Finance considers fixes for trust taxation

CPA Canada and others have called on Finance Canada to fix problems created by 2014 changes to the taxation of spousal and similar “life interest” trusts. In a recent letter, Finance lays out some options.

Among the changes to the taxation of testamentary trusts and estates enacted in 2014, concerns have been raised over how the changes can sometimes produce unfair and unexpected results for spousal, joint partner and alter ego trusts on the death of a trust beneficiary.

The Joint Committee on Taxation of the Canadian Bar Association and Chartered Professional Accountants of Canada (CPA Canada) raised these concerns in a submission to Finance Canada and has been working with Finance, the Conference for Advanced Life Underwriting (CALU) and the Society of Trust and Estate  Practitioners (STEP) Canada to find solutions.

In a recent letter to the three stakeholders, Finance lays out an option that it is considering to resolve these problems. This option would essentially aim to ensure that deemed income arising on a beneficiary’s death would be taxed in the trust and not in the beneficiary’s estate (subject to certain narrow elective options). 

A potential technical fix would also address the impact of the rules on the ability of trusts to benefit from donation tax credits for gifts of property made after the beneficiary’s death.

The Joint Committee on Taxation will continue to provide input to Finance to help ensure these types of trusts are taxed with fairness and neutrality.