2016-0645801C6 2016 STEP - Q4 - QDT & pref beneficiary election

Principal Issues: 1. Has the introduction of the QDT rules affected the availability of the preferred beneficiary election? 2. Does a trust that otherwise qualifies to be a QDT and to make the preferred beneficiary election have the ability to choose which election to make, if any? 3. Can a trust that has elected to be a QDT for a taxation year also make a preferred beneficiary election in the same year?

Position: 1. No. 2. Yes. 3. Yes.

Reasons: 1. There have been no changes to the preferred beneficiary election rules as a result of the changes to the rules applicable to testamentary trusts, including the introduction of the QDT. Similarly, there has been no change to the method in which the preferred beneficiary election is made. 2. Both the QDT and preferred beneficiary election are elective provisions. As such, the trustees together with the disabled beneficiary can choose which joint election will be made, if any. 3. QDTs and the preferred beneficiary election are not mutually exclusive elections. It is possible for a trust that has made a joint election to be a QDT to also make a preferred beneficiary election.

Author: Panourgias, Marina
Section: 122(1)(c); 122(2); 122(3); 104(14); 104(12); 104(15); 108(1)

STEP CRA Roundtable – June 10, 2016

Question 4.  Qualified Disability Trust and Preferred Beneficiary Election  

There are a number of conditions that must be met in order for a trust to be eligible to be a Qualified Disability Trust (“QDT”) for a particular tax year.  One of the conditions in subsection 122(3) is that the electing beneficiary cannot make a joint election with any other trust for that other trust to be a QDT in the same year.  Consider the situation where each of the four grandparents of an individual with a disability establishes a trust for the individual under his/her will.  Since the individual with a disability is a beneficiary of each of the four trusts, it would only be possible for one of the trusts to be a QDT for 2016 and subsequent tax years.  As a result, only the QDT will be taxed at graduated income tax rates while the remaining three trusts would be subject to tax at the highest marginal tax rate. 

Where the preferred beneficiary election in subsection 104(14) is available, it is possible for a trustee and preferred beneficiary to jointly elect to have all or a portion of the taxable income earned by the trust included in the income of the preferred beneficiary.  Thus, the income of the trust will be taxed based on the individual’s graduated income tax rates.  

Can the CRA confirm whether the introduction of the QDT provisions restricts the ability to make a preferred beneficiary election?  In particular, is it possible for a preferred beneficiary election to be made for each of the four testamentary trusts created for the benefit of the same disabled individual?  

CRA Response

The introduction of the QDT provisions has not restricted the availability of the preferred beneficiary election under subsection 104(14) of the Income Tax Act, nor have there been any changes to the method in which a preferred beneficiary election is made. Many of the requisite conditions for making a preferred beneficiary election differ from those required for a trust to be a QDT.  Accordingly, where the respective conditions of each election are met, the trust has the ability to choose whether to make a preferred beneficiary election or a QDT election.  It is also possible for a trust which elects to be a QDT to also make a preferred beneficiary election (jointly with the beneficiary) in a given tax year.

2016-064580
Marina Panourgias

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