Testamentary trusts that qualify as such under the ITA are currently taxed at the same graduated marginal rates as natural persons. However, the Federal Government indicated in its 2013 Budget that it intends to review the taxation of testamentary trusts. This was again confirmed in the 2014 budget with graduated rates set to expire at the end of 2015. After that point, all income retained in a testamentary trust will be taxed at the top marginal rate.
There are two key exceptions to the new rules. The first is for estates which are a form of testamentary trust. Estates will be permitted to use the graduated rates for the first 36 months. After that, the top marginal rate will be applied on all income.
The other exception is for testamentary trusts where the beneficiary is an individual who qualifies for the Disability Tax Credit. This of course does not cover all persons for whom the use of a testamentary trust is a legitimate planning tool rather than an attempt to minimize taxes.
Testamentary trusts are subject to tax at both the federal and provincial levels.
For the most part, the taxation of testamentary trusts follows the same rules as for all trusts. The comments with respect to inter vivos trusts and the need to properly establish amounts that are paid or payable to a beneficiary for a tax year of the trust are equally applicable here in order for the trust to be able to deduct those amounts from its income.
The filing deadline, as with all trusts, is within 90 days from the end of the tax year for the trust. Testamentary trusts currently can have an off-calendar year end but the 2014 Budget requirements change this to a calendar year end just like inter vivos trusts.