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Good news update from the Department of Finance regarding subsection 104(13.4)

On November 4, 2015, I wrote a short blog giving interested readers an update regarding the status of the discussions that the CBA/CPA Canada Joint Committee on Taxation (which I lead the Joint Committee’s efforts on this topic), the Society of Trust and Estate Practitioners (STEP), and the Conference for Advanced Life Underwriting (CALU) (the “Working Group”) have had with the Department of Finance regarding significant issues of concern raised by many tax, trust, and estate practitioners regarding subsection 104(13.4) of the Income Tax Act.

Today, I’m pleased to share with you a letter that the Department of Finance just released to the Joint Committee, STEP, and CALU. In short, it states the Department of Finance has heard our concerns and is prepared to continue further discussions relating to specific recommendations made by the Working Group to amend subsection 104(13.4) to deal with the misplaced tax liability and charitable donation mismatch concerns. With respect to the misplaced tax liability, have a look at page 5 of the letter which indicates Finance’s understanding of the Working Group’s recommendations:

We understand from these discussions that the Joint Committee, CALU, and STEP Canada would generally support an option that would, put in very general terms, subject affected trusts and their beneficiaries to an income tax treatment for the 2016 and later taxation years that more closely corresponds to that available to trusts for 2015 and earlier taxation years, by taxing in the trust the income deemed to be recognized on the death of the beneficiary.  Under this option, the subsection 104(13.4) and related amendments generally would remain as enacted, except that paragraph 104(13.4)(b) would be amended so that it did not apply to a trust in respect of the death of a particular beneficiary unless;

  • the trust is immediately before the particular beneficiary’s death a testamentary trust that is a post-1971 spousal or common-law partner trust;
  • the trust was created by the will of a taxpayer who dies before 2017;
  • the particular beneficiary is resident in Canada immediately before the particular beneficiary’s death; and
  • the trust and the particular beneficiary’s graduated rate estate jointly elect in prescribed form to have that paragraph apply.

So what does the above mean? Well, existing paragraph 104(13.4)(b) is the provision that causes the misplaced tax liability to occur. In other words, it causes the tax liability from the deemed disposition of the trust assets to be in the hands of the deceased’s estate as opposed to the trust. The proposed amendment would cause the tax liability to remain in the trust – as it should be – with very limited elective exceptions. Similarly, the Working Group is recommending that charitable donations made in the calendar year of the death of the life interest beneficiary from trust assets to be placed in the right spot. All great news.

However, will the legislation be retroactively amended to deal with our concerns? Is there any guarantee that subsection 104(13.4) will be amended? There are no great answers to those obvious questions. Accordingly, taxpayers and their advisors will need to carefully weigh what the letter means to their planning given the fact that subsection 104(13.4) is scheduled to become effective law on January 1, 2016. The debate still exists as to whether or not current estate plans should take into consideration the potential negative implications of subsection 104(13.4) or take comfort in the fact that the Department of Finance appears sympathetic to the concerns that have been expressed. Ideally, we would like to see some immediate legislative changes. However, I commend the Department of Finance for listening to practitioners’ concerns and sending the letter.

Estate planning practitioners, your work continues, but now with better direction from the Department of Finance on the concerns previously expressed about subsection 104(13.4). The Joint Committee will continue to work with STEP, CALU, and the Department of Finance to deal with these important issues.