As fellow bloggers have noted, the Society of Trust and Estate Practitioners held its annual national conference in Toronto on June 9th and 10th. Each year, one of the most anticipated sessions is the Canada Revenue Agency (“CRA”) Roundtable.
Question No. 4 at this year’s Roundtable concerned the interplay between the preferred beneficiary election (“PBE”) and the qualified disability trust (“QDT”). I have in a previous blog outlined the requirements for a trust to qualify as a QDT. In my next blog, I will explain in more detail the requirements for a trust and a beneficiary to jointly elect to use the PBE. For present purposes, it is sufficient to note that the PBE is an election that is available to certain trusts with one or more disabled beneficiaries who are related to the settlor of the trust. If the trust and the disabled beneficiary make a joint election, the portion of the accumulating income of the trust for the year that is designated in the joint election is included in the income of the beneficiary without such income being “paid or payable” to the beneficiary. In other words, the designated income is accumulated in the trust but it is taxed in the hands of the disabled beneficiary at his or her graduated rates.
At the Roundtable, the CRA was asked to consider a scenario where the four grandparents of a disabled beneficiary each establish a testamentary trust for that beneficiary in their wills. As a result of the QDT rules, only one of the testamentary trusts for the beneficiary can be treated as a QDT for that beneficiary in a particular year. The question for the CRA was whether the introduction of the QDT rules had restricted the ability to use the PBE. In other words, could the PBE be used in each of the four testamentary trusts established for the disabled beneficiary, even though only one of them can be treated as a QDT?
The CRA confirmed that there can be only one QDT for a particular disabled beneficiary in a particular year, so it is true that only one of the four testamentary trust in this scenario can be treated as a QDT each year. Helpfully, the CRA also confirmed that the introduction of the QDT rules had not restricted the application of the PBE. Accordingly, provided all of the requirements for the PBE were met, each of the four testamentary trusts in this scenario could jointly elect with the disabled beneficiary to use the PBE. The CRA noted that the requirements to use the PBE and the requirements for a trust to qualify as a QDT are not identical, so it is important to ensure the conditions for each are carefully reviewed. To this I would add, it is also important for estate planners to consider the conditions for both the PBE and the QDT at the planning/drafting stage to determine if either or both of these tools are available for a particular disabled person.
Given the limitation on the number of QDT’s for a particular disabled beneficiary, it is welcome news that the new QDT rules do not restrict the ability to use the PBE in respect of the same beneficiary.