In tabling the 2012 Budget, the Québec Minister of Finance Raymond Bachand announced three measures regarding the taxation of trusts.
Tax Rates
The first measure affects all inter vivos trusts. Following the budget measures, inter vivos trusts will no longer enjoy a reduced tax rate on their taxable income for Québec tax purposes. The Québec government has increased to 24% (from 20%) the tax rate applicable to inter vivos trusts. Before the introduction of this measure, the tax rate of an inter vivos trust varied between 20% and 24% depending on the amount of taxable income. With this increase, the Québec government has harmonized its rate with those of other provinces.
Property income derived from the rental of immovable properties located in Québec by a trust that is not a resident of Canada
The second measure is a new tax on the income derived from the rental of immovable properties located in Québec and owned by an inter vivos trust that is not resident in Canada. A tax of 5.3% of net rental income will be payable by such trusts. Moreover, this rental income shall be computed separately from its other sources of income. These trusts will also be required to file an income tax return to the Québec Revenue Agency for each taxation year in which it owns a rental property in Québec, whether or not a tax liability arises for the year.
Deemed disposition of property by a trust that is not resident of Québec
Furthermore, an inter vivos trust that becomes a resident of Canada after March 19, 2012 will be deemed to dispose, immediately before that time, of each of its immovable properties located in Québec, used primarily for the purpose of earning rental property income. The proceeds of disposition will be equal to its fair market at that time. The trust will be liable for Québec tax on the capital gain and the recapture of depreciation that may arise as a consequence of such deemed disposition. Concurrently, the trust will be deemed to acquire the immovable at a cost equal to the proceeds of disposition.
Finally, such a trust must now obtain a newly created compliance certificate from the Québec Revenue Agency before disposing of any immovable property located in Québec. Any purchaser of such property must obtain a copy of the certificate or demonstrate that he conducted a reasonable inquiry to ensure that the seller was not an inter vivos trust that began to reside in Canada after March 19, 2012. Failure to obtain such a certificate will render the purchaser liable for the trust's tax liability arising from the disposition, which can amount to a maximum of 12% of the purchase price.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
