Blog: Income tax instalments for testamentary trusts that are not graduated rate estates

March 10th, 2016 La date limite pour les taxes de vente (TPS, TVH et TVQ) et les avantages imposables de 2016 approche

For taxation year-ends after 2015, a testamentary trust that is not a graduated rate estate (GRE) will be subject to income tax instalments.

Instalment threshold

  • For a trust resident of Quebec – $1,800 (federal taxes only)
  • For all other trusts – $3,000 (federal and provincial taxes combined)

A trust is subject to income tax instalments in 2016 if net federal taxes owing (taxes payable less any tax withheld at source) is greater than instalment threshold in either of the two preceding taxation years, AND 2016 net taxes owing is greater than the instalment threshold.

Taxable income of trust

The trustee can report income or capital gains in a trust where the amounts are not paid or payable to a beneficiary.

Previously, a trustee could make a designation to tax any income or capital gains that was paid or payable to a beneficiary in the trust.  It was depending on the circumstances, an interesting planning tool. After 2015, a trustee can only make a designation to tax income or capital gains in a trust in order to apply trust losses carried forward. As a result, a trustee can no longer elect to create taxable income and pay tax in the trust where the amounts have been distributed to the beneficiaries. Accordingly, many trusts will not be subject to instalments.

Calculation of the income tax instalments

In general, each quarterly instalment would be ¼ of the previous year taxes payable. Where the previous taxation period is a short year, the tax calculation would be annualized.

For 2016, if the tax instalments paid are based on the previous year taxes payable, they will most likely be less than the net taxes owing on the 2016 trust income tax return because of the loss of graduated tax rates. As a result, such trusts may require a further payment of tax at time of filing the 2016 return.

When is the first income tax instalment due?

The first quarterly instalment for trusts is due March 15, 2016. The Canada Revenue Agency (CRA) will not be notifying trust administrators of the requirement to make instalments for 2016.

What happens if instalment payments are deficient?

Generally, if a taxpayer pays less than the required income tax instalments, they will be subject to instalment interest calculated on each deficient instalment. In the past, CRA administrative policy has been to not assess penalties or interest where a trust fails to make sufficient instalment payments. It is unclear whether this policy will be continued. Crowe BGK will monitor this policy and report on our findings in a future tax highlight.

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