There was a time when the creation of trusts in the province of Alberta was practically an industry unto itself. I can attest from personal experience when I was in private law practice a decade or so back that Alberta firms advertised directly to their Ontario colleagues.
From then up to last year, among the provinces Alberta clearly had the lowest top bracket tax rate at 39%, being 29% federal and 10% provincial. At times that has ranged from 5% to over 15% better than elsewhere in the country.
The expectation was that the trust’s residence for tax purposes would follow that of the trustee. This came under scrutiny in 2012 in Fundy Settlement with the Supreme Court of Canada ruling that residency is determined based on the location of the trust’s central management and control. In that case, that meant Canada rather than Barbados. The Newfoundland Supreme Court considered that case in Discovery Trust earlier this year, upholding a trust’s contention that it was resident in Alberta.
Still, even if a trust is properly established, managed and documented, is it still worth the effort to have it taxed in Alberta?
Changes to testamentary trusts
Inter vivos trusts have long been taxed at the highest combined federal-provincial tax rate, but testamentary trusts could take advantage of graduated brackets. Potentially this benefit could be multiplied for someone who was a beneficiary out 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.
This obviously takes the shine off using testamentary trusts for tax purposes (let alone multiples), though where it is expected that a given beneficiary will be at top bracket in another province, a 39% tax rate may still seem useful — so long as the rate remains at that level.
Alberta rate changes
Even before the election of a majority NDP government in Alberta earlier this year, the incumbent Progressive Conservatives had proposed adding another tax bracket. This became moot once the election was called.
After winning a majority in May, the NDP moved swiftly to carry out a number of election promises before the summer. This included the addition of 4 provincial brackets, 3 of them above the federal bracket ($138,586 in 2015): 12% at $125,000, 13% at $150,000, 14% at $200,000 and 15% at $300,000. The rates are effective October 1, so there is a pro-rata calculation based on the addition applying for 1/4 of the year in 2015. For the top bracket, that means 11.25% for 2015, and then 15% hereafter.
Combined with the 29% federal bracket, that makes for a top combined rate of 44%, the same as Saskatchewan and slightly above the Newfoundland top rate of 43.3%. Alberta is no longer the obvious choice.
Liberals election platform
At time of writing, the Liberals have just won a majority in the federal election. A key plank in their tax platform was to reduce a middle federal bracket from 22% to 20.5%, and to add a top bracket for income over $200,000 at the rate of 33%.
With a majority mandate, it can be expected that these tax changes will be put in place, certainly for 2016. That will raise all provincial combined top rates by that same 4% increment. In Alberta’s case, that will take it to 48% in 2016.
This series of changes make for a significantly different tax proposition for testamentary trusts than would have been contemplated no more than three years ago, particularly for trusts resident in Alberta. Those who have drafted their Wills intending to take advantage of the tax differential should take another look and decide if their plans still make sense. For existing trusts, legal and tax advice is recommended if a variation of the trust is desirable or even possible.