Organizations”).

Concerns Raised by our Tax Professionals

Amendments to the Income Tax Act (Canada) (the “Act”) affecting the Trusts and, in particular, surviving spouses or life interest beneficiaries of the Trusts, were enacted on December 16, 2014 as part of the measures announced in the 2014 Federal Budget.  The amendments are to take effect on January 1, 2016.  In their submissions to the Department of Finance, the Organizations raised two particular points of concern in relation to the amendments:

  1. Under the new rules, in particular under paragraph 104(13.4)(b), there is a prevailing likelihood that the income tax liability previously payable by a Trust on the death of a surviving spouse or life interest beneficiary (the “Beneficiary”) will now be borne by the Beneficiary’s estate.  In some cases (particularly in situations involving children from blended families) the residual capital beneficiaries of a Trust will be different than the beneficiaries of the Beneficiary’s estate.  This gives rise to unfair and unintended results; and
  2. There is the possibility of “stranding” donation tax credits in cases where a Trust makes a gift of property after the death of the Beneficiary to a charity.  Because the tax liability associated with the Beneficiary’s death is to be borne by the Beneficiary’s estate and not by the Trust, the latter will often not have income tax payable against which it will be able to deduct the donation tax credit associated with the charitable gift.

The concerns raised by the Organizations with the Department of Finance are a reflection of the current difficulties faced by members of the private client services industry when advising their clients on estate and succession planning-related matters (including existing estate plans) and in dealing with the new rules taking effect on January 1, 2016.  In the Letter, the Department of Finance provided a very general response to the Organizations’ concerns, which response is detailed below.

The Department of Finance’s Response

The Department of Finance states that, based on its discussions with the Organizations, it understands that the Organizations would support “an option that would, put in very general terms, subject affected trusts and their beneficiaries to an income tax treatment for the 2016 and later taxation years that more closely corresponds to that available to trusts for 2015 and earlier taxation years.”  In this regard, the Department of Finance appears to have recognized that certain of the amendments to the Act could generally remain as enacted, but that new paragraph 104(13.4)(b) could be amended effective January 1, 2016 so that it would not apply to a Trust in respect of a Beneficiary’s death unless certain limited conditions are met.  These conditions (which would continue to have the Trust’s deemed disposition on the Beneficiary’s death taxed to the Beneficiary) could include, in general, that the Trust is a testamentary spousal trust created by the Will of a taxpayer who dies before 2017, that the Beneficiary is resident in Canada immediately prior to his or her death and that the Trust and the Beneficiary’s graduated rate estate jointly elect in a prescribed form to have paragraph 104(13.4)(b) apply.

To respond to the second concern regarding the possibility of  “stranding” donation tax credits, the option generally outlined above could permit the Trust to allocate the eligible amount of a charitable gift made by the Trust after the Beneficiary’s death (but in the year in which the Beneficiary died) to the Trust’s taxation year in which the Beneficiary died (being the taxation year which, under the new rules, is deemed to end on the date of the Beneficiary’s death).  This solution would appear to be largely responsive to the problems identified by the Organizations in their submissions.

The Organizations should be commended for their efforts, diligence and persistence in raising their members’ concerns regarding the amendments to the Act with the Department of Finance.  However, as noted by STEP Canada in a communiqué to its members this week, the Department of Finance did not irretrievably commit to recommend that the approach outlined in the Letter (or any other potential mechanism) be pursued or enacted into law.  Rather, the Department of Finance has agreed to continue to deal with the Organizations in addressing their concerns and in receiving their input regarding a potential solution to the possibly unfair and unintended consequences presented by the new rules.  As such, although the Letter constitutes a truly hopeful and promising step taken by the Department of Finance to attempt to resolve the concerns surrounding the new rules, individuals whose tax and estate planning may be impacted by the new rules should nonetheless seek (or continue to seek) the advice of competent legal and private client professionals.


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