At one time, setting up trusts in Alberta was practically an industry unto itself. I can attest from personal experience: when I was in private law practice a decade ago, Alberta law firms advertised directly to their Ontario colleagues.
Until last year, Alberta had the lowest top-bracket tax rate at 39% (29% federal and 10% provincial). Over time, this has been 5% to 15% better than elsewhere in the country. For tax purposes, it is generally expected that the trust’s residence would be the same as the trustee’s residence. But this came under scrutiny in 2012: in Fundy Settlement v. The Queen, the Supreme Court of Canada ruled that a trust’s residency is determined by the location of the trust’s central management and control.
In the Fundy case, that meant Canada rather than Barbados. The Newfoundland Supreme Court considered Fundy when deciding Discovery Trust v. Minister of National Revenue earlier this year; the court upheld the trust’s contention that it was resident in Alberta. Even if a trust is properly established, managed and documented as resident in Alberta, is it still worth the effort?
Changes to testamentary trusts
Inter vivos trusts have long been taxed at the highest combined federal-provincial tax rate, while testamentary trusts could take advantage of graduated brackets. The benefit of graduated rates could be multiplied for someone who was a beneficiary of more than one will.
After this year, with the exception of the first 36 months of an estate and trusts for qualified disabled beneficiaries, testamentary trusts will also be taxed at the highest bracket.
Alberta rate changes
After winning a majority in May, Alberta’s provincial NDP government moved swiftly to carry out a number of election promises. This included adding four provincial brackets, three of them above the top federal bracket ($138,586 in 2015):
- 12% at $125,000;
- 13% at $150,000;
- 14% at $200,000; and
- 15% at $300,000.
These rates were effective October 1, so there’s a pro-rata calculation for one-quarter of the year in 2015. For the top bracket, that means 11.25% for 2015, and 15% thereafter.
Combined with the 29% federal bracket, that means a top combined rate of 44%—the same as Saskatchewan’s, and slightly above Newfoundland’s top rate of 43.3%. Alberta’s no longer the obvious choice for a low-tax jurisdiction.
Impact of Liberal majority
Trudeau’s Liberals won a federal majority in October.
A key plank of their tax platform was to reduce a middle federal bracket from 22% to 20.5%, and add a top bracket for income over $200,000 at a rate of 33%. Since the Grits have a majority, we can expect them to implement these changes for the 2016 tax year. That will raise all combined federal-provincial top rates by 4%. In Alberta’s case, that will take it the combined rate from 44% to 48% in 2016.
The changes create a significantly different tax situation for testamentary trusts, particularly for those resident in Alberta. Clients who have drafted wills intending to take advantage of residency-based tax differentials should have a second look and decide if their plans still make sense.
For existing trusts, legal and tax advice is recommended to determine if it’s possible to vary, or change, the trust’s terms.
Doug Carroll, JD, LLM (Tax), CFP, TEP, is vice president, Tax and Estate Planning, Invesco Canada
Originally published in Advisor's Edge Report
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