Reprinted with the kind permission of the following presenters who are experts in Disability law.
PRESENTED BY: KEN M. KRAMER, Q.C., PRINCIPAL & SENIOR ASSOCIATE COUNSEL KMK LAW CORPORATION & HALLDOR K. BJARNASON, BARRISTER & SOLICITOR ACCESS LAW GROUP
TRENDS IN BC’S DISABILITY LANDSCAPE
As of August 2015, there were approximately 96,000 people receiving disability assistance in BC.
The Ministry (SDSI) will provide about $976 million in disability assistance in 2015-16, an increase of 162% since 2001–02.
Funding of more than $5 billion a year is being allocated towards programs and services for people with disabilities.
Government has set a goal of making B.C. the most progressive place in Canada for people with disabilities with the Accessibility 2024 plan.
DISABILITY AND ESTATE PLANNING
- When an estate plan needs to include a beneficiary with a disability, many practical, tax and disability benefit issues must be considered.
- SDSI provides disability assistance to Persons with Disabilities (PWD) who require financial or health support and are unable to fully participate in the workforce.
- Proper planning will ensure that beneficiaries with disabilities continue to receive disability assistance
TRUSTS AND DISABILITY
- To achieve a greater level of certainty, estate planning will often involve the use of Trusts.
- Notwithstanding recent legislative and policy changes, Trusts continue to be a very effective vehicle in planning for individuals with disabilities.
- In particular, they offer great value where the person with a disability is unable to manage money for themselves due to capacity issues and/or has a higher level of susceptibility to exploitation
- Trusts also preserve access to provincial disability benefits.
WHY A DISABILITY TRUST?
- Funds in a trust are not treated as an asset of a person receiving disability assistance. The beneficiary continues to qualify for assistance.
- Trusts provide a way for a person on PWD or their family to transfer and safeguard assets. The trust can cover disability-related costs now and in the future while the beneficiary remains eligible for disability assistance
QUALIFIED DISABILITY TRUSTS
Changes in Federal Income Tax Act (effective January 1st, 2016)• Bill C-43, which received Royal Assent on December 16, 2014, introduced a new type of trust to benefit individuals with disabilities: the Qualified Disability Trusts (“QDT”).
• QDT: one of two exceptions where a testamentary trust, during its lifetime, will be taxed at a graduated rate instead of at the highest marginal rate (47%) on income generated in the trust.
• The other exception is known as a “Graduated Rate Estate” (GRE) which only have graduated tax rates for a maximum of 36 months
- “Electing Beneficiary”
- Defined in subsection 122 (3) as a beneficiary of the trust that qualifies for the disability tax credit in their taxation year that ends within the trust’s taxation year; and
- Does not make a QDT election with any other trust.
- Electing beneficiaries must be a “named” beneficiaries
FURTHER QDT QUALIFICATIONS
- The trust must be resident in Canada for the tax year.
- The trust must make a joint election with a “qualifying beneficiary” to be a QDT.
- At the end of the taxation year, the trust must have arisen on, and as a consequence of, a particular individual’s death.
OTHER PLANNING NOTES FOR QDT
Late Filled Election
- One of the pitfalls of the QDT election is that there is no relief for a late filed election. This means that if your client does not elect to have the trust treated as a QDT on time, the trust will be taxed at the highest marginal rate for the year.
Must be named beneficiaries
- The QDT definition specifically requires that electing beneficiaries be named beneficiaries in the instrument under which the trust was created. This may not always be true with a testamentary trust.
- A QDT may be subject to a recovery tax under subsection 122(2) of the ITA in respect to a previous year.
- A QDT recovery tax will be triggered if any of the following occur:
a) None of the beneficiaries at year- end is an electing beneficiary for the previous year.
b) The trust ceases to be resident in Canada.
A capital distribution is made to a non-electing beneficiary.
When a trust does not qualify as a QDT tax-efficient investing becomes important.
Strategies to consider when planning for the use of a QDT:
Have the person with the disability as the only beneficiary to ensure the recovery tax will not apply.
Be mindful that an electing beneficiary may only make the election with one trust for each taxation year. As examples, planning can be done to benefit from the QDT election by:
- Having the insurance proceeds paid to the estate instead of a trust.
- With multiple trusts, choosing the trust with the highest income the QDT.
- Ensure that an electing beneficiary has the capacity to make a joint election to be QDT.
- Such in election may be difficult to make in the case where an electing beneficiary does not have the capacity to make such an election. In such a case, a court appointed guardian may be required in order to successfully make the election.
- Life insurance trusts may be QDTs. As proceeds of life insurance may be significant, it would be prudent to consider whether such trust should be designated as the QDT.
- If a spouse is eligible for the DTC, it is possible for a testamentary spousal trust to qualify as a QDT.