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.
Thursday, 7 September 2017
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:
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.
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:
- 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";
- by denying the LCGE on gains included in Split Income; and
- where the related individual is under 25, by including any income earned on Split Income itself in Split Income.
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.
Monday, 29 May 2017
Transfers Between Spouses in Alberta Still Presumed Gifts
Author: Nathaniel Brenneis, Student-at-Law
One individual transfers property over to another individual without receiving anything in return. In this situation, it is generally assumed that the individual receiving the property will hold the property in trust for the transferring individual who remains the beneficial owner. This is called the "presumption of resulting trust." It is up to the recipient of the property to rebut this presumption by proving that the transferred property was actually intended to be a gift.
There is a limited exception to the presumption of resulting trust called the "presumption of advancement." This presumption only arises in cases where the transfer is made from spouse to spouse or from parent to minor child. The principle provides that, absent evidence to the contrary, a gratuitous transfer of property between such parties will automatically be considered a gift.
The presumptions of advancement and resulting trust are both legal tools that assist in determining a transferor's intention at the time of a transfer. This is particularly important when a transferor has died and his or her intentions are being disputed. As a consequence, the presumptions can have a major impact on the division of assets as between spouses and beneficiaries. For example, they help determine whether jointly held property belongs to the surviving spouse or is divided up along with the rest of the deceased's estate.
There are members of the legal community, however, who question whether the presumption of resulting trust still applies between married couples in Alberta. The presumption of advancement between married partners has already been abolished across most of Canada, and many argue that contemporary social conditions no longer support its application. The presumption of advancement is largely based on the outdated understanding that most wives depend on their husband's financial support to survive. For obvious reasons, this sort of justification is no longer relevant in modern society.
Nonetheless, the Alberta legislature has yet to abolish the presumption of advancement. As a result, unless there is no evidence suggesting otherwise, transfers between Albertan spouses will still be presumed to be gifts. However, due to present social conditions, it is unlikely that a court would require a great deal of evidence to defeat this presumption when spouses are involved. In such a case, the transfer would be treated as a resulting trust.
So what does this mean? It means that any property that you transfer to or hold jointly with your spouse will likely be treated as a gift unless you explicitly express otherwise. If you do not intend for your spouse to be the beneficial owner of the property in question, it is important that you carefully record and document your true intentions and share them with both your spouse and beneficiaries.
Alternatively, for ways to ensure that your gifts are securely given to your loved ones, please see our blog post, Supporting Gifts and Property Transfers Down the Road.
One individual transfers property over to another individual without receiving anything in return. In this situation, it is generally assumed that the individual receiving the property will hold the property in trust for the transferring individual who remains the beneficial owner. This is called the "presumption of resulting trust." It is up to the recipient of the property to rebut this presumption by proving that the transferred property was actually intended to be a gift.
There is a limited exception to the presumption of resulting trust called the "presumption of advancement." This presumption only arises in cases where the transfer is made from spouse to spouse or from parent to minor child. The principle provides that, absent evidence to the contrary, a gratuitous transfer of property between such parties will automatically be considered a gift.
The presumptions of advancement and resulting trust are both legal tools that assist in determining a transferor's intention at the time of a transfer. This is particularly important when a transferor has died and his or her intentions are being disputed. As a consequence, the presumptions can have a major impact on the division of assets as between spouses and beneficiaries. For example, they help determine whether jointly held property belongs to the surviving spouse or is divided up along with the rest of the deceased's estate.
There are members of the legal community, however, who question whether the presumption of resulting trust still applies between married couples in Alberta. The presumption of advancement between married partners has already been abolished across most of Canada, and many argue that contemporary social conditions no longer support its application. The presumption of advancement is largely based on the outdated understanding that most wives depend on their husband's financial support to survive. For obvious reasons, this sort of justification is no longer relevant in modern society.
Nonetheless, the Alberta legislature has yet to abolish the presumption of advancement. As a result, unless there is no evidence suggesting otherwise, transfers between Albertan spouses will still be presumed to be gifts. However, due to present social conditions, it is unlikely that a court would require a great deal of evidence to defeat this presumption when spouses are involved. In such a case, the transfer would be treated as a resulting trust.
So what does this mean? It means that any property that you transfer to or hold jointly with your spouse will likely be treated as a gift unless you explicitly express otherwise. If you do not intend for your spouse to be the beneficial owner of the property in question, it is important that you carefully record and document your true intentions and share them with both your spouse and beneficiaries.
Alternatively, for ways to ensure that your gifts are securely given to your loved ones, please see our blog post, Supporting Gifts and Property Transfers Down the Road.
Thursday, 4 May 2017
Unequal Treatment of Adult Children Beneficiaries
Author: Barbara Kott, Student-at-Law
When drafting a will, people expect that their wishes will be respected after they pass away. However, like any other legal document, the validity of a will may be challenged. If a challenge is successful, your estate may be divided based on the Wills and Successions Act of Alberta, which may not be in keeping with your wishes. If you plan to treat your adult children unequally in your will, you should consider the possibility of challenges from the adult child inheriting a smaller share.
Adult children beneficiaries may challenge a will by arguing that their deceased parent lacked the requisite mental capacity to make the will. Or, they may argue that the deceased parent was under duress or was unduly influenced when they made the will. Regardless of whether these arguments have merit, your estate will have to defend them, and pay the cost of doing so. Litigating a challenge to a will can significantly reduce or deplete the assets of an estate.
In some instances, a conversation with your children may be sufficient to relieve you of a concern that they may challenge your will. In other instances, further precautions may be necessary. Here are some tips for preventing your adult children from successfully challenging your will:
1. Inter Vivos Gifts
An inter vivos gift is a gift given during the donor's lifetime. If you give property away during your lifetime, it will not pass through your estate. Therefore, you may prevent a child who is unhappy with their inheritance from challenging your will by giving all, or some, of your property before your death. However, a gift is also open to challenge. For ways to ensure that your gift is securely given see our blog post, Supporting Gifts and Property Transfers Down the Road.
2. Document Your Intention
You can prevent a claim against your estate by an unhappy child beneficiary, or create evidence to be used by your estate in defending a claim, by drafting a document stating your intention. The document should state that you intend an unequal distribution of your estate, and why. You can keep the document private, only to be provided to the executor of your estate, unless the will is challenged, in which case you can leave instructions that it may be provided to a child challenging the will, and also used as evidence in support of the will. The use of a document stating your intention can be discussed with your lawyer when you prepare a will.
3. Update Your Will
Assets that are not disposed of in your will, or codicil to a will, will be disposed of in accordance with the Wills and Successions Act of Alberta. If you are looking to treat your adult children unequally, an intestate disposition may not achieve that end. Therefore, it is important to update your will so that it includes all of your assets and is in keeping with your wishes.
Another factor to consider is whether you want your child's spouse to benefit from the inheritance you leave to your child. If you give property to a child during your lifetime, or through your will, your child will need to take steps to prevent that property from becoming family property for the purposes of division in the event of a divorce. Your child should be aware of the exempt property provisions under the Matrimonial Property Act, so that they can make decisions about whether they want all or a portion of an inheritance to be property of their marriage.
When drafting a will, people expect that their wishes will be respected after they pass away. However, like any other legal document, the validity of a will may be challenged. If a challenge is successful, your estate may be divided based on the Wills and Successions Act of Alberta, which may not be in keeping with your wishes. If you plan to treat your adult children unequally in your will, you should consider the possibility of challenges from the adult child inheriting a smaller share.
Adult children beneficiaries may challenge a will by arguing that their deceased parent lacked the requisite mental capacity to make the will. Or, they may argue that the deceased parent was under duress or was unduly influenced when they made the will. Regardless of whether these arguments have merit, your estate will have to defend them, and pay the cost of doing so. Litigating a challenge to a will can significantly reduce or deplete the assets of an estate.
In some instances, a conversation with your children may be sufficient to relieve you of a concern that they may challenge your will. In other instances, further precautions may be necessary. Here are some tips for preventing your adult children from successfully challenging your will:
1. Inter Vivos Gifts
An inter vivos gift is a gift given during the donor's lifetime. If you give property away during your lifetime, it will not pass through your estate. Therefore, you may prevent a child who is unhappy with their inheritance from challenging your will by giving all, or some, of your property before your death. However, a gift is also open to challenge. For ways to ensure that your gift is securely given see our blog post, Supporting Gifts and Property Transfers Down the Road.
2. Document Your Intention
You can prevent a claim against your estate by an unhappy child beneficiary, or create evidence to be used by your estate in defending a claim, by drafting a document stating your intention. The document should state that you intend an unequal distribution of your estate, and why. You can keep the document private, only to be provided to the executor of your estate, unless the will is challenged, in which case you can leave instructions that it may be provided to a child challenging the will, and also used as evidence in support of the will. The use of a document stating your intention can be discussed with your lawyer when you prepare a will.
3. Update Your Will
Assets that are not disposed of in your will, or codicil to a will, will be disposed of in accordance with the Wills and Successions Act of Alberta. If you are looking to treat your adult children unequally, an intestate disposition may not achieve that end. Therefore, it is important to update your will so that it includes all of your assets and is in keeping with your wishes.
Another factor to consider is whether you want your child's spouse to benefit from the inheritance you leave to your child. If you give property to a child during your lifetime, or through your will, your child will need to take steps to prevent that property from becoming family property for the purposes of division in the event of a divorce. Your child should be aware of the exempt property provisions under the Matrimonial Property Act, so that they can make decisions about whether they want all or a portion of an inheritance to be property of their marriage.
Monday, 24 April 2017
What Happens to Real Property Upon Death?
Author: Allison Rudzitis
When two or more people own real property together, ownership of that property can take the form of either tenancy in common or joint tenancy. In the tenancy in common scenario, two or more people hold title to the real property in a manner by which each is entitled to occupy the entire property but each may also dispose of his or her interest independently of the other. Tenants in common are able to hold different portions of the property (i.e. it does not have to be equal. If one of the tenants in common dies, the deceased's interest forms part of his or her estate upon death, and is subject to probate.
Property held by way of joint tenancy means that each person has an undivided interest in the land with equal rights to possession and equal title acquired by the conveyance. A major distinguishing feature of joint tenancy is that, unlike tenancy in common, the right of survivorship applies. This means that upon the death of one joint owner, the land as a whole vests with the survivor(s), and can only be disposed of by will of the last surviving owner. In this circumstance, real property does not form part of the estate and is not subject to probate fees.
The process for transferring property upon the death of a joint tenant is easy and straightforward. A statutory declaration must be signed by the surviving joint tenant attesting to the fact that the other joint tenant has passed away. This statutory declaration must be accompanied by a death certificate (either an original or notarized copy) confirming the death of the deceased joint tenant. These documents are then submitted to Land Titles, and a new title is issued describing the name(s) of the surviving joint tenants.
Both types of land ownership are appropriate for different reasons. It is important to consult with a lawyer when determining how land will be held, so that your specific circumstances can be ascertained and the ideal form of land ownership is determined.
When two or more people own real property together, ownership of that property can take the form of either tenancy in common or joint tenancy. In the tenancy in common scenario, two or more people hold title to the real property in a manner by which each is entitled to occupy the entire property but each may also dispose of his or her interest independently of the other. Tenants in common are able to hold different portions of the property (i.e. it does not have to be equal. If one of the tenants in common dies, the deceased's interest forms part of his or her estate upon death, and is subject to probate.
Property held by way of joint tenancy means that each person has an undivided interest in the land with equal rights to possession and equal title acquired by the conveyance. A major distinguishing feature of joint tenancy is that, unlike tenancy in common, the right of survivorship applies. This means that upon the death of one joint owner, the land as a whole vests with the survivor(s), and can only be disposed of by will of the last surviving owner. In this circumstance, real property does not form part of the estate and is not subject to probate fees.
The process for transferring property upon the death of a joint tenant is easy and straightforward. A statutory declaration must be signed by the surviving joint tenant attesting to the fact that the other joint tenant has passed away. This statutory declaration must be accompanied by a death certificate (either an original or notarized copy) confirming the death of the deceased joint tenant. These documents are then submitted to Land Titles, and a new title is issued describing the name(s) of the surviving joint tenants.
Both types of land ownership are appropriate for different reasons. It is important to consult with a lawyer when determining how land will be held, so that your specific circumstances can be ascertained and the ideal form of land ownership is determined.
Wednesday, 12 April 2017
Life Insurance - Uses, Tips and Traps
Author: Crista Osualdini
Life insurance is a familiar product to many of us and can be an element of estate planning that should not be overlooked. It is typically used to either create or preserve wealth and can be used in a variety of ways in structuring an estate plan. For example:
Creating Liquidity to Pay Debts - When completing your estate plan, an analysis should be done of the nature and extent of anticipated debt and expenses upon death. In Canada, upon death we are notionally deemed to have disposed of all our assets for tax purposes. This means that any unrealized capital gains at the time of death will be taxed. This can often result in a significant tax bill - family cottages often being a prime example. Life insurance can create the necessary liquidity so that assets do not need to be sold in order to pay associated tax debt or any other forms of debt.
Creating Wealth Outside the Estate - When developing an estate plan, the law requires you to ensure that certain persons are properly provided for. These people include, but are not limited to, spouses, minor children and dependent adult children. This can become problematic, especially in blended family situations, where there is a need to provide for a second spouse, but also a desire to provide for non-dependent adult children of the first marriage. Life insurance can be used to create wealth and increase the "size the pie" that is available for persons you would like to provide for.
Funding Buy/Sell Agreements in Privately Held Corporations - It is typical that in a small business upon the death of a shareholder, either the remaining shareholders or the corporation will purchase the deceased shareholder's shares. This can be a substantial cost. The expense could interfere with the company's ability to carry on business with the added cost of new financing or reduced capital availability. Life insurance can be a tool used to fund the share purchase so that the impact of the shareholder's death on the operation of the corporation is minimized.
When working with life insurance, the following are 10 Tips and Traps from my experience in working with individuals to develop their estate plan:
Life insurance is a familiar product to many of us and can be an element of estate planning that should not be overlooked. It is typically used to either create or preserve wealth and can be used in a variety of ways in structuring an estate plan. For example:
Creating Liquidity to Pay Debts - When completing your estate plan, an analysis should be done of the nature and extent of anticipated debt and expenses upon death. In Canada, upon death we are notionally deemed to have disposed of all our assets for tax purposes. This means that any unrealized capital gains at the time of death will be taxed. This can often result in a significant tax bill - family cottages often being a prime example. Life insurance can create the necessary liquidity so that assets do not need to be sold in order to pay associated tax debt or any other forms of debt.
Creating Wealth Outside the Estate - When developing an estate plan, the law requires you to ensure that certain persons are properly provided for. These people include, but are not limited to, spouses, minor children and dependent adult children. This can become problematic, especially in blended family situations, where there is a need to provide for a second spouse, but also a desire to provide for non-dependent adult children of the first marriage. Life insurance can be used to create wealth and increase the "size the pie" that is available for persons you would like to provide for.
Funding Buy/Sell Agreements in Privately Held Corporations - It is typical that in a small business upon the death of a shareholder, either the remaining shareholders or the corporation will purchase the deceased shareholder's shares. This can be a substantial cost. The expense could interfere with the company's ability to carry on business with the added cost of new financing or reduced capital availability. Life insurance can be a tool used to fund the share purchase so that the impact of the shareholder's death on the operation of the corporation is minimized.
When working with life insurance, the following are 10 Tips and Traps from my experience in working with individuals to develop their estate plan:
- In light of the aging baby boomer generation, it is anticipated that over the course of the next thirty years there will be an unprecedented inter-generational wealth transfer. It will likely follow that estate litigation will be on the rise. Consider naming beneficiary on your life insurance other than your Estate, this will assist in protecting it from claims of disappointed beneficiaries and creditors.
- Consider the need for life insurance earlier rather than later. Life insurance is often prohibitively expensive later in life and thus renders it an uneconomical solution.
- If you name your Estate as the beneficiary of your life insurance, it will be subject to probate fees. While Alberta currently has low flat rate probate fees, this may not always be the case. In certain Provinces, probate fees are calculated as a percentage of estate value.
- In addition, if you name your Estate as the beneficiary of your life insurance, your executors will likely need to wait for a Grant of Probate to be issued prior to the insurance provider releasing funds. At the time of writing, a Grant of Probate takes approximately three to four months to issue at the Court of Queen's Bench.
- Make sure your beneficiaries are aware that you have life insurance in place. Or alternatively, provide this information in your Will. If your executor or beneficiaries do not know that you have life insurance in place, it is possible that it may go unclaimed upon your death.
- When life insurance is used to fund a corporate buy out of share upon death, make sure your shareholders' agreement sets out whether those funds will be paid through the Capital Dividend Account and thus on a "tax free" basis to the estate of the deceased shareholder. If this is unclear in the agreement, it can lead to litigation as to who receives the tax benefit generated by the payment of life insurance to the corporation.
- Ensure that your beneficiary designations are not in violation of any existing separation or divorce agreements. If they are, this will likely lead to litigation. The result of such litigation could be that a remedial trust is imposed by the Court over the insurance proceeds for the benefit of whomever the insurance was supposed to be paid pursuant to the agreement.
- Make sure initial and any subsequent amendments to beneficiary designations are done correctly. The Insurance Act sets out the requirements for making a beneficiary designation amendment and must be complied with. Far too often these designations are completed incorrectly which can lead to expensive and time consuming litigation. Make sure the designation is signed by you and specifically names the insurance policy that you are referring to and who you are naming as the beneficiary.
- Insurance can be a great tool to use when you are desirous of making a charitable donation upon death. There are different ways to structure such a gift, so ensure you receive tax advice on what method is best for your circumstances.
- For couples with young children, an important consideration in estate planning is appointing guardians for the children in the event of the death of both parents. Part of this discussion usually pertains to where the children would live. Quite often parents will want to maintain continuity for the children and for them to continue living in the family home. Do not forget about mortgage insurance and considerations as to how the Estate will be able to afford to continue to maintain the family home.
Tuesday, 7 March 2017
Dependency Claims and Estate Planning
Author: Fred Fenwick, Q.C.
One of our estate litigators in Calgary, Fred Fenwick, Q.C., recently recovered a judgment in excess of $500,000.00 in favour of a medically disabled, adult biological child as against the estate of her estranged biological father.
The case was unusual as the biological
relationship had never been acknowledged (although it was suspected) and although
medically disabled as an adult, the claimant had no support relationship with
the deceased during his lifetime.
Notwithstanding all that, the provisions of the Dependent’s Relief Act (now continued into the Wills and
Succession Act) require an estate to support “family members” which
includes not only the usual and expected family members (spouses, adult
inter-dependent partners, minor children) but also “a child of the deceased who is at least 18 years of age at the time of
the deceased’s death and unable to earn a livelihood by reason of mental or
physical disability”.
Notwithstanding the
lack of any support connections during the deceased’s lifetime, the Claimant
was medically disabled at his death and was eventually proven by DNA evidence to
be “a child” and therefore under the statutory definition qualified for
support.
The case was
factually difficult and required the development of DNA evidence from the
living disabled adult child (not difficult these days) but as well from the
deceased who had passed away in 2009 (found in a hairbrush!). The case also required the development of
complicated medical evidence including expert opinion as to the lifespan of a
medically disabled person which became an element of contest at the hearing. You can imagine how unpleasant it was at the
hearing for the disabled person to hear
strangers debating just how short their life was doomed to be.
How you felt about
the success of the case at the end of the day would of course depend on what
side you stood. On the one hand, a
genuinely medically disabled person was able to be lifted out of poverty and
provided a modest level of comfort and support.
In addition, she was taken off the welfare rolls and all of our taxes
went down by a miniscule amount. On the
other hand, this claim “came out of the blue” for the deceased and his other
children and the final distribution of the estate and payment to the residual
beneficiaries of the estate was delayed and of course reduced by the amount of
the award and legal costs.
From an estate
planning point of view, the case points out the necessity of a close, candid,
and confidential relationship with your lawyer and other advisors when planning
your estate and drafting your Will. As
in this case, you may not have disclosed to your family or your lawyer the
identity and the nature of your dependants, or the extent of their
dependency. In other situations, it may
not be immediately apparent that the property you think is yours may be jointly
held, or perhaps held by a corporation. Accumulating
debts such as deferred taxes or child and spousal support have the potential to
eat into an estate before intended payments to beneficiaries are
available. There are many, many examples
which point out how planning and administering an estate also law involves corporate,
tax, family and litigation law.
The Wills and
Estates Department at McLennan Ross LLP practices with lawyers and staff with specific experience in estate
planning, Wills drafting and probate but also practices with leading counsel in
family law, corporate law, taxation, litigation and the other areas that you may
not have been considering, but often do influence both the planning of your
estate and the practical administration of it years later.
Thursday, 9 February 2017
What Other Documents Should You Consider When Getting a Will?
Author: Colin Flynn
The two most common documents that are drafted
along with a Will are firstly, a Personal Directive, and secondly, Enduring Power
of Attorney. Having all three of the
above mentioned documents should be part of any complete approach to planning
for an individual’s final years. Having
all three can help a great deal in avoiding issues such as family infighting
regarding what each family member believes your wishes to be.
The
Enduring Power of Attorney
An Enduring Power of Attorney (EPA) is a
document that you sign while you still have capacity, which enables someone
else to look after your finances when you cannot (ie. when you lose capacity). If you do not have an EPA it will be necessary
for someone to apply to the courts for an order of Trusteeship should you
become incapacitated.
The
Personal Directive
Should you become incapacitated, the
Personal Directive gives your appointed agent the authority to determine where
you live and the kind of medical treatment you receive, as well as other
personal decisions not dealing with your assets.
The Personal Directive should also
contain what is morbidly referred to as a “Pull the Plug” clause, which
provides for the type of treatment you are to receive in order to prolong your
life. You should specify whether or not
you wish for your life to be prolonged by artificial means when in a coma or a
persistent vegetative state. Further, it
should be noted whether or not you wish to be given pain medication even though
it may dull consciousness and indirectly shorten your life.
Although a Personal Directive generally
contains language that your Agent must make any decisions based upon their
knowledge of your wishes, beliefs and values, as much information as possible
ought to be included in the Personal Directive to avoid any uncertainty in the
future.
Conclusion
Just as changing your beneficiaries requires drafting of a new Will, should your wishes as written in a Personal Directive or Enduring Power of Attorney change, so too should these documents. As with a Will, "sooner rather than later" are words to live by (pun intended), as any number of circumstances could lead to a loss of capacity, and hence, loss of the ability to put your wishes in writing and potentially avoid issues such as those noted above.
Conclusion
Just as changing your beneficiaries requires drafting of a new Will, should your wishes as written in a Personal Directive or Enduring Power of Attorney change, so too should these documents. As with a Will, "sooner rather than later" are words to live by (pun intended), as any number of circumstances could lead to a loss of capacity, and hence, loss of the ability to put your wishes in writing and potentially avoid issues such as those noted above.
Monday, 23 January 2017
Legal Representatives Beware - You Can Be Personally Liable for Taxpayer's Tax Debts
Author: MaryAnne Loney
According to subsection 159(1) of the Income Tax Act (the “Act”), legal representatives jointly and severally, or solidarily liable for a taxpayer’s tax liability while they are the legal representative, to the extent that the legal representative is at that time in possession or control of property that belongs or belonged to the taxpayer or their estate.
According to subsection 159(1) of the Income Tax Act (the “Act”), legal representatives jointly and severally, or solidarily liable for a taxpayer’s tax liability while they are the legal representative, to the extent that the legal representative is at that time in possession or control of property that belongs or belonged to the taxpayer or their estate.
The Canada Revenue Agency (the “CRA”)
recently released Technical Interpretation 2006-0638171E5 (the
“Interpretation”) considering a legal representative’s liability pursuant to
subsection 159(1) of the Act. In the Interpretation
the CRA interpreted what is meant by “that time.”
The Interpretation is quite alarming as it
appears to suggest legal representatives such as executors or trustees could be
personally liable for a tax debt the legal representative did not know about as
a result of exercising their proper responsibilities.
Fact Scenario:
The CRA considered the following scenario:- A trust whose sole individual beneficiary has an unpaid tax liability for 2014 holds marketable securities with a fair market value (“FMV”) of $125,000 on December 31, 2016.
- The Trustee is the legal representative for the beneficiary for the purposes of section 159 of the Act.
- The beneficiary filed his 2014 tax return and was assessed $150,000 outstanding tax liability on April 30, 2015.
- Due solely to market decline, on April 30, 2015 the portfolio had a FMV of $100,000.
- On January 1, 2016 the CRA issued the Trustee a demand notice for the beneficiary’s tax debt.
- On January 7, 2016 the Trustee sold the portfolio and, again due solely to market decline, was only able to obtain $70,000.
CRA Interpretation:
The CRA concluded that the wording of
section 159(1) was such that “that time” is the time an amount becomes payable,
being April 30, 2015 – despite the fact that at this point no demand for
payment had been made to the Trustee and there is no indication that the
Trustee had any way of knowing of the beneficiary’s tax liability.
The Trustee could therefore be personally liable
for the $30,000 loss in value between April 30, 2015 and the sale in January
2016.
Problems with interpretation for legal representatives:
The Interpretation is alarming for a couple
of reasons.
First, a legal representative may not learn
of that tax liability until after it is payable. This could occur when the legal
representatives responsibilities do not include being responsible for the tax
compliance of the person they represent, or, even when they are responsible for
tax compliance, in the case of a late filed return or a later reassessment.
Second, the Interpretation appears to
suggest that a legal representative could be personally liable for reductions
in the value of the assets as a result of properly carrying out their fiduciary
obligations as legal representatives – this could include not just as a result
of market changes from investing as in the Interpretation but even potentially
as a result of paying other creditors.
Advice going forward:
Unfortunately, there do not appear to be
any perfect answers – it is far too easy to imagine circumstances where there
is tax liability a legal representative has no way of knowing about and the
legal representative cannot liquidate all the assets and turn them into cash
and/or must pay other creditors or risk breaching their fiduciary duties.
That being said, the Interpretation highlights
that tax compliance should be of primary concern to a legal
representative. Tax returns should be
filed prior to when tax payments are due when possible and as soon after when
not possible. Tax liabilities should be
paid promptly and on a timely basis. It also
may make sense for an executor to obtain a clearance certificate for the
deceased even if they are not yet ready to obtain one for the estate to reduce
the risk that there is outstanding tax liability the executor is unaware of.
It is also worth noting that this will
likely only be a problem when the trust or estate does not have sufficient
assets to cover the tax liability as, in all likelihood, a legal representative
could be compensated from the trust or estate, provided the trust or estate had
sufficient assets.
Finally, on a positive note, the CRA does not appear to date to be aggressively using subsection 159(1) to assess legal representatives for other's tax liability. Given the important role legal representatives play in our society, hopefully this won't change.
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