No Need to Panic ...

Just a quick note to let you know that, for many of you, there's no need to panic about the upcoming changes to the Income Tax Act concerning trusts and how they are taxed. Some of you might be aware that in 2016, the graduated taxation rate for testamentary trusts (meaning trusts created by a Will) will be replaced with a top marginal tax rate.

The bottom line relevance of this for us is that the way the world currently works is that when money is placed in a Henson Trust (aka an absolute discretionary trust), the income from that inheritance is taxed at a beginning (lower) marginal tax rate. This is a special stipulation that only applies to trusts created by a Will (testamentary trusts).

This is all about to change in 2016, however; when testamentary trusts will be taxed in the same way all other trusts are - meaning that they will be taxed at the top marginal tax rate. When you think about the inheritance you are leaving a challenged family member, you really don't want to see that eaten away by the trust being taxed at the highest taxation rate. After all, who needs that money more - the federal government or your family member?

But the reason I say that there is no need for most of us to panic is that the government has included a special exemption which states that if the beneficiary of the trust (your challenged family member, for example) qualifies for the Disability Tax Credit ("DTC"), the trust can be approved as a Qualifying Disability Trust and, as such, will continue to be taxed at beginning marginal rates, just as it is now.

There are a few more catches, of course, such as, for example, the fact that an individual can only have one Qualifying Disability Trust, which could result in some unexpected consequences if, for example, more than one family member leaves the person an inheritance in their Will. Please, always remember to check with your accountant or tax adviser, for information specific to your particular situation.

Moving past that, regular readers will recall that I have preached before as to the importance of the DTC,as that not only does it provide a nice tax break for the individual or their family, but the DTC is the very same tax credit that allows an individual to qualify for a RDSP. The math there is pretty simple ...

No DTC = No RDSP

Going back to the rules around the taxation of trust, it's important to realize, that the mere fact that your child (or other family member) qualifies for assistance through the Province's Services for Persons with Disabilities Disability Supports Program does not mean they automatically qualify for the DTC - and, even if they do qualify, it's highly unlikely that any government official is going to come along and suggest you apply for it.

In order to qualify for the DTC, the federal government must find that the person is "markedly restricted" in the activities of daily living. The wording of this requirement seems to be continually evolving, but trust me when I say that it is always worth the effort (and re-effort, should you be turned down) for a person to apply (and appeal and/or reapply, as necessary) for the DTC, as it has the potential to open many doors, as we've just seen with these new changes to the taxation of trust.

So what are you waiting for?