Beginning in 2016, all trusts (whether created during an individual’s lifetime, or in their will) will be subject to tax at the highest marginal rate unless the trust meets one of two exceptions. The first exception applies if the trust qualifies as a “graduated rate estate” (GRE). This exception, which has been discussed in previous posts, will allow most estates to have access to graduated rates of taxation for up to 36 months, if certain requirements are met. The second exception applies where the trust qualifies as a “qualified disability trust” (QDT). This exception will allow certain trusts that are created for the benefit of a person with a disability to have access to graduated rates of taxation.
The requirements that must be met in order for a trust to qualify as a QDT are as follows:
- The trust must be a testamentary trust that arose on and as a consequence of death. This means that a trust created during the lifetime of the taxpayer for the benefit of a disabled child will not qualify.
- The trust must be resident in Canada. This requirement should be easy to meet where the trustees all reside in Canada and manage the trust from Canada.
- The trust must elect jointly with the eligible beneficiary to be a QDT. This may be difficult in cases where the beneficiary does not have capacity to make the election. In this case, a court appointed committee may be required to make the election on behalf of the beneficiary.
- The beneficiary must qualify for a disability tax credit under the Income Tax Act. Only individuals with a severe mental or physical impairment that impacts their basic activities of daily living, and that has lasted for over a year, will qualify for the disability tax credit.
- The beneficiary cannot make a QDT election in respect of any other trust. This means that if the parents of a disabled child each created a testamentary trust for the benefit of their child, and died at the same time, only one of the trusts would qualify as a QDT. The second trust would get taxed at the highest marginal rate.
It may be worth revisiting estate plans that involve a disabled beneficiary to make use of this new planning opportunity, where appropriate.