All About Estates


In my last blog I began a discussion of multiple wills. I will continue that discussion in my next blog. For today’s blog, I will focus on two recently-announced tax measures that relate to planning for persons with disabilities. The measures were included in the legislative proposals relating to the Income Tax Act (“ITA”) released on September 16, 2016.

The first measure relates to the calculation of the “recovery tax” for a qualified disability trust (“QDT”) under paragraph 122(1)(c) of the ITA. Below is an excerpt from my previous blog on the recovery tax that summarizes the existing formula:

The quantum of the recovery tax is represented by formula “A minus B”. For a particular year, “B” represents the actual tax paid by the trust in the year and “A” represents the amount of tax that would have been paid in the year if the income retained in the trust was taxed at the highest marginal rate. However, variable “A” is subject to two adjustments. First, if any of the income retained in the trust in the particular year is distributed to an electing beneficiary as capital in a subsequent year, but prior to the year the trust ceases to be a QDT, it is deducted from the taxable income for the particular year. Second, the federal and provincial income tax paid in the particular year in respect of the subsequently-distributed retained taxable income is also deducted from the taxable income for the particular year. In short, the purpose of the recovery tax formula is to put the trust in the same position it would have been in if all of the retained taxable income for the particular year, less any amounts subsequently distributed to an electing beneficiary and the related tax liability, was taxed at the top marginal rate.

The existing formula of “A minus B” has been changed to “A minus (B minus C)”. The new variable “C” captures the federal income tax paid in the particular year in respect of the subsequently-distributed retained taxable income. As noted above, variable “A” is reduced by this amount. The Explanatory Notes to the legislative proposals explain that new variable C has been included so that, if credit is given for such federal income tax in determining variable A, credit for that amount is not given a second time through variable B, which represents all of the tax previously paid. In short, this prevents a double credit being given for the same federal income tax previously paid.

The second tax measure relates to transfers from certain registered accounts (RRSP, RRIF, Registered Pension Plan, Pooled Registered Pension Plan or a specified pension plan) of a deceased individual to the Registered Disability Savings Plan (“RDSP”) of a child or grandchild who is financially dependent on the deceased individual due to mental or physical infirmity. Subsection 146.4(4) of the ITA sets out the conditions that an RDSP must satisfy in order to be registered. Subparagraph 146.4(4)(f)(i) currently provides that an RDSP must prohibit contributions from being made to a plan at any time the beneficiary of the plan is not eligible for the disability tax credit (“DTC”) in respect of a particular taxation year that includes the time of the contribution. However, if a plan so provides, subsection 146.4(4.1) of the ITA permits the holder of an RDSP to make an election known as a “DTC election” in respect of a beneficiary who is no longer DTC-eligible. As part of the election, a medical doctor must certify in writing that the nature of the beneficiary’s condition is such that the beneficiary is likely to become DTC-eligible again in a future taxation year. If the election is made before the end of the calendar year after the year the beneficiary becomes DTC-ineligible, the RDSP will not have to close by that date as would normally be the case, and the RDSP can remain open for a further four years (and can of course continue in the normal course if the beneficiary become DTC-eligible again within that time).

The new tax measures amend subparagraph 146.4(4)(f)(i) of the ITA to provide that a plan must prohibit contributions while a beneficiary is not DTC-eligible, unless the contribution is a “specified RDSP payment” and there is a valid DTC election in place. A specified RDSP payment is a payment made from one of the above-mentioned registered plans of a deceased person to the RDSP of a child or grandchild who is financially dependent on the deceased individual due to mental or physical infirmity. That is to say, amended subparagraph 146.4(4)(f)(i) ensures that the rollover to an RDSP is still available where the beneficiary of the RDSP is not DTC-eligible but a valid DTC election is made.

About Darren Lund
Darren Lund is a member of the Trust, Wills, Estates and Charities at Fasken, Toronto office. Darren has expertise in a broad range of estate planning matters, including multiple wills, inter vivos trusts, disability planning, estate freezing, and planning for beneficiaries and assets outside Canada. Darren advises trustees and beneficiaries on all aspects of estate administration, both contentious and non-contentious, and his experience includes passing of fiduciary accounts, trust variations, post-mortem tax planning, and administering the Canadian estates of non-residents. He also speaks and writes on a variety of related topics such as estate planning for spouses and couples, inheriting overseas property and estate planning for persons with disabilities. He previously practised estates law at a large national law firm. Email: