Graduated Taxation of Testamentary Trusts

A popular estate planning tool in Canada is under review by Canada’s Department of Finance as part of Economic Action Plan 2013.  

Currently, income from a testamentary trust, usually created by the deceased’s will, may be taxed at the graduated marginal tax rates available to an individual. This permits an individual beneficiary to save tax, by having the individual’s testamentary trust income taxed as if it was a separate person, with the benefit of the lower tax rates applicable to lower ranges of income. The potential tax savings to an individual who is already in the highest tax bracket for non-trust income, is in the range of $12,000-$14,000 per year, per beneficiary.

A person can create many separate testamentary trusts for children, grandchildren and others, and if the trust income is high enough, substantial income tax can be saved each year the trusts continue. If the trust is not producing significant income, e.g. the trust holds a personal use residence or cottage, there is no tax saving.

Testamentary trusts created by will can endure for the lifetime(s) of successive for as long as 80 years after the death, so it is not surprising for the government to wish to review the use of testamentary trusts.    

 The government invites public input until December 2, 2013 at trusts-fiducies@fin.gc.ca

If you have questions about trusts or estate planning, please feel free to contact one of the lawyers in our Wealth Preservation + Estate Litigation Practice Group.