Testamentary trust legislation up for comment

Comments are now open on the Budget 2013 proposal to eliminate the tax benefits of trusts and certain estates, which are taxed at graduated rates.

The government is concerned “taxpayers are using estates and trusts to obtain unintended tax advantages,” it says in a release.

“Eliminating the tax benefits of graduated rate taxation for trusts and certain estates would ensure increased fairness and neutrality in the federal income tax system. The proposed measures would also address the potential growth in tax planning involving existing rules and the associated impact on the tax base.”

Read: How to use testamentary trusts

Testamentary trusts are popular estate planning tools.

When Advisor.ca spoke to accountant Kim Moody on 2013 Budget Night, he told us he has provisions for five such trusts in his will: one for his wife, and then one for each of his four children after she dies.

“From the point of my death until the last kid dies, I get graduated tax rates on all my assets. That could be 100 years from now. Looks like they want to fix that,” he says.

Read: 5 tax benefits of testamentary trusts

Another problem: testamentary trusts aren’t always used primarily for tax purposes.

Many people use them to leave money to minor children. Without the graduated rates, children would be forced to withdraw the money at the age of majority to avoid being taxed at the highest marginal rate, instead of the lowest (assuming they have no other income). And, if the trust’s large, this could mean kids inherit far more than their parents intended.

Read: Party’s over for tax-advantaged investing

To prepare for a possible elimination of graduated taxation, Stella Gasparro, an accountant at MNP, wrote in Advisor’s Edge: “Revisit existing plans to ensure clients can wind up certain trusts in case the cost of keeping them ultimately outweighs the benefit. If a trust exists for a non-tax reason (e.g., to protect assets), consider distributing income each year to beneficiaries in lower tax brackets.”

Read: Help wealthy clients adapt to Budget 2013

The comment period is open until December 2, 2013. Send comments to trusts-fiducies@fin.gc.ca.

Written submissions can be forwarded to:

Trust Graduated Rates Tax Legislation Division Tax Policy Branch Department of Finance L’Esplanade Laurier 17^th Floor, East Tower 140 O’Connor Street Ottawa, Canada K1A 0G5 Facsimile: 613-992-2036