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The trustees of the AET distribute the assets to Jill’s beneficiaries shortly after her passing (so we’ll ignore income earned after death). Jill’s 2016 taxable income is $150,000, which includes investment income of $60,000. Jill dies on November 30, 2016, with her investments worth the same as on January 31.
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Jill transfers Portfolio 1 to an AET (of which she is a capital beneficiary) on January 31, 2016.
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RRIF = $500,000 (children designated as beneficiaries) Ontario resident Jill Smith, age 75, has the following assets:Ĭash, term deposits and bonds = $1 millionĮquities = FMV of $2 million and ACB of $1.6 million (unrealized gain of $400,000)Įquities = FMV of $300,000 and ACB of $200,000 (unrealized gain of $100,000) However, capital losses can be carried back to the preceding three years if capital gains were realized by the AET.Ĭonsider a simplified case study. There is no ability to elect to have losses of the AET be applied to the final personal tax return of the deceased, since an AET is created during the settlor’s lifetime and not upon her death.
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AETs require administration (e.g., annual tax returns), and settlors can incur additional professional fees.Not so for an AET-again, the highest marginal rate applies. Under the old rules, there is a deemed disposition of assets on the death of the settlor, and the resulting capital gain or loss is taxed in the AET (at the highest tax rate for the province of residence of the trust).Īlso, consider that, after a person has died, income earned by a graduated rate estate (GRE) is subject to marginal personal tax rates.
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Draft legislation released Januwill restore the rules that existed before January 1, 2016, if enacted. This can cause a mismatch if the beneficiaries under the will are not the same as the beneficiaries of the AET (e.g., in a second marriage situation). Under current legislation, deemed capital gains on death are taxed on the final personal return, even though the assets are held by the AET. A trust subject to 75(2) attributes income earned in the AET back to the settlor during their lifetime, and the income is taxed at the settlor’s marginal rate.Ĭurrent life interest trust rules can create unintended issues with respect to the tax treatment of deemed capital gains upon the death of an AET beneficiary. Many AETs are subject to subsection 75(2), a tax avoidance provision that applies when a trust’s settlor is also the capital beneficiary. Although the initial transfer into the AET is tax-deferred, income earned by the AET is taxed at the highest rate, which is 54% in Nova Scotia, for instance. However, the lack of power of encroachment will likely be undesirable to the settlor, since that could mean not being able to get capital back from the AET.ĪETs are not set up for tax savings. Asset protection: An AET may reduce possible claims by creditors against assets if the distribution of capital to the settlor is impossible, or entirely discretionary by the trustee.It also continues after a client’s death, while a POA does not. Power of Attorney alternative: An AET can be more comprehensive in detailing the powers of the trustee.A probated will is a publicly available document. Confidentiality: The trust agreement must be sent to CRA, but the terms of the trust are private.Continuity of management and liquidity: There’s uninterrupted access to the assets of the deceased since the assets don’t need to go to probate.
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