Flaherty chases trust tax breaks; Aimed at wealthy

National Post


Two specific tax planning techniques often favoured by wealthy Canadians have been eliminated in the 2014 budget.

The first change is the elimination of graduated tax rates for testamentary trusts, as originally proposed in last year's budget. A testamentary trust is a type of legal arrangement in which one person, typically known as the estate trustee, holds and manages the deceased's property for the benefit of someone else, known as the beneficiary. A testamentary trust also includes an estate, which arises upon death and generally lasts until the executor distributes the assets to the beneficiaries who are inheriting under the will of the deceased.

For tax purposes, both trusts and estates are considered to be individuals and must file returns that require them to pay tax on any taxable income that is not paid to the trust's beneficiaries. The taxation of testamentary trusts at graduated rates allows the beneficiaries of those trusts to effectively access more than one set of graduated rates and is often recommended as a post-mortem tax planning strategy.

The federal budget proposes to kill this type of planning beyond the initial three years after death by taxing any income retained in a testamentary trust at the highest marginal tax rate.

The second surprising change was the instant elimination of what was commonly referred to as an immigration trust. These trusts were often set up offshore by wealthy immigrants moving to Canada as a way to shelter investment income from Canadian taxation during their first five years of Canadian residency, under a special tax exemption for non-resident trusts.

Citing "tax fairness, tax integrity and tax neutrality concerns," effective immediately, immigrants to Canada can no longer use this to avoid paying tax on their worldwide investment income.