Supporting a loved one with a disability is a challenging responsibility with many considerations. Ensuring their needs are taken care of requires proper care and attention. The Preferred Beneficiary Election (PBE) may be an option to provide your loved one with adequate financial support.
The PBE is a joint election between the trust and a qualifying beneficiary. This election allows for the income of the trust to be retained by the trust while being subject to tax on the beneficiary’s tax return. By doing so, the income will be subject to tax at graduated tax rates rather than subject to tax in the trust at the highest marginal rate.
This election can be highly beneficial as it is not always advisable to distribute the income from the trust to the beneficiary. Many social assistance benefits such as provincial disability benefits are income and asset tested. Distributing income from a trust to the individual could cause them to exceed the income and asset limits and therefore jeopardize their benefits. With proper planning, the PBE can allow access to lower tax rates while simultaneously preserving access to these benefits.
To qualify as a preferred beneficiary, the beneficiary must be a resident of Canada at the end of the tax year and must be either:
Eligible for the disability tax credit; or
18 years of age, dependant on another person due to a physical or mental infirmity, and whose income does not exceed the basic personal amount for the year.
The preferred beneficiary must be the settlor of the trust, the spouse or former spouse of the settlor, a child, grandchild or great-grandchild of the settlor or a spouse of a child, grandchild or great-grandchild of the settlor.
The preferred beneficiary election is completed by submitting a signed statement with the trust’s tax return each year. The statement must indicate that the preferred beneficiary election is being made, the amount of the income that is being elected upon, the social insurance number of the preferred beneficiary, and confirmation that they meet the criteria as a preferred beneficiary. The statement must be signed by the trustee and the preferred beneficiary, or their guardian. Late elections may be accepted in certain circumstances, but it is always advisable to submit the election in a timely manner.
The election can be made on any amount up to the trust’s accumulating income for the year, which is generally the trust’s income after deductions. Depending on the circumstances, it may be advisable to elect on the entire accumulating income or a lesser amount. Planning should be completed on an annual basis to determine the optimal amount.
There are additional options that may be available to help you and your loved one, such as the Registered Disability Savings Plan, Qualified Disability Trust, and Henson trust. Each of these options have benefits depending on your specific needs.
For more information, please contact email@example.com or 1 844-GYTD-CPA