Magazine article CMA - the Management Accounting Magazine

Election Time - the New Trust Rules

Magazine article CMA - the Management Accounting Magazine

Election Time - the New Trust Rules

Article excerpt

Spousal trusts -- "post-1971" and "pre-1972" -- check the differences.

Elections, elections. We have already experienced the 1992 U.S. Presidential election and will likely see Canadian federal and provincial elections in 1993. But the most important elections for trustees are those that will be filed under the proposed trust rules of the Income Tax Act (ITA).

To prevent the potential indefinite tax deferral by trusts on accrued gains, the 21-year rule was put in the ITA when capital gains were first taxed in 1972. This article, the first of two parts, will describe the rule. Part two will describe the deferral election.

The rule provides that most trusts are deemed to have disposed of their assets every 21 years. For trusts created before 1972, the first deemed disposition date was January 1, 1993. Capital property, land inventory and depreciable property are deemed disposed of at fair market value (FMV). The result is that a trust with non-liquid assets and accrued gains faces a tax liability without any cash to pay it. Furthermore, the 21-year rule also affects trusts formed for non-tax reasons, such as trusts for the benefit of the elderly or disabled.

On February 11, 1991 the Department of Finance proposed complex new draft legislation which was released in a notice of ways and means motion dated June 22, 1992. It is important to note that many of the provisions, especially the anti-avoidance, are retroactive to February 11, 1991.

The proposed legislation does not do away with the 21-year rule but allows an election to defer its application in certain cases. The proposals allow a trust to elect to defer the deemed disposition until all interests of exempt beneficiaries have ended (normally on the death of the last exempt beneficiary).

To decide if a trust qualifies for the election, you must first determine the type of trust and establish when the first deemed disposition occurs. This requires a careful reading of the will or trust deed.

For post-1971 spousal trusts, both testamentary and inter vivos, the first deemed disposition is on the death of the spouse-beneficiary. The trust will continue to have a deemed disposition every 21 years thereafter. This type of trust is one in which the spouse was entitled to receive all of the trust's income prior to his/her death and no person except the spouse could, before the spouse's death, receive or otherwise obtain the use of any of the income or capital of the trust. …

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