Parliament recently enacted significant changes to the taxation of estates and trusts and charitable giving on death beginning in 2016.  These changes include beneficial income tax treatment for qualified disability trusts or "QDTs".  The purpose of this publication is to briefly summarize these important changes and the impact they may have on your estate plan.

Income Taxed at Graduated Rates

At the present time, the income of a trust established by a will (a "testamentary trust") is subject to tax at graduated rates, that is, the rate of tax increases as the amount of the trust's income increases until the trust's income exceeds $150,000.  Income greater than that amount is taxed at the top marginal rate of 45.8% (in British Columbia, to be reduced in 2016 to 43.7%).  Beginning in 2016, the income of most testamentary trusts will be subject to tax at the top marginal rate.  However, the income of QDTs will continue to be taxed at graduated rates. 

Qualified Disability Trusts

A QDT is a testamentary trust resident in Canada which has a beneficiary who is eligible for the disability tax credit under the Income Tax Act (Canada).  In order to qualify as a QDT, the testamentary trust must make a joint election with that beneficiary.  A beneficiary may make only one such election with respect to a single trust.  The election must be made annually, and may be made for as many years as the trust exists. 

A QDT is eligible to have its income subject to tax at graduated rates.  In circumstances where any of the capital of a QDT is distributed to someone other than a beneficiary who is eligible for the disability tax credit (e.g. where the trust document names contingent beneficiaries after the death of the disabled beneficiary), there are complex rules that provide for the claw -back of any tax savings resulting from the income of the QDT being taxed at graduated rates.

QDTs may be a valuable estate planning tool for families of disabled persons.  Bull, Housser & Tupper LLP's Wealth Preservation Group will be pleased to assist in planning for and implementing QDT structures.  Please contact any member of the Wealth Preservation Group. 

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.