Tax Changes – Review Your Estate Plan and Especially Your Will

By Martin Rumack

April 26, 2016

Alter Ego Trusts, Charitable Gifts, Estate Tax Audits, Existing Wills, Trust Funds, Wills



Clients who have used our firm to prepare their Wills and Powers of Attorney know that every three years we write to remind them to review and determine whether any changes need to be made to reflect their current personal circumstances. This is my own practice and not a legal requirement.  I wanted to bring to your attention that in December of 2014, subsequent to the publication of last year’s newsletter, major amendments were made to the Income Tax Act which may have an effect on your Will and Estate Planning.  These changes will come into effect on January 1, 2016.

Existing Wills

Under the current provisions of the Income Tax Act when an individual dies, they are deemed to have disposed of or sold off their capital assets on death.  This usually results in a capital gain tax liability, which could lead to a monetary problem if the majority of assets are not liquid.  In some cases their assets are transferred into a separate trust for the sole benefit of the surviving spouse during their lifetime.  This allows the delay of the payment of taxes until the surviving spouse passes away.  However, the tax liability remains that of the estate of the first spouse who passed away as the assets will be distributed in accordance with that spouse’s Will.

Under changes in effect January 1, 2016, the tax burden will now shift to the estate of the surviving spouse.  This will result, unfairly in my opinion, on the tax liability becoming the responsibility of the surviving spouse who does not even own the capital assets.  If your Will does not contain a spousal trust, this will not have any effect on your Will.  These new tax rules will only apply to Estates where a spouse dies after December 31, 2015.

Alter Ego Trusts

In a similar manner, in the situations where an Alter Ego Trust has been established, the new rules shift the tax liability from the Trust to the estate of the party who established the trust, ie., the Settlor of the trust.  While this change may be insignificant in many cases; it depends on an individual case situation.

Tax Rate and Charitable Gifts

Trust Funds

Currently any income earned by trusts or funds that are established by a Will is taxed in the same manner as are individuals; in other words, the higher the taxable income, the higher the tax rate for the year in question.  The new tax rules commencing in 2016 will now limit trusts or funds created in a Will to benefit from the graduated marginal tax rates for a period no greater than 3 years from the date of death.  After the 3-year period any future income will be automatically taxed at the top marginal rate.  This 3-year time period is called the “graduated rate estate”.

Charitable Gifts

Currently any Will leaving a charitable gift results in tax credits, which are applied to the taxable income of the deceased party in the year of death and the year prior to the year of death.  Under the new amendments, charitable gifts provided for in a Will must be delivered within the 3-year period following the death.  Make sure your Will takes this into account.  If more than 3 years is required to distribute charitable gifts, then certain tax credits may be lost.

Under the circumstances everyone should review their Wills and any Trusts now!  I would also recommend consulting with your tax accountant and/or your financial advisor as well as myself.

Estate Tax Audits

January 1, 2015 saw the implementation of the requirement of Estate Trustees both with and without a Will, (formerly known as Executors and Administrators, respectively), to comply with the filing and valuation reporting requirements of the new Estate Administration Tax Act.  This is another piece of legislation introduced to help the provincial government ensure it gets all the tax revenue it can by putting the onus on Executors and Administrators to accurately report the true value of all of the assets of a deceased person as of the date of death.

The return must be filed within 90 days from when the Certificate of Appointment of an Executor with or without a Will was issued.  There are no guidelines on which returns will be scrutinized or audited. I strongly advise Executors to be extremely accurate and provide complete disclosure in completing and filing these returns.  If necessary hire a qualified appraiser to provide you with an accurate value of any and all material assets.

The burden is on the Executor.  While a residential property may not require a formal appraisal, as Executor you should minimally obtain several letters of opinion on the realistic value of the property from experienced real estate agents familiar with the area in which the property is located.  This may suffice thereby eliminating the cost of formal appraisals.

With respect to assets such as shares of a private company, works of art, valuable jewellery, professional appraisals must be undertaken.


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