Canadian Lawyer

44 O C T O B E R 2 0 1 5 w w w . C A N A D I A N L a w y e r m a g . c o m marginal rate still applies here as well, and for residents of Ontario, that won't affect the individual's eligibility for dis- ability insurance. Daniel Strickland, an estates lawyer with Siskinds LLP in London, Ont., says that is an important distinction for a portion of the clientele with whom he works. There are tax sav- ings to be had for those who meet the difficult test for the disability tax certifi- cate, but he estimates that only 15 to 20 per cent who may well qualify actually take advantage of it, likely because they don't know about it or don't have a law- yer advocating on their behalf. The new rules don't allow for older, pre-existing trusts to be grandfathered. All trusts, new or old, will be subject to the highest tax rate beginning Jan. 1. That can create extra work for lawyers who will have to revisit old and existing files. There also remains a possibility for some people who had a trust estab- lished years ago and failed to revisit it to leave a confusing and potentially costly legacy after death with income from capital taxed way beyond what they had originally anticipated. David Rotfleisch estimates the addi- tional tax cost could be $10,000 to $20,000 per year for each trust. "In terms of future planning, it's a whole new world. We can no longer do what we did," says Rotfleisch, a tax and busi- ness lawyer and chartered professional accountant, pointing at the spousal trust in particular. "They will wake up Jan. 1 with quite a New Year's head- ache." The rules reduce the flexibility and options after death, although he points out there's no particular harm in keeping those testamentary trusts in place. The five-year tax holiday avail- able through immigration trusts was eliminated in 2014, prior to the current changes. Previously, those immigrating to Canada could use the trust as a tax haven for up to 60 months. Now, lawyers must come up with another strategy to achieve savings. With the addition of the latest changes, McMillan LLP tax lawyer Ryan Walker has been advising clients to carefully examine their situations and begin doing corrective planning where necessary. "Trusts are difficult for the tax system to deal with . . . these changes are a further example of the government trying to address these unique legal con- cepts which are trusts." While much of what has changed makes sense in the government's deter- mination to remove the preferential treatment allowed through testamen- tary trusts, there is one change affecting life interest trusts including spousal, alter-ego, and joint-partner trusts, leav- ing many to suggest there is room for a correction of some. There's a rollover of assets going into those trusts, so there is no triggering for capital gains tax when the trust is created. That tax is paid in the trust at death of the life beneficiary. Now, under the new rules, on the death of the life beneficiary, the taxes are instead allocated to the life ben- eficiary's estate, creating a mismatch of taxes being incurred by one taxpayer and the assets being held by a differ- ent taxpayer. This is now considered a significant problem in a blended family situation where the beneficiaries of the trust may not be the same as the benefi- ciaries of the estate. "That is a major change that people are concerned about," says Atin. "One of the classic reasons why you use a spou- sal trust is exactly this situation, when you have a second marriage." But, he adds, when that second spouse dies and triggers payment by those who are not benefiting from the trust, its effective- ness is compromised. And just how the Canada Revenue Agency will deal with that is also a question. "Who knows how to draft around that?" Strickland is alerting clients with spousal trusts to make them aware of the possible impact and make any nec- essary changes to avoid troubling situ- ations later. "We're not certain how the CRA will interpret these rules. . . . We're at least encouraging [clients] to review the estate planning techniques that go beyond the will" such as life insurance contracts and registered accounts. The federal Department of Finance says it continues to accept comments online about the changes related to spousal trusts online "as part of devel- oping the measure." Nick Smith, of Legacy Tax and Trust Lawyers, points out this is an impor- tant distinction in British Columbia, where alter-ego and joint-partner trusts are more commonly used because they help to avoid probate fees as well as challenges under the province's wills variation legislation. In B.C., all spouses and children have the right to challenge wills. "In other provinces those issues are not as prevalent," says Smith. For those who no longer find value in the trust in the absence of the mar- ginal tax rate, there is the option of col- lapsing the trust, although, unless the trust terms allow for its collapse, that may involve an application before the courts, which incurs further costs for the clients. Niedermayer expects there may well be more activity in court- ordered variations. "There's still some tax advantage, but you won't see it on such a broad scale," concludes Atin. Following the chang- es, the advantages now weigh more in favour of the control and protection elements of will trusts. "We just won't use them purely for this tax advantage anymore." L E G A L R E P O RT \ T R U S T S & E S TAT E S TRUSTS ARE DIFFICULT FOR THE TAX SYSTEM TO DEAL WITH . . . THESE CHANGES ARE A FURTHER EXAMPLE OF THE GOVERNMENT TRYING TO ADDRESS THESE UNIQUE LEGAL CONCEPTS WHICH ARE TRUSTS. RYAN WALKER, McMillan LLP

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