As part of a crackdown on planning using testamentary trusts to
obtain the benefit of multiple graduated tax rates, the Federal
Government recently enacted a number of amendments to the
Income Tax Act. These address circumstances where a
testamentary trust (including an estate) incurs a debt or
obligation to a beneficiary or any other person with whom a
beneficiary of the trust does not deal at arm's length. In
these circumstances, the trust could lose its status as a
"testamentary trust", and with it, the graduated tax
rates afforded to testamentary trusts.
The real worry for estate planners are debts arising from
innocuous payments, such as funeral expenses paid by a beneficiary
of an estate where the estate's assets are tied up in illiquid
form (such as private company shares or land). Unless one of the
exceptions apply, such a payment could very well cause an estate to
lose its status as a "testamentary trust" and with it,
the trust's graduated tax rates.
