Budget 2014 clamps down on trusts

The federal government plans to eliminate special tax benefits that arise from applying graduated taxation to testamentary trusts and grandfathered trusts, Finance Minister Jim Flaherty revealed today in the 2014 budget.

Graduated rates will apply for the first 36 months to enable the executor to settle an estate. Should the estate remain after that period, it will be taxed at a flat rate.

“This measure is a follow-through to what was proposed in last year’s budget,” said Doug Carroll, vice-president of tax and estate planning at Invesco Canada, who was in the budget lock-up with Advisor.ca.

However, Ottawa will keep in place the graduated taxation rate of testamentary trusts whose beneficiaries are eligible to receive the federal Disability Tax Credit, and plans to reveal more details about this exception in the coming months.

This year’s budget proposes to also provide more flexibility in the tax treatment of charitable donations made in the context of a death that occurs after 2015. Rather than viewing will and designation donations as having been made before a person’s death, the federal government will consider these donations to have been made by the estate at the time they were transferred to the recipient.

An estate’s trustee will also be able to choose whether to allocate the donation in the taxation year it’s made; an earlier taxation year of the estate; or the last two taxation years of the deceased.

“This allows individuals to make donations that will take effect at death, resulting in the most efficient tax benefit for their estate,” said Carroll. “It’s one of the few positive aspects of the budget.”

But the federal government won’t likely win much praise from wealthy foreigners thinking about immigrating to Canada.

The 2014 budget proposes to eliminate the non-resident trust exemption that allows new Canadian residents to avoid being taxed in Canada on foreign-source income for the first five years after their arrival.

Similarly, high-income Canadians will have to contend with a broader application of the so-called kiddie tax as a result of a proposed change to the definition of “split income” in the Income Tax Act.

Currently, a small business owner might sell goods or services and have payment directed into a trust of which one or more of his or her children are designated as beneficiaries. However, as of the 2014 taxation year, income splitting will apply to business and rental income paid or allocated to a minor from a trust or partnership.

This year’s federal budget also provides several tax credits targeted to specific communities.

For instance, Ottawa plans to increase the Adoption Expense Tax Credit, which covers 15% of such costs as adoption agency fees and mandatory immigration expenses, from $11,774 to $15,000 for 2014, indexed thereafter to inflation.

The Medical Expense Tax Credit (METC), which provides roughly 15% in tax relief for eligible medical and disability-related expenses, will be expanded to include service animals trained to assist people with severe diabetes and the design of therapy plans for people with “severe and prolonged” mental or physical impairment who are also eligible to obtain the Disability Tax Credit.

The METC currently only covers therapy, but not its preparation.

In another health-related tax measure, acupuncturists and naturopathic doctors will no longer charge GST or HST for their services.

Meanwhile, people who volunteer at least 200 hours every year involved in ground, air or marine search-and-rescue services will receive a 15% tax credit based on an amount of $3,000, as proposed by the federal budget.

A simple tweak to income tax rules related to the intergenerational rollover and the $800,000 Lifetime Capital Gains Exemption will help farmers and fishers.

If they want tax relief now, they have to show that half or more of their property is used for farming or fishing. As a result of the budget, a property used mainly for farming and fishing now qualifies.

Ottawa also plans to broaden a tax-deferral program – which currently allows farmers to delay paying tax on up to 90% of the sale of cattle, goats, sheep and pregnant mares due to flood or drought – to include all horses and bees.

Amateur athletes aren’t forgotten in the 2014 budget either.

To help them save more tax-free money, the federal government plans to allow income contributed to an amateur athlete trust to qualify as earned income when determining the Registered Retirement Savings Plan contribution limit of the trust’s beneficiary. This measure would extend to trust-income contributions dating back to 2011.

Canadians also won’t have to check off the GST/HST Credit application box on their annual income tax return in the future, thanks to the 2014 budget.

Instead of applying for the credit, the Canada Revenue Agency will automatically determine eligibility based on previous tax returns.

Flaherty acknowledged to reporters that some might consider this year’s budget “boring.” But its measures will not only balance the federal budget by 2015, it will result in a $6.4-billion surplus, he told the House of Commons when delivering his budget Tuesday afternoon.

“But let me be clear,” said Flaherty. “A return to surplus is not a license to spend recklessly.”