Recent changes to the taxation of testamentary trusts have caused some concern on the part of my clients. I have reassured them that the changes will have no effect on the protective power of Henson trusts. There will be no change to the use of Henson trusts and protection of ODSP benefits.
The changes will however require certain new procedures after they have passed on, and for trusts that now exist and will have to comply with the new requirements when 2016 tax returns are filed.
The forms to be used to comply will not be available until February 2017, around tax filing time.
Commencing in 2016 the graduated taxation rate of testamentary trusts is replaced, with certain exceptions, with a top marginal tax rate taxation of all trust income reported in the hands of the trust. With an exception for certain beneficiaries with special needs, testamentary trusts will be taxed on the same basis as inter vivos trusts. This means that trust income must find a way to be taxed in the hands of lower tax bracket beneficiaries.
This change will affect much common estate planning that used testamentary trusts to have income from inheritances taxed a beginning marginal rates in the hands of the trust rather than at the higher marginal rate of the heir in their own hands.
This tactic has not been a primary part of the planning by my client families.
The changes have a special exception which will protect a large number of my clients' children as beneficiaries of their trust, I estimate at least a third of them.
If you aren’t using this tax credit on line 318 of your tax return we should discuss putting this in place. Please also check line 315 for the ‘caregiver tax credit’ if the child lives with you. When we identify these credits and put them back in place we typically recapture $16,000 and $8,000 respectively.
If the child qualifies for the 'Disability Tax Credit', meaning that they are 'markedly restricted' in the activities of daily living, they then can have their trust approved as a 'Qualifying Disability Trust'. Their trust then continues to be taxed at beginning marginal rates, just as under the old tax regime.
This is the same tax credit which allows the child to set up a Registered Disability Savings Plan. With proper contributions and investment when the child turns 60 and starts to draw upon it the plan could amount to $500,000!
Considering the importance of the disability tax credit for both of these purposes, if your child is not presently approved for the tax credit, and you think they should. be we should talk. If you have been told by a doctor that they would not qualify this does not mean that they won’t qualify.
Children who qualify for ODSP or other disability benefits but who are not deemed to be 'markedly restricted' will not benefit from the saving provisions of the 'Qualifying Disability Trust', which is unfortunate.
For these beneficiaries we will have other ways to declare the trust income in the hands of the child with minimal impact on ODSP benefits. If the trust has a modest income, resulting in only $6,000 or less income in a calendar year, the money can be spent on the child and declared as income in their hands, so there will be no issue about top rate taxation or ODSP benefits offsets.
If the income is greater, we can have the income declared once a year with minimal effect on monthly benefits.
This link provides a more detailed explanation of the changes, and I'll be happy to e-mail an excellent article by Guy Desmarais at Collins Barrow upon request.