TESTAMENTARY TRUSTS

Testamentary trusts are valuable investment vehicles because they allow income-splitting of investment income on to a separate income tax return for up to three years after the death of the testator.

By permitting a trust to file a separate income tax return, one can take advantage of the lower marginal tax rates allowed by Revenue Canada. As long as the amount received is invested in the name of the trust, the trust will pay the lowest rate of tax on the initial tax bracket of the income earned by the trust. This is very advantageous if the beneficiary is at the top tax bracket, but can also be advantageous if the beneficiary receives income-based benefits such as the Supplement and Old Age Security, or pays rental payments, or receives benefits under the Saskatchewan Drug Plan, that are based upon your personal income. Testamentary trusts can also help to minimize credits that may be clawed back, such as the age tax credits and GST tax credits.

Some testamentary trusts may have the additional benefit of allowing the allocation of income earned by the trust to the beneficiary(s) spouse or the beneficiary(s) children and grandchildren who may not have any other taxable income. If allocated to a beneficiary in the zero tax bracket, some of the income may not be taxed at all! 

A word of caution, however. A testamentary trust ceases to be a testamentary trust and is therefore taxed in the top tax bracket if any amount at all is added to the trust after the death of the testator.