Wednesday, 14 October 2020

Planning for Death in Business: Capital Dividends and Unanimous Shareholders Agreements

By Michelle Fong and MaryAnne Loney

Making a plan for the storm when the weather is still good is the fundamental basis of estate planning and business succession planning. It allows everyone involved to set out their intentions, have open and clear communications, and set a plan in place that they feel will allow their successors to succeed.

One of the key tools used for this planning is a unanimous shareholders agreement (“USA”). Where estates and businesses intersect is often in the buy-sell options upon death and life insurance clauses in a USA.

The buy-sell upon death clause typically requires the estate to sell the shares of the corporation back to the corporation at a fair or agreed price. But how will the corporation fund the repurchase? That is where life insurance and capital dividends come in.

Corporations may take out life insurance on the lives of the shareholders. Upon the death of a shareholder, the insurance proceeds will be paid to the corporation and be added to the capital dividend account balance.[1] The capital dividend account represents amounts that a private corporation[2] may pay out to shareholders as tax-free dividends, called “capital dividends”.[3] The capital dividend account is maintained “on-paper”. It is not a dollar balance that appears on financial statements or tax returns.

The corporation will then use the insurance proceeds to repurchase the shares. However, in fairness, the corporation should elect that the addition to the capital dividend account as a result of the insurance proceeds should be used to repurchase the shares. This allows the estate to then receive those funds as tax-free capital dividends. If the life insurance proceeds are insufficient to cover the entire repurchase price, the difference will usually be treated as a taxable dividend.

This is helpful for the corporation, as it provides a means to deal with the shares of deceased shareholders, and it is helpful for the estate, as it provides a tax efficient way to deal with the shares of a private corporation.

However, unless a USA obligates the corporation elect that capital dividends be paid out as part of the repurchase, under corporate law, the corporation can theoretically keep the capital dividend account balance for the other shareholders, leading to significantly worse tax results for the estate. Since this is usually not the parties' original intention, this regularly leads to expensive litigation.

Therefore, when estate planning for individuals who own shares in private corporation, not only will the individual’s will be important, but also a USA for the corporation. You should contemplate including in a USA clauses that:

1.    require or permit the corporation to maintain life insurance on the lives of the shareholders;

2.    gives the corporation an option to repurchase any shares owned by the deceased shareholder at the time of his/her death from his/her estate;

3.    set outs a formula or definition for the repurchase price for the above-mentioned option that is reasonable for both the estate and the corporation;

4.    sets out that the repurchase price paid will be designated as a capital dividend to the extent that the capital dividend account balance was increased by the receipt of life insurance proceeds related to the deceased shareholder.

It is worth remembering that the cost of establishing a proper USA prior to death can save the estate and corporation significant litigation and/or tax costs after death. McLennan Ross has an experienced and talented Wills & Estates Team as well as a skilled Tax Team able to assist you with estate and business planning and its related tax implications.



[1] Income Tax Act (“ITA”), subsection 89(1). Other items that are included in the capital dividend account include the non-taxable portion of capital gains, and capital dividends received from other corporations.

[2] ITA, see definition in subsection 89(1). Generally, a Canadian resident corporation and not controlled by one or more public corporations, prescribed federal Crown corporations, or any combination thereof.

[3] ITA, section 83.

Thursday, 30 July 2020

Were My Parents Right? – Implications of the Family Property Act

By Moe Denny

My parents have always harped about not moving in with a partner until we’re married. Recent changes to the Family Property Act (the “Act”), suggest they may have been on to something as long term dating may trigger entitlement to property.

The Act, which replaced the Matrimonial Property Act, governs the division of property when a relationship breaks down and makes all property subject to “division” unless it is exempted by legislation or it is excluded by agreement. 

The former Matrimonial Property Act applied only to “spouses”; however, the Act now applies to both “spouses” and “adult interdependent partners” (“AIP”), which means that a wider group of individuals are captured under the legislation.

So what is an AIP? Generally, people become AIPs when they live together in a relationship of interdependence:

  • for a continuous period of 3 years or more; or
  • of some permanence, if there is a child of the relationship by birth or adoption;[1]

Generally, a relationship will be deemed interdependent when two people are not married to one another but still share one another’s lives, are emotionally committed to one another, and function as an economic and domestic unit.

A few things that AIPs can apply for though the Act include:

  • a family property order to have property distributed;
  • exclusive possession of a family home and/or exclusive use of household goods; and
  • disclosure of property.

For the most part, division of property under the Act is based on the market value of the property and not the actual physical property, which means you won’t be splitting or sawing anything in half, but rather giving the fair market value of the property. The applicable date when market value is calculated is either the date the relationship of interdependence began, or the date the AIP acquired the property (whichever is later).

The Act does exempt certain property’s market value, such as property acquired by gift from a third party (like parents), property acquired by an AIP by inheritance, and property acquired by an AIP before the relationship of interdependence began.

All this considered, gifts from third parties (parents) to a person (child) are exempt property, meaning that the value of the property from latest of the date of receipt, or the date the relationship became an AIP is exempt. However, increases in value from such date are not exempt.

Why does this matter? One of the main differences between marriage and an AIP relationship is that marriages have a notable (and hopefully memorable) start date. AIP relationships are based on cohabitation[2], which can occur early in a relationship and then the 3rd anniversary of cohabitating can pass without much fanfare. The date that determines what value is exempt and what value is subject to family property division is the date that the cohabitation starts (not the 3rd anniversary, meaning property entitlement back dates to the move-in date).

Thus, before you move in with your partner, you should consider whether you’re willing to have property divided in the event of a break down of a relationship. Not only that, but keep in mind that the Act introduces and subjects AIP relationships to a full regime of property division and disclosure.

Third parties (such as parents) should also take stock of their children’s relationships being that if it becomes an AIP relationship, it may have implications on succession or estate plans, just like they would if their children were about to get married.

If you wish to discuss the above or any of your Wills & Estates needs, please contact Crista Osualdini, Moe Denny, or Michelle Fong. As necessary and in light of the circumstances, our Wills & Estates team is available to assist you on evenings and weekends and will work to accommodate your schedule and circumstances to ensure that you are properly prepared.



[1] Or, if they enter into an AIP agreement.

[2] Or an AIP agreement.


Wednesday, 24 June 2020

Update: Remote Witnessing and Signing of Estate Planning Documents



On June 18, 2020, the Government of Alberta introduced Bill 24, the COVID-19 Pandemic Response Statutes Amendment Act, 2020 (“Bill 24”). In our news release of May 27, 2020, we highlighted a concern that had arisen in the provisions of Ministerial Order 39/2020 (“M.O.”). The M.O. authorized the remote witnessing of Wills, Enduring Powers of Attorney, and Personal Directives in light of the COVID-19 pandemic where public health recommendations for social distancing placed significant restrictions of the ability of lawyers to meet with their clients to execute their estate planning documents in person. Once put into practice, it came to light that the M.O. would not authorize the execution of Wills in counterpart. 

This issue has been addressed by the introduction of Bill 24, which amends several pieces of provincial legislation, chief among them the Personal Directives Act RSA 2000 cP-6, the Powers of Attorney Act RSA 2000 cP-20, and the Wills and Succession Act, SA 2010 cW-12.2. These amendments define “deemed presence”, stating that persons are deemed to be in each other’s presence while connected by an electronic method of communication in which they are able to see, hear and communicate with each other in real time. Once Bill 24 is passed, it will be possible to execute estate planning documents remotely in Alberta utilizing video conferencing. 

The Wills and Estates team at McLennan Ross LLP are well-equipped to advise clients on their estate planning needs, as well as to meet remotely to execute estate planning documents safely during the COVID-19 pandemic.

Tuesday, 23 June 2020

Personal Representatives – Notice Obligations

By Lydia Roseman, Student-at-Law


This post seeks to answer the following questions: who must a personal representative[i] give notice to? When must notice be given? What must be included in that notice?

There are a number of groups of people that may be entitled to notice before a personal representative distributes the assets of an estate. These notice requirements arise in a number of different pieces of Alberta legislation meaning it can be challenging to figure out exactly who you, as personal representative, must give notice to.

Exactly who is entitled to notice, and what the notice looks like, can also vary depending on whether you are acting with or without a grant. When the personal representative applies for a grant of probate or administration, there are strict rules governing the form of notice provided to the interested parties.

A personal representative may be acting without a grant of probate or administration in a couple situations. For example, if the deceased held all their assets jointly with another person, such as their spouse, it may be that all their assets automatically transferred to that other person. In that case, there may be no assets to administer and therefore no need for a court order formally granting the representative the authority to deal with assets. If all of the assets are held in cash or in bank accounts in fairly small denominations, again the personal representative may be able to access and distribute those assets without a grant (the bank may, however, require a bond of indemnity before they release the funds).

Where, however, you are dealing with an organization that requires a formal authorization to access the assets, for example the land titles office for real property, you will need a grant of probate or administration.

Below, this article addresses each group of people that may be entitled to notice and what that notice will look like, with or without a grant. As a starting point, notice must generally be given to anyone who is a beneficiary or who may have rights under the Wills and Succession Act (WSA) or the Family Property Act (FPA) (formerly known as the Matrimonial Property Act).

Following that is a discussion of a couple of special cases that may further complicate the notice requirements. The post ends with a discussion of the potential consequences on a personal representative of non-compliance.

Beneficiaries

            No Grant

Anyone who is entitled to a specific gift or a share of the residue of the estate is a beneficiary and must be given notice. This notice must be given even if there are no assets in the estate.
The current notice requirements state that the notice must:
1.     Identify the deceased.
2.     Provide the name and contact information of the personal representative.
3.     Describe the gift left to the beneficiary in the will or the applicable provisions of the WSA or Intestate Succession Act.
4.     Provide the date of the testator’s[ii] will.
5.     If the beneficiary is a residual beneficiary, provide a copy of the will.
6.     State that any gift is subject to the prior payment of the testator’s debt.

The notice may be given using the Court’s Form NGA 1. While the form of notice is flexible when acting without a grant, we recommend using the Court’s recommended forms as a starting point. Using these standard forms will save time and help ensure you provide the required information to the individual.

            Grant

All the beneficiaries under the will must be identified on form NC 6 which is included in the application for the grant of probate or administration with will annexed. The correct form of notice to be given to those beneficiaries will depend on what the beneficiary is receiving under the will.
If an individual is entitled to a specific gift, such as a piece of property, notice is given in Form NC 20. This notice includes a description of the specific gift to the beneficiary. If the specific gift is no longer within the estate, for example if the piece of property was sold prior to the testator’s death, then the beneficiary does not need to be notified. You will, however, need to make a note in the grant application that the gift no longer exists.

If the beneficiary is entitled to a share in the residue of the estate, use Form NC 19 instead. The main difference is that this form requires that you attach a copy of the application for the grant, including a copy of the entire will and a list of the estate’s assets and debts. The reason that a residual beneficiary is entitled to a copy of the will and the list of assets and debts is because they need to have enough information to know what their “residual gift” actually includes.

If there is no will, that is the deceased died intestate, you must still give notice to the “heirs” of the estate. This notice is completed via Form NC 21. The personal representative must identify the share of the estate that will be distributed to the heir under the WSA. In this situation, we suggest that you obtain legal advice to help you determine who the heirs are and what they are entitled to.

Spouses and Adult Interdependent Partners

            No Grant

Notice to a spouse or adult interdependent partner (AIP) will usually be provided under the beneficiary section above. However, there may be additional information that must be provided. If the spouse or AIP is not the sole beneficiary under the will, notice must be given to the individual of his or her rights under the WSA and FPA. This essentially provides notice to the spouse or AIP that there is a possibility they may have a claim to more of the testator’s estate. Forms NGA 2 and NGA 3 can be used for this notice.

If the spouse or AIP is a dependent or represented adult, instead send the notice to the individual’s trustee or attorney using Form NGA 4.

            Grant

As above when acting without a grant, if the spouse or AIP is not the sole beneficiary under the will, there are additional notice requirements. The applicant for the grant must serve on the individual a copy of the application for the grant, Form NC 23 outlining their rights under the WSA, and Form NC 22 outlining their rights under the FPA.

Where the spouse or AIP is a dependent or represented adult, the notice must be served upon the attorney or trustee, still using Forms NC 22 and NC 23.

Children

            No Grant

A child of the testator is not automatically entitled to notice. Only a child who meets the definition of a “family member” must be notified. Children born inside and outside the marriage are treated the same. A child will qualify as a “family member” if he or she is:
·       under 18 years of age (including in the womb);
·       over 18 and unable to earn a livelihood by reason of mental or physical disability; or
·       between 18 and 22 and a student under his parents’ charge.

Where a child of the testator falls into one of these categories, notice must be provided to the child referring them to their rights under the WSA. This notice may be in Form NGA 2.

This notice will instead be served on the child’s guardian if he or she is a minor, or on the child’s attorney or trustee if he or she is unable to earn a livelihood due to mental disability. In these cases, additional notice must also be provided which can be in Form NGA 4. Where the child is a minor, notice must also be served on the Public Trustee and can be in Form NGA 4. Note that the notices in both Form NGA 4 and NGA 2 must include a copy of the will.

            Grant

The same definition of “child” applies where the personal representative applies for a grant; therefore, the same categories of children are entitled to notice. Those children (or their guardians, trustees, or attorneys) must be given notice of their rights under the WSA and a copy of their grant application.

Where the child is under 18 (including in the womb), the notice is given to both the Public Trustee (Form NC 24.1) and the child’s guardian (Form NC 24). If the child is over 18 and unable to earn a livelihood by reason of physical disability, or falls into the student category, Form NC 24 is served directly on the child. Finally, if the child is over 18 but unable to earn a livelihood due to mental disability, Form NC 24 must be served on the child’s attorney and/or trustee.

Grandchildren and Great-Grandchildren

            No Grant

If the deceased stood in the place of a parent to a grandchild or great-grandchild who was a minor on the date of death, notice must be sent to the guardian of the grandchild or great-grandchild (Form NGA 2) and the Public Trustee (Form NGA 4).

            Grant

If the testator had a grandchild or great-grandchild in the position described above, notice must be served on the guardian of the grandchild or great-grandchild (Form NC 24) and on the Public Trustee (Form NC 24.1).

Special Cases

            Separated AIP or separated or divorced spouse

If a spouse was separated from the deceased but not yet divorced, that spouse is still entitled to the notice as described above.

If an AIP recently separated from the deceased, or a spouse recently divorced the deceased, that individual may still be entitled to notice. A surviving ex-spouse or former AIP is entitled to notice of their rights under the FPA so long as the individual could have brought a family property division application immediately before the deceased passed. These timelines can be quite complicated but generally this means that if the deceased divorced a spouse in the last two years, or lived with an AIP in the last 3 years, that individual may be entitled to notice.

Also note that it is possible for a testator to have both a spouse and an AIP, or two spouses, falling within the notice provisions. This could occur, for example, where a spouse and the deceased were separated and the deceased lived with an AIP, or where the deceased was divorced and remarried within two years of his or her death. When this type of situation occurs, notice must be served on both individuals.

If you are handling an estate with former spouses or AIPs, we recommend seeking legal advice to ensure you properly fulfill your obligations to these individuals.

            What if an individual entitled to notice is deceased?

For example, if a beneficiary in the will is deceased, but the gift has not lapsed, that beneficiary may still be entitled to notice. The notice must generally be provided to the personal representative of the estate, either appointed or listed in the will.

If there is a will but no personal representative, consider contacting the Public Trustee to see if it would be willing to apply for a grant of administration or act as administrator for the deceased beneficiary. If the deceased beneficiary did not have a will but you know who the heirs are under intestacy rules, it is a good idea to give notice to the beneficiary’s heirs.

In this situation, you can also apply to the Court for direction on how you should proceed.

            What if an individual owed notice is missing?

You cannot serve notice on an individual if you cannot find them. What happens then? The personal representative must make all efforts to find the individual. If the individual cannot be found, the personal representative must apply to declare the person missing under the Public Trustee Act. Once the individual is declared missing, any required notice must be sent to the Public Trustee.

When should you give notice?

There is no specific legislated timeline for sending notice to beneficiaries, spouses, and other family members mentioned above. That being said, the personal representative cannot obtain a grant of probate or administration, or distribute the assets of the estate, until notice has been given.

We recommend providing notice as soon as possible. To do so, the personal representative must have located the will (if it exists), assessed the testator’s assets and debts, and identified all the beneficiaries and family members. If the personal representative will be applying for a grant, the application will need to be completed so that a copy can be included in the notices. Once these steps are complete, the notices should be sent.

How should you give notice?

A personal representative applying for a grant must be able to prove that notice was served on the required parties (or their lawyers). This is easiest to do by using registered mail. This will provide confirmation of delivery that can readily be provided to the Court. You can also personally serve someone, that is hand deliver to them yourself, and then swear that you did so in an affidavit.

Finally, the party required to be served can acknowledge their receipt of the documents. When applying for a grant, this acknowledgement can be contained in Form NC 2 or on the bottom of the notice.

When acting without a grant, it is a good idea to still follow one of these steps so that you are able to prove service if you ever need to in the future.

Effect of Non-Compliance

If a personal representative fails to provide the required notice, the Court has the discretion to:
·       order the personal representative to provide the notice;
·       impose conditions on the personal representative;
·       remove the personal representative;
·       revoke a grant; and
·       make any other order it considers appropriate.

Importantly, personal representatives are also considered to be trustees within Alberta’s Trustee Act and are in a fiduciary relationship with the beneficiaries. Breaches of fiduciary obligations can lead to serious, personal consequences.

If you are ever in doubt about the required notices, consider retaining a lawyer. The estate will usually pay the legal fees associated with this advice.

Our Wills & Estates team would be happy to help you with any issues that may arise during your time as a personal representative.


[i] For ease of reading, I use the term personal representative and do not differentiate between an executor and an administrator. In general terms, the personal representative named in a will is an executor. When there is no valid will or where the will fails to name a personal representative, the acting personal representative is called an administrator.

[ii] A testator is a person who has written and executed a will.

Friday, 29 May 2020

85 is the New 71 – The Advanced Life Deferred Annuity

By Lydia Roseman, Student-at-Law and Michelle Fong

While the proposed legislation states that the ALDA will be deemed to have come into effect on January 1, 2020, some industry professionals suspect that it will not come into force until next year. We will update this article once such legislation is enacted.

Budget 2019 proposed a new type of annuity, the advanced life deferred annuity (ALDA), to provide greater flexibility to Canadians managing their retirement savings.

When individuals contribute to registered plans, such as a registered retirement savings plan (RRSP), the amounts contributed are tax-deferred until the funds are withdrawn out from the plan. Generally, these are considered “retirement savings” because it is expected that you do not withdraw them until after you have retired. The benefit of waiting is that people are usually in a lower tax bracket after retirement. However, not everyone wants to start withdrawing funds (and being taxed on such funds) immediately after retirement.

The most common example is an RRSP. An RRSP “expires” in the year that the owner turns 71. The owner’s options are to:
·       withdraw all the funds from the RRSP;
·       convert it to a registered retirement income fund (RRIF); or
·       use the funds to buy some other annuity.

A full withdrawal means all the funds are included in the owner’s taxable income. Alternatively, at the moment, an RRIF and most other annuities purchased using registered funds will generally require minimum annual withdrawals (taxable) by you by the end of the year you turn 71. The proposed ALDA (a new annuity) will instead allow you to defer the start of withdrawals until the end of the year you turn 85.

This change can mean a valuable tax deferral for individuals who do not need or want to draw down their registered funds between the ages of 71 and 85. Those individuals can continue to hold some of these funds tax free for an additional 14 years.

The ALDA is also a great tool for longevity planning. By purchasing an ALDA, you ensure that there are funds available to support you in your (much) later years.

Things to Know

The ALDA is currently designed to have come into effect on January 1, 2020.* It will be available for purchase under an RRSP, RRIF, deferred profit sharing plan, pooled registered pension plan (PRPP), or a defined contribution registered pension plan (RPP). An ALDA will also be a “qualified investment” for a trust governed by an RRSP or RRIF.

There are, however, a couple limits on the amount of an ALDA that an individual can purchase. There is a lifetime dollar limit of $150,000 (indexed to inflation) and a lifetime limit of 25% of any particular qualifying plan.

These limits apply at the time of purchase meaning that any subsequent devaluation of assets held by a plan and corresponding reduction in the lifetime ALDA limit will not lead to a surrender of the excess amount. That means it is best to purchase an ALDA when the assets in your qualifying plan are at their peak value to ensure maximum contribution to the ALDA and therefore maximum tax deferral.

The value of the ALDA will be excluded in calculating the minimum amount that must be withdrawn in a year from a RRIF, PRPP or defined contribution RPP.

The tax benefits are two-fold. First, you may defer the taxes of up to 25% or $150,000 of your funds held in a registered plan until you are 85. Second, by excluding the value of the ALDA from the RRIF, PRPP, or defined contribution RPP minimum calculation, the regular payments out of these funds/plans will therefore be lower meaning even more tax savings between the ages of 71 and 85.

Non-Compliance

Any purchases of ALDA contracts beyond an individual’s limit will attract a tax of 1% per month on the excess amount. However, all or a portion of this penalty may be waived if the purchaser establishes that the overcontribution was a reasonable error and the excess amount is repaid to the registered fund it was taken from by the end of the following year.

A non-compliant ALDA contract will be considered a non-qualifying annuity purchase or a non-qualified investment for tax purposes. This may mean an immediate tax liability.

It is very important that you receive advice and purchase an ALDA through an appropriate institution.

Conclusion

The ALDA is a great new tool for tax deferral and longevity planning. If done right, it can mean substantial tax reduction between your 71st and 85th years. But, if done wrong, it may lead to immediate negative tax consequences.

Our Wills & Estates team would be happy to help you incorporate the use of an ALDA into your succession plan and estate plan. Please contact our office.

*The legislation implementing the ALDA has not yet been enacted. As drafted, the changes will be deemed to have come into force on January 1, 2020.