Monday, 14 May 2018

New Trust Reporting Requirements – Big Implications?

Authors: MaryAnne Loney and Mike Harris
All trustees need to be aware that trust reporting requirements are changing. 
Currently, a trust only needs to file an income tax return in certain circumstances, including if it earns income, disposes of capital property, or makes distributions to beneficiaries during the year. There is no current requirement to identify all of the trust’s beneficiaries.
However, the 2018 Federal Budget announced that starting in 2021, except for specifically exempted trusts, trusts resident in Canada and non-resident trusts required to file in Canada will need to:
1.      file income tax returns annually;
2.      report all the settlors, trustees and beneficiaries; and
3.      identify persons who exert control over trustee decisions related to income and capital (“protectors”).

Excluded trusts include constructive or resulting trusts (which usually no one knows exist until proclaimed by a judge), lawyer trust funds, trusts that qualify as non-profits or charities, trusts governed by registered plans (which already require significant reporting), and graduated rate estates. Most importantly, many common forms of trusts (such as family trusts and spousal trusts) will not be exempted from this reporting requirement.
There will also be penalties for late filing of up to $2,500, plus a penalty of 5% of the maximum fair market value of the property if the failure to file was made knowingly or due to gross negligence. Given the CRA’s willingness to find gross negligence on the part of taxpayers, this is quite alarming.
The purpose of these changes is to help identify aggressive tax planning, tax evasion and money laundering – concerns that have been in the media both nationally and internationally. 
However, trustees that have not been responsible for filing tax returns in the past will now have to ensure returns are properly filed, which adds an additional administrative burden. 
Further, the new requirement for trusts to report settlors, beneficiaries, trustees and protectors will provide the CRA with substantially more information they can use for audit purposes.

Potentially Big Implications?
While there are a few years before these changes come into effect, it is important trustees know the changes are coming and consider the implications this additional disclosure may have. 
Currently, there are many rules dealing with beneficiaries and trusts that are rarely audited because the CRA doesn’t know what trusts are out there and who all their beneficiaries are. 
For example, in a discretionary trust, pursuant to subparagraph 256(1.2)(f)(ii) of the Income Tax Act, all beneficiaries are considered to own all the shares of corporations owned by the trust in determining whether corporations are associated. The effect of this provision was recently upheld by the Tax Court in Moules Industriels et al v The Queen (2018 CCI 85).
When corporations are associated, they are required to share a single $500,000 business limit for purposes of claiming the small business deduction. Association rules are complex, but the effect is that corporations owned by beneficiaries of a discretionary trust, depending on the various share ownerships, may be associated with any corporations owned by the trust. Further, since two corporations that are associated with a third corporation are in turn associated, corporations owned by two beneficiaries of a trust, with no connection beyond both being owned by someone who is a beneficiary of the trust, may end up being associated. Cousins with completely unrelated corporations may suddenly find themselves sharing a single small business deduction.
While this issue has existed for several years, it has not been a significant concern because the CRA usually did not know who the beneficiaries of a trust were – especially not the beneficiaries of discretionary trusts who owned profitable corporations of their own, as they were less likely to receive distributions and therefore come to the CRA’s attention.
All this will change once the first trust returns are filed for 2021. The CRA will suddenly have records of every beneficiary of every trust (except for trusts where the trustees fail to file and are subject to penalties). The CRA will be able to combine this information with their records of all private corporations shareholders. It’s far too easy to imagine them putting together an algorithm to identify where associated corporations have not been properly identified in corporate tax returns – not just for 2021 but for previous years as well.
And this is only one potential new audit avenue open to the CRA. Trusts and their beneficiaries are often considered to be related for many purposes and as soon as any of the parties are non-resident there are a whole slew of other potential issues.

With this change on top of other recent changes, such as the taxation of corporations, this is now a very good time for trustees to review the tax implications of their trust’s current structure. Especially family trusts owning shares of a private corporation may no longer make sense.
Even if there continues to be valid reasons to have the trust in place, it is more important than ever everyone is properly reporting to the CRA. The chances of getting caught for failing to do so are going up substantially.

Wednesday, 4 April 2018

Judicial Discretion, Consent and Closure: Priority and Control Over the Dead

The Alberta Court of Appeal in Campbell v. Campbell, 2018 ABCA 46, agreed with the chambers judge, dispensing with the consent of the appellant-father of the deceased to have his son’s remains tested to determine the cause of death under “suspicious circumstances”.  Although the father opposed the mother’s application in order to maintain the integrity of their deceased son’s remains, the chambers judge empathized with the mother, who believed testing was necessary to bring dignity to their son’s death and closure to their family.

On appeal, the father argued that Section 36 of the General Regulation to the Funeral Services Act, Alta Reg 226/1998, gave him priority and control over the disposition of the deceased’s remains.  Section 36 specifically states that, “subject to an order of the Court,” the right to control the disposition of human remains vests in the prescribed order of priority, which includes a parent of the deceased.  Where parents of the deceased cannot agree to whom controls the disposition of the remains, the General Regulation stipulates, “the order of priority begins with the eldest person in that rank.”  This would mean the father of the deceased in this case.  

Despite the father conceding that the General Regulation gave the Court discretion to depart from the prescribed priority, he argued that the Court must have persuasive reasons for doing so.  Specifically, the father argued that there was no factual basis to support the chamber judge’s decision.  He stated that no evidence was presented that supported the position that testing should be done on the deceased’s remains or that testing would accomplish anything.  Although the Court of Appeal agreed that no expert evidence was presented to identify a potential connection to the death of the deceased, such as having a history of concussions, this did not provide sufficient reason for the Court to prevent further testing as other possibilities such as mental illness and substance abuse had already been ruled out.  

Considering the facts before him, the chambers judge concluded that the benefits of conducting testing on the preserved remains of the deceased outweighed the lost opportunity of determining the deceased’s cause of death.  The Court of Appeal agreed, finding that the chambers judge acted reasonably in exercising his discretion, ultimately dispensing with the father’s consent, and providing closure for the family.  At the end of the day, the facts of this case, Court of Appeal and the drafters of the General Regulation to the Funeral Services Act gave the chambers judge control over the dead.

Thursday, 15 February 2018

Who Gets the Farm?

Author: Joel Franz

Justice Nielsen released his decision in Kachur Estate, 2017 ABQB 786, on December 19, 2017. While disputes regarding estate succession in the farming context are common throughout Alberta, reported decisions are less plentiful, given that most matters settle prior to a hearing. This decision provides some guidance regarding the passing of farm land and equipment in not uncommon circumstances. 

In this case, the testator farmed some property with his brother. The testator’s will provided that a life estate be provided to the brother to allow him to continue farming, along with “all of my farm equipment”. Upon the death of the brother, the land and equipment was to go to the testator’s two nephews in equal shares. Other issues were also dealt with in the decision, but for the purposes of this blog post, we will be dealing with what the court decided relating to “farm equipment” and the extent of the brother’s gift. The brother argued at trial, that he owned the farm equipment jointly with his brother, and that upon the testator’s passing, all of the property passed to him. The brother’s argument was rejected based on conflicting evidence, and section 11 of the Alberta Evidence Act, which requires that parties to estate litigation “shall not obtain a verdict…on that party’s own evidence in respect of any matter occurring before the death of the deceased person, unless the evidence is corroborated by other material evidence”. In this case, only the brother’s evidence suggested that the farm equipment was to be passed to him jointly and pass outside the estate.

Justice Nielsen also had to determine what included “farm equipment” for the purposes of the will. Justice Nielsen’s first port of call was the Oxford Dictionary which defined farm equipment as “the necessary items for farming”. No list of farm equipment was provided and evidence was provided at trial that if the equipment was used on the farm, it was likely farm equipment. This would include vehicles and other items that may not necessarily be considered farm equipment per se, however if they were used for the primary purpose of farming they would be included in the definition.   

Finally, the court noted that as part of the brother’s life interest, he would be required to pay the cost of insurance for the land, buildings, farm equipment, as well as taxes, utilities, and cost of reasonable maintenance and repair of the land and farm equipment until the brother passed away. The court acknowledged that there was case-law authority suggesting no obligation on a life tenant to insure property. However, after considering all of the evidence, the court held that it would have been in the reasonable contemplation of testator that the land, property and equipment be insured, particularly when all of these items were to be passed to the next generation after the brother had passed away. 

The court did note that the brother was not obliged to pay for major repairs to the land, home or other buildings including farm equipment and that the nephew beneficiaries were responsible for expenses of a capital nature. Only ongoing routine maintenance was to be paid for by the brother. 

This case serves as another useful reminder that in joint farming operations, it is always best to have agreements put in writing as to properly clarify each party’s position and to prevent costly litigation. 

Friday, 26 January 2018

The Importance of Signing

Alberta’s Wills and Succession Act, SA 2010, c W-12.2 (“WSA”) gives courts the power to order that a will is valid, even where it does not comply with formal requirements required by the Act. But how far can a court go?

The Alberta Court of Queen’s Bench found, on December 6, 2017, that power will not allow a court to add a signature to an unsigned will where the testator had not had the opportunity to review the will and had not been given the chance to sign it.


In the decision of Edmunds Estate, 2017 ABQB 754, a paralegal prepared a will according to the instructions of the testator, Ms. Edmunds. However, Ms. Edmunds never had the opportunity to review the final version of the unsigned will; she was hospitalized and then passed away unexpectedly before she had a chance to execute it. The beneficiary of the unsigned will asked the Court to validate it despite the absence of Ms. Edmunds’ signature.


Section 39 of the WSA allows the Court to add or subtract from a will to make it accord with a testator’s evidenced intentions. However, in order to do so, the Court must be satisfied, “on clear and convincing evidence”, that the will does not reflect the testator’s intentions because of an accidental slip or omission or if the person preparing the will failed to give effect to the testator’s instructions.

When it comes to adding a signature, the Court is only permitted to add the testator’s signature if the Court is satisfied on clear and convincing evidence that the testator:
(a)  intended to sign the document but omitted to do so by pure mistake or inadvertence, and 
(b)  intended to give effect to the writing in the document as the testator’s will.


In order for a court to rectify the will, there must first be an accidental omission, or a situation where the person who prepared the will misunderstood, or failed to give effect to, the testator’s instructions.

The death of a testator, as in Edmunds Estate, is not an accidental omission. The Court in that case found, ['Ms. Edmunds'] death cannot be responsibly characterized as an ‘accident’ that resulted in the omission of her signature on the unsigned will.” The Court did find, however, that if she attended a meeting to execute the will but failed to do so, there may have been a basis for a different conclusion.

The Court also found that an unsigned will does not represent a failure on the part of  the person preparing the will to give effect to a testator’s instructions. The instructions, the Court found, were never given by Ms. Edmunds as the execution meeting never occurred and therefore this section did not apply.

The Court also determined that a signature can only be added if there was clear and convincing evidence it was omitted by “pure mistake or inadvertence.” The Court relied on other cases which showed that a testator dying does not satisfy the element of omission by “pure mistake or inadvertence.” The Court found a pure mistake implies that the testator thinks she is doing one thing but, in fact, does something else (ex: executing a power of attorney and mistaking it for a will). Inadvertence arises from accidental oversight. Neither were present in this case.

In Edmunds Estate, there was no clear and convincing evidence of intention to sign the document and to give effect to the writing in the document as the testator’s will. Though, if Ms. Edmunds had attended upon execution and attempted to sign the will, the Court indicated it may have arrived at a different conclusion.


It is difficult to imagine a scenario in which a Court will ever validate an unsigned will where the testator had not had the opportunity to review and execute it. It is, therefore, critically important for an individual to follow through with completion of the will to ensure that his or her intentions will be carried out.

Where a testator dies before reviewing and signing his or her will, it will be challenging to show clear and convincing evidence that he or she intended to sign the unsigned will. The Court recognized that wills are frequently revised, sometimes dramatically, at the very meeting convened to deal with execution. Arguing that a document never reviewed by the testator perfectly reflected his or her wishes is likely going to be unsuccessful.

Further, the death of a testator does not constitute evidence that the failure to sign arose through pure mistake or inadvertence. Death, even accidental death, does not meet the definition of “pure mistake” or “accidental oversight.”

Friday, 5 January 2018

Gifting of Irrevocable Right of Survivorship

By Justine Bell, Student-at-Law

Recently, Alberta’s Court of Queen’s Bench held an inter vivos gift of a joint interest in real property may be irrevocable where a party intended to gift an irrevocable right of survivorship.

In Pohl v Midtal, 2017 ABQB 711, a mother and father transferred their interest in a quarter-section of farmland to themselves and their daughter as joint tenants. The parents had intended to live on (and farm) the quarter-section until they were unable to do so and, thereafter, for their daughter to assume possession of the quarter-section. Several years post-transfer, the father’s relationship with his daughter had deteriorated. The father, on his own behalf and as the mother’s attorney, registered a transfer thereby severing the parties’ joint tenancy and rendering the daughter a tenant in common. This transfer worked to “reduce” the daughter’s joint interest in the quarter-section to a mere one-third undivided, common interest. The effect of this “reduction” was to deprive the daughter of a right of survivorship (i.e., an entitlement to the whole quarter-section upon the death of her parents). The daughter, accordingly, brought an action against her (deceased) parents as means of recovering her joint interest in the quarter-section.

Briefly, the Court of Queen’s bench held a party gifting a joint interest is presumed to retain the ability to sever same. The Court, however, held this presumption may be rebutted with evidence indicating a gifting party intended otherwise:
There is a presumption that the right of survivorship is given with the joint tenancy in a “normal” way, preserving the ability of the parent to sever. But that presumption can be rebutted by evidence that the intention of the transferor was to give an irrevocable right of survivorship which would prevent the transferor from applying to sever the joint tenancy in the future (at para 52).
Here, the Court held this presumption of severability had been rebutted and, as such, the daughter had been gifted an irrevocable right of survivorship. That is, evidence of the parents’ intentions (i.e., that their daughter would take exclusive benefit of the quarter-section upon their death) allowed for an inference they had relinquished their right of severance upon gifting her a joint interest in the quarter-section.

Accordingly, one ought to take caution when gifting a joint interest. While the law assumes a gifting party retains his/her right to sever a joint tenancy, care should be taken to document an irrevocable right of survivorship has not been gifted. Conversely, a gift of a joint interest in property with a right of survivorship may be confirmed in a will as a means of ensuring the intention of such a gift is understood by all parties involved.

Thursday, 7 September 2017

Estates May Need to Take Steps to Trigger Losses During First Year

Author: MaryAnne Loney

Proposed tax amendments have significantly limited options available for dealing with shares of private corporations in estates. Executors may now need to take active steps to trigger losses to avoid significant tax consequences.

On July 18th, 2017, the Department of Finance released proposed changes to the Income Tax Act (the “Act”). These changes have the stated aim of eliminating many of the tax advantages of private corporations.

While the proposed legislation is not directly aimed at estates (which are granted special tax treatment as graduated rate estates (“GREs”) during the three years after death) one of the proposed changes could have significant negative tax consequences for GREs and their beneficiaries.

Effective July 18th, 2017 (so immediately!) the Department of Finance has expanded and added to the anti-avoidance provisions preventing surplus stripping by individuals.
Only 50% of capital gains are subject to tax, meaning they are taxed at a significantly lower effective rate than dividends. Therefore, there are substantial advantages in taking profits out of a corporation as capital gains instead of as dividends – i.e. surplus stripping. The Canada Revenue Agency and the Department of Finance have long had issues with surplus stripping and there were already provisions in the Act which aimed to prevent it in certain circumstances, most notably when the lifetime capital gains exemption (“LCGE”) had been claimed on shares in the past by a related party in order to increase the adjusted cost base (“ACB”) of the shares.

The proposed changes would dramatically expand the scope of provisions which prevent surplus stripping such that no capital gain ever previously reported by a non-arm’s length party will contribute to the “hard” ACB of shares for the purposes of surplus stripping.
This causes a problem for estates and their beneficiaries because they will usually be related to the deceased. Therefore, despite the fact that the deceased was required to pay taxes on a deemed disposition at fair market value on his or her death, unless the estate or beneficiary can find an arm’s length purchaser to buy the shares, any amounts taken out of the corporation will be taxed a second time as dividends.

Luckily, there is one potential solution to this problem – use the loss carry back available to GREs in their first year. If all the value in the shares is paid out in the form of dividends and the shares are then disposed of (either by winding up the corporation or redeeming the shares) this will trigger a capital loss in the estate equal to the value of the shares high ACB. The estate may elect to carry this loss back to the deceased’s terminal return, thereby eliminating the capital gain the deceased was required to report.

This will still result in the amount being taxed at the higher dividend tax rates, as opposed to the lower capital gains tax rates, but at least the double taxation is avoided. Steps which previously allowed for the capital gains tax treatment instead of the dividend tax treatment will no longer be effective.

It is critical to note that the loss carry back is only available in the first year. Therefore, it is crucial that executors take steps in the first year of the estate to trigger the losses or they will lose the opportunity.

What Executors Should Do
The above described changes potentially require executors to take active steps during the first year of the estate to avoid significant negative tax consequences. As a result, we recommend that executors of estates with corporate shares should consult with a tax advisor as soon as possible regarding what, if any, steps should be taken in light of the changes.

Tuesday, 1 August 2017

Is This the End of Tax-Motivated Family Trusts?

Author: MaryAnne Loney

Proposed tax changes affecting private corporations will significantly reduce the tax advantages of owning shares of corporations in family trusts. These changes, along with others over the past few years, mean trusts with shares of private corporations will need to determine whether their current structure is still advisable.

On July 18th, 2017, the Department of Finance released proposed changes to the Income Tax Act (the "Act"). These changes have the stated aim of eliminating many of the tax advantages of private corporations.

Two of the main tax advantages of trusts are that trusts can be used for income splitting and multiplication of the lifetime capital gains exemption ("LCGE"). As a result, many owners of corporations have set up family trusts.

These advantages are possible because income and gains earned by a trust may be attributed to the trust's beneficiaries. Therefore, if a trust was paid dividends, those dividends could be paid out by the trust to beneficiaries in low tax brackets, allowing them to be taxed in those tax brackets. Likewise, if a trust sold property is eligible for the LCGE, the capital gain could be paid out to multiple beneficiaries, allowing each beneficiary to use their own LCGE to offset their allocated gain.

The proposed rules take specific aim at income splitting, including capital gains to allow access to multiple LCGEs. A summary of the proposed  changes can be found here. The gist of the changes are that the Department of Finance is proposing to extend "kiddie tax", being a tax on income from a non-arm's length person's business ("Split Income") at the top marginal tax rate in the following ways:
  1. by making payments to adults from a business where a related person has significant influence over the business included in Split Income, unless the income or gains paid are "reasonable";
  2. by denying the LCGE on gains included in Split Income; and
  3. where the related individual is under 25, by including any income earned on Split Income itself in Split Income.
These changes cover payments made through a trust. However, in two ways the proposed changes are specifically punitive to trusts.

First, if income would have been Split Income if paid directly to an individual under 25 when they were under 18, if the income was instead paid to a trust any income earned on the income allocated to the individual under 25 will still be Split Income. The punitive factor here is that the original payment is treated as if it were paid while the individual was under 18, and therefore no consideration will be made as to whether the original payment was reasonable. This effectively eliminates any advantages of attempting to use trusts to split income with individuals under 25.

Second, an individual will no longer be eligible to claim LCGE exemption in respect of capital gains that accrue during the period a trust holds the property unless the trust is spousal or common-law partner trust or alter ego trust. This means that there is a potential tax cost of holding property which could potentially qualify for the LCGE in a trust if the beneficiaries could otherwise benefit from the LCGE.

These changes only apply starting in 2018. As a result, income splitting opportunities will continue to exist for 2017. Additionally, the proposed legislation has provided that taxpayers who under the current rules are eligible for the LCGE may elect in 2018 to have a deemed disposition and reacquisition, thereby allowing them to claim the LCGE and bump up the cost of the property. However, after 2018, where a family trust is only in place for purely tax reasons, it may make sense to wind up the trust.

What Should Trustees Do
The above described changes potentially require trustees to take active steps to avoid negative tax consequences. Further, the changes proposed by the Department of Finance on July 18th are just two of the latest in a string of several significant tax changes which have been enacted over the last few years effecting corporations and trusts. Alone, any of these changes would be significant, but together the aggregate effect is that most structures involving private corporations put into place a few years ago are no longer effective and may not be advisable.

As a result, we recommend that trustees of family trusts with corporate shares should consult with a tax advisor regarding what, if any, steps should be taken in light of the changes. As any additional income splitting will need to be done in 2017 and, if it makes sense to do so, the LCGE election will need to be made in 2018. We would therefore recommend speaking to a tax advisor before the end of the fall 2017.

Click here to read our alert on how the proposed changes to the Income Tax Act may require estates to take steps to trigger losses during the first year.