By M. Elena Hoffstein – Guest Contributor, Charity & NFP Law Bulletin No. 380, February 25, 2016
On December 16, 2014, Bill C-43 received Royal Assent. The new rules introduced by the Bill affect the manner in which testamentary trusts are taxed, and in addition, change significantly the manner in which testamentary charitable gifts will be dealt with under the Income Tax Act, RSC 1985, c.1 (5th Supp.) (“ITA”).
In order to better appreciate the significance of the changes, it is important to review briefly the law as it was prior to 2016.
In the past, income and capital gains retained in inter vivos trusts were taxed at a different rate than testamentary trusts. Inter vivos trusts have always been taxed at the top marginal rates of tax. On the other hand testamentary trusts and certain pre-1971 inter vivos trusts have enjoyed access to progressive rates of tax and other benefits not available to inter vivos trusts. Bill C-43 has eliminated the various differences between inter vivos and testamentary trusts commencing in 2016. There are two exceptions to these new rules. Firstly, the progressive tax rates will continue to apply to the first thirty-six (36) months of an estate that arises as a consequence of the death of an individual and that is a testamentary trust. This type of trust has been given a new name, the graduated rate estate or GRE, as it is now affectionately named. The second exception is for trusts that qualify as qualified disability trusts or QDTs for disabled individuals. It is not intended to discuss QDTs in this Bulletin.
For the balance of this Bulletin, please see Charity & NFP Law Bulletin No. 380.