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Trust taxation changes a 'headache' for taxpayers

When changes to the taxation of testamentary trusts take effect on Jan. 1, the additional cost for taxpayers is likely to be in the tens of thousands of dollars per year for each trust, Toronto tax litigation lawyer David J. Rotfleisch tells Canadian Lawyer.

As the article notes, trusts have been used as a tax-savings tool in estate planning, namely for those with investment savings. But, while inter vivos trusts have always been taxed at the highest rate, testamentary trusts have benefited from a tax advantage, as they are treated as a separate tax person and any earnings from investment have been taxed at marginal rates.

“So some of those earnings would be taxed at lower rates while, as in an individual’s income, higher earnings are subject to the maximum tax rate,” says the article.

However, as of Jan. 1, the marginal rate will no longer apply.

“In terms of future planning, it’s a whole new world. We can no longer do what we did,” says Rotfleisch, founding tax lawyer at Rotfleisch & Samulovitch Professional Corporation, of the spousal trust specifically. He estimates the additional tax cost could be $10,000 to $20,000 per year for each trust.

“They will wake up Jan. 1 with quite a New Year’s headache,” he says.

While Rotfleisch tells Canadian Lawyer that the rules reduce the flexibility and options after death, he says that there is no particular harm in keeping those testamentary trusts in place.

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