Insights & Resources

Recent federal tax changes have made a big impact on family trusts. These changes could make family trusts less beneficial for managing wealth. If you have a family trust or are considering one, it’s important to understand the effects of these new rules. Here’s what you should know about the changes to the capital gains inclusion rate, alternative minimum tax (AMT), and new reporting rules.

Capital Gains Inclusion Rate Increase

One of the major changes in Budget 2024 is the rise in the capital gains inclusion rate. Currently, 50% of capital gains are taxable. This will soon increase to two-thirds (66.7%) for corporations and most trusts. For individuals, graduated rate estates, and qualified disability trusts, this increase applies to capital gains over $250,000 (Trotta, 2024).

This change, effective for capital gains realized on or after June 25, 2024, will increase taxes on capital gains by roughly 30%, depending on your province or territory. For example, in Alberta, the capital gains tax rate will rise from 24% to 32%, a 33% increase.

For family trusts, this means capital gains held in the trust will face a much higher tax rate. Some trusts may transfer property to Canadian resident beneficiaries on a tax-deferred basis. But this option isn’t always available. If not, the trust may face a much heavier tax burden, making it less useful for managing capital gains.

Alternative Minimum Tax (AMT) Changes

The AMT has also been updated. It is a parallel tax calculation designed to ensure those with low tax liabilities still pay some tax. Budget 2023 raised the AMT rate from 15% to 20.5% and increased the “safe-harbour” exemption for individuals from $40,000 to $173,000 (Trotta, 2024). This gives individuals more room before AMT applies.

However, trusts don’t get this exemption. Without the safe-harbour cushion, trusts are more exposed to AMT, especially those with significant income. Only 50% of interest expenses are deductible for AMT purposes, and donation credits are capped at 80%. This may lead to more income being taxed at the highest marginal rate inside the trust, instead of being distributed to beneficiaries with lower tax rates.

Family trusts holding investments or prescribed-rate loans will feel the higher AMT exposure. As a result, trustees may need to adjust the trust’s strategy to avoid higher taxes.

New Trust Reporting Rules

Another significant change involves new trust reporting requirements. Starting in 2023, most family trusts must complete a new reporting schedule (Schedule 15). There are a few narrow exceptions, but most family trusts will not qualify.

This means family trusts will face stricter reporting rules. Trustees must provide more details about beneficiaries, trustees, and the nature of the assets held in the trust. This increased scrutiny could lead to higher administrative costs, making trusts more cumbersome for families to maintain.

Is a Family Trust Still Right for You?

With these changes, it’s a good time to rethink whether a family trust is still the best choice for your financial plan. Higher capital gains taxes, greater AMT exposure, and stricter reporting rules may reduce the benefits of using a trust for some families.

If you have a family trust or are thinking about setting one up, it’s wise to speak with your financial advisor. They can help you understand how these changes affect your situation. In some cases, other strategies may offer better ways to manage your assets and reduce taxes.

We Can Help

Family trusts have been a helpful tool for managing wealth, but recent tax changes are reshaping the landscape. The increased capital gains inclusion rate and expanded AMT may reduce the advantages trusts offer. To stay ahead, it’s crucial to understand how these new rules impact your trust and financial goals.

If you’re unsure about the future of your family trust, let’s schedule a review. We can assess your options and find the best strategy for you. We work with business professionals, executives, and families to grow and protect their wealth using our Wealth Plan formula. To discuss our approach and if it is the right fit for you, we invite you to schedule a no-obligation discovery consultation.

Disclaimers

Trotta, Matt. “How Tax Changes Affect Family Trusts.” Advisor’s Edge, 17, Sept. 2024, https://www.advisor.ca/tax/estate-planning/how-tax-changes-affect-family-trusts/. Accessed 23 Oct. 2024.