Principal Changes for 2017

New rules applicable to the principal residence of a trust

As of 2017, to be eligible for the principal residence exemption, trusts must meet additional eligibility criteria. For the property to be considered the trust's principal residence, the specified beneficiary of the qualified trust must be resident in Canada in the year. If the trust acquires the residence after October 2, 2016, the trust's constituting act must specify that the primary beneficiary has a right to use the residence throughout the period in the year in which the trust owns the property.

In the paragraph above, a qualified trust is a trust that falls under one of the following categories:

First category: a spousal trust, a joint spousal trust, an alter ego trust with no age limit or certain trusts for the exclusive benefit of the settlor during the settlor's lifetime. Depending on the type of trust, the specified beneficiary of the trust must be either the settlor or the settlor's spouse or former spouse.

Second category: a qualified disability trust whose electing beneficiary for the year is:

  • a specified beneficiary of the trust for the year; and
  • the spouse, de facto spouse, former spouse, former de facto spouse or child of the settlor of the trust.

Third category: a trust for a minor child of deceased parents whose specified beneficiary for the year is an individual who meets the following conditions:

  • The individual's parents are not alive at the beginning of the year.
  • One of the parents is a settlor of the trust.
  • The individual is under 18 at the end of the year.

A specified beneficiary of a trust is a person who has a beneficial interest in the trust and usually inhabits the trust's residence (or whose spouse, former spouse or child usually inhabits the residence).

In the case of a joint spousal trust, a qualified disability trust or a trust for a minor child, there can be more than one specified beneficiary in a given taxation year.

For years ending after October 2, 2016, the trust may designate a principal residence under federal legislation. For the purposes of Québec legislation, no such designation may be made unless it is made with the Canada Revenue Agency, in which case it is automatically deemed to be made.

Under the transitional rules, trusts that do not qualify under the new rules can claim the principal residence exemption on the capital gains accrued until the end of 2016 if:

  • They had a principal residence on December 31, 2016; and
  • They disposed of the principal residence after 2016.

Reduction of the general tax rate for SIFT trusts

As of 2017, the general corporation tax rate is being gradually reduced. The current rate of 11.9% is reduced to 11.8% in 2017, 11.7% in 2018, 11.6% in 2019 and 11.5% in 2020. The rate reductions take effect on January 1 of each year.

A SIFT trust that has an establishment in Québec must calculate the non-deductible allocations amount and allocate the amount to its beneficiaries as an eligible dividend (see Schedule E of the Trust Income Tax Return). It must also pay income tax on the taxable distributions amount at the same tax rate as corporations.

For more information, see Specified Investment Flow-Through Trust.

Partial increase in the rate of the tax credit for donations and gifts

As of 2017, the total amount of the tax credit for donations and gifts that a trust other than a graduated rate succession or a qualified disability trust can claim for a taxation year is equal to:

  • 20% of the lesser of $200 and the trust's total eligible donations and gifts for the year; and
  • 25.75% of the amount by which the trust's total eligible donations and gifts for the year exceeds $200.

The total amount of the tax credit for donations and gifts that a graduated rate succession or a qualified disability trust can claim for a taxation year is equal to:

  • 20% of the lesser of $200 and the trust's total eligible donations and gifts for the year;
  • 25.75% of the lesser of the following amounts:
    • The amount by which the trust's total eligible donations and gifts for the year exceeds $200,
    • The amount by which the trust's total income for the year (line 99 of the return) exceeds the threshold of the fourth income tax bracket for the year; and
  • 24% of the amount by which the trust's total eligible donations and gifts for the year exceeds the aggregate of $200 and the amount of donations and gifts to which the rate of 25.75% applies. 

New rules regarding gifts of property with undeniable ecological value

As of March 22, 2017, the following rules apply to gifts made by trusts of property with undeniable ecological value:

  • The municipalities and municipal or public bodies performing a function of government that receive such a gift must prove to the Ministère du Développement durable, de l'Environnement et de la Lutte contre les changements climatiques that the gifts received will be protected in the long-term.
  • Private foundations are no longer authorized to receive gifts of property with undeniable ecological value.
  • Certain gifts of personal servitudes are considered gifts of property with undeniable ecological value, provided they meet certain conditions (for example, the personal servitude must have a term of not less than 100 years).

For more information, see section 4.3 of the Guide to Filing the Trust Income Tax Return (TP-646.G-V).

Easing of carry-over rules for charitable donations and gifts

Gifts made upon a death (gifts made by will or by designation and gifts made by the succession) can be used to reduce the income tax of the deceased for the year of the death or the previous year, provided:

  • The death occurs after December 31, 2015;
  • The transfer of the donated property (or a substituted property) is made within 60 months after the death; and
  • At the time the property is transferred, the succession is a graduated rate succession or it has ceased to be a graduated rate succession solely because it has existed for more than 36 months after the death.

These gifts can also be used to reduce the income tax of the graduated rate succession for the year of the transfer or previous years or of the succession that was a graduated rate succession in the year of the transfer.

The new carry-over rules for charitable donations and gifts also apply to gifts of cultural property, gifts of musical instruments and ecological gifts.

For more information, see section 4.3 of the Guide to Filing the Trust Income Tax Return (TP-646.G-V).

Deferral of the payment of income tax payable on the deemed disposition of interest in a qualified public corporation

The deemed sale of property is applicable to certain trusts on a date determined by the Taxation Act (as a rule, the 21st anniversary of the creation of the trust or the date on which the spouse for whom the trust was created died, and the same date every 21 years thereafter).

As of February 22, 2017, a trust can elect to defer, under certain conditions and for a maximum of 20 years, the payment of Québec income tax attributable to the deemed disposition of qualified shares in a qualified public corporation.

A qualified share refers to:

  • a share that is included in a large block of shares, or in part of a large block of shares, of a qualified public corporation; or
  • a share of a private corporation more than 95% of the value of which is attributable to a large block of shares, or to part of a large block of shares, of a qualified public corporation.

A qualified public corporation is a public corporation that, at a given time, meets the following conditions:

  • Its head office is in Québec.
  • Its base payroll in Québec for the taxation year including the given time represents at least 75% of its base payroll in Québec for the taxation year in which the deemed disposition of the shares occurred, where the given time does not correspond to the time of the deemed disposition.

This measure applies to shares that are qualified shares at the time of the deemed disposition.

The trust must use the prescribed form to elect to defer the payment of income tax payable on the deemed disposition of its interest in a qualified public corporation. It must also provide satisfactory security no later than the deadline for paying the trust's income tax for the taxation year in which the deemed disposition occurred.

New class of depreciable property for incorporeal capital property

As of 2017, a new class of depreciable property (class 14.1) replaces incorporeal capital property. In addition, the incorporeal capital property system is replaced by a new capital cost allowance (CCA) class. The new class of property includes:

  • goodwill;
  • property that was incorporeal capital property before January 1, 2017, and that the trust still owned on January 1, 2017;
  • property acquired as of January 1, 2017, the cost of which would be treated as an eligible capital expenditure under the rules respecting incorporeal capital property.

Special rules apply to goodwill and to expenditures and receipts that do not relate to a specific property (for example, the purchase of a customer list or other property that has unlimited duration, such as a permit, licence, franchise rights or a farm quota).

Transitional rules are in place so that the cumulative balance of incorporeal capital property is transferred to the new class of depreciable property. The balance as at December 31, 2016, becomes the opening balance of the new class of property. For the first ten years, the CCA rate for the new CCA class is 7% for expenditures incurred before January 1, 2017.

This new class of property is subject to the usual rules applicable to depreciable property, including the rules regarding the recapture of capital cost allowance and capital gains. The half-year rule (50% reduction of the net amount of acquisitions) applies to property in this class.

New form for the payment of income tax instalments

As of 2017, we will send form TPZ-1026.F-V, Instalment Payments Made by a Trust, to trusts that must pay income tax instalments to notify them of the amount of the instalments. However, if you wish to calculate the amount of instalments the trust must pay, you can use form TP-1026.F-V, Calculation of Instalment Payments to Be Made by Trusts.

For more information, see Income Tax Instalments of Trusts.

New form for the payment of a balance due

As of 2018, you can use form TPZ-1026.0.1.F-V, Payment of Balance – Trusts, to pay a trust's balance due for 2017 or another taxation year. This form can be used to pay the balance due at a financial institution or by mail. To obtain the form, use the Ordering Forms and Publications service or contact our client services.

For more information, see section 4.4 of the Guide to Filing the Trust Income Tax Return (TP-646.G-V).

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