Wednesday, March 23, 2016

Federal Budget Confirms that the Department of Finance is Reversing 2015 Changes to Taxation of Life Beneficiary Trusts

In yesterday's 2016 Federal Budget, the Minister of Finance confirmed that the Department of Finance, Canada will reverse the recent changes to the way certain life beneficiary trusts are taxed on the death of the life beneficiary. 

In 2015, the previous Government changed the way that life beneficiary trusts are taxed. Instead of taxing the trust on the deemed disposition of assets on the death of the life beneficiary in the trust, the Income Tax Act was amended so that the life beneficiary’s personal representative would declare the income in the life beneficiary’s return. It was unclear whether the tax would ultimately be borne by the life beneficiary’s estate or the trust. These came into effect this year.

Earlier this year, Department of Finance Canada has drafted proposed legislation to tax the gains in the trust, except that in case of the death of a life beneficiary in 2016, an election will be available to tax the gains in either the trust or the life beneficiary’s estate.

You have to look carefully to find it, but there is a short statement in Tax Measures: Supplementary Information confirming that the Government intends to proceed with the proposed legislation:

Budget 2016 confirms the Government’s intention to proceed with the following tax and related measures that were announced in the current session of Parliament but have not yet been legislated:
legislative proposals on the income tax rules for certain trusts and their beneficiaries (draft legislative proposals were released for comment on January 15, 2016).
I wrote about some of the potential problems with the 2015 changes here, the Department of Finance Canada's draft legislation here, and the Canadian Bar Association, Wills, Estates and Trust Section's response here.

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