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such as a registered retirement savings plan (RRSP), the amounts contributed are tax-deferred until the funds are withdrawn out from the plan.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 71^st and 85^th 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.

Timeline of an Estate: Tax and Other Considerations

by Michelle Fong

Being entrusted to be an Executor is an honour – it means that the deceased believes that you are the best suited person to manage and care for their estate. However, the position also comes with legal responsibilities and liabilities. The “job” of an Executor can last from a year or more, with or without contentious beneficiaries.

The Executor has many duties. This article focuses the notable deadlines and timelines. The “Administering the Estate” timeline focuses on the Grant of Probate process (if there is no Will, it is called a Grant of Administration). The “Tax” timeline focuses on what needs to be done at what point to alleviate the tax burden of the estate.

ESTATE ADMINISTRATION TIMELINE

Broadly speaking, in administering an estate, the Executor’s role is to gather the assets of the estate, protect them, ensure debts are paid, then distribute the assets. It seems simple enough. However, there are certain events and their timing that should be considered.

1.   A Notice to Claimants may be published in the local newspaper. The Executor is responsible for ensuring debts of the estate are paid before they distribute the assets to the beneficiaries. This notice “starts the clock” for any claimants who are owed money from the estate – they must contact the Executor within 30 days and formalize their claim.  After the 30 days, the Executor can move forward with the estate without worrying about claimants coming out of the woodwork. The Executor can be held personally liable if they distribute the estate to beneficiaries before ensuring all debts are paid.

2.     Apply for a Grant of Probate (or Administration). There is no “deadline” for applying for a Grant of Probate (or Administration) but certain institutions may refuse to acknowledge an Executor’s authority until a Grant of Probate is obtained. This may make it difficult to deal with the estate assets and debts without a Grant of Probate.[1] It takes time to compile the information for an application for the Grant and, once it is submitted to the Court, it can take 4-5 months to be processed. This is also assuming that no one contests the application.

3.    Family Maintenance and Supports claims. After the Grant of Probate is obtained, a family member[2], as legislatively defined, will have 6 months from the date of the Grant to make a family maintenance and support claim from the Estate. The basis of the claim is that the deceased failed to make adequate provision for the proper maintenance and support of the family member. If the Executor distributes the estate assets prior to this 6-month deadline (or prior to the matter being settled, if a claim is lodged), then the Executor will be personally liable to the family member for the estate assets they are found to be entitled to.

4.  Final Clearance Certificate. The Executor is responsible for ensuring debts of the estate are paid before they distribute the assets to the beneficiaries. One major debt of the estate is tax. After filing the terminal tax return and receiving the Notice of Assessment, the Executor should pay taxes owed and then apply for a final Clearance Certificate (if the Estate is designated as a graduated rate estate (see below), then the final Clearance Certificate is applied for when the Estate is almost ready to distribute). This Certificate is the CRA’s confirmation that all taxes have been paid. The Certificate may take 1 to 1.5 years to be issued. If the Executor distributes the estate prematurely, they will be personally liable for any taxes that are found still owing. It is recommended to wait until after the receipt of the final Clearance Certificate before distributing assets to beneficiaries. For more info, see here.

5.  Accounting.  Accounting is a very important task.  The Executor must provide an accounting to the beneficiaries every two years of their management of the Estate assets.  The law requires this accounting to take a particular form, so it is best to seek advice from experienced counsel. The Executor can have the accounting approved by the beneficiaries or by the Court.  By seeking this approval, the Executor’s liability for their management of the Estate assets during the accounting period is relieved.   

6.    Executor compensation. Executor compensation is a priority claim against the Estate and may be paid in priority to certain other debts.  Unless the Will expressly provides for the amount of executor compensation, compensation may not be taken absent beneficiary or Court approval. 

7.    Distribution to Beneficiaries – Once all of the debts of the Estate have been paid and the accounting approved, either by the beneficiaries or the Court, a distribution to the beneficiaries can occur. 

TAX TIMELINES

First and foremost, the Executor should hire a good accountant. Depending on the complexity of the estate, a tax lawyer may also need to be brought on. As mentioned above, taxes are usually owed by the Estate. This is because, for one, there is a deemed disposition of all capital property upon death (capital gains taxes incurred) and, second, any income of the deceased in the year of death will also attract tax (e.g. interest income, employment income, etc.).

Filing return

Terminal tax return (Final income tax return)

If the deceased died on or before October 31^st, then the terminal tax return is due April 30^th of the following year. (Or, June 30^th if the deceased was self-employed).

If the deceased died after October 31^st, then the terminal tax return is due 6 months after the death.

Other tax returns

Any returns that the deceased was responsible for, such as corporate tax returns or trust returns, may become the responsibility of the Executor if there are no other directors of the corporation, or other trustees of the trust. Be aware that:

·  A corporation’s T2 return filing deadline is 6 months after its tax year-end (but corporate taxes may be due 2 or 3 months after tax year-end). 

·   A trust’s T3 return filing deadline is 3 months after its tax year-end. Taxes are due at the same time.

Elective returns

In addition to the regular terminal tax return filed for the deceased, other optional returns can be filed. The benefits of filing multiple returns is, generally, certain tax credits can be claimed on each return (duplicating tax credits) and the income in each return will be subject to graduated rates (duplicating the lower tax rates).

1.  Rights or things return. Rights or things relate to income that the deceased was entitled to but had not yet been paid. For example, declared but unpaid dividends, or work in progress amounts. This return is due 1 year after death or 90 days after the Notice of Assessment for the terminal return, whichever is later.

2.     Income return from proprietor (business) or partner.  If the deceased died after the end of the business's fiscal period but before the calendar year-end (in which the fiscal period ended), you can file an optional return for the deceased. This return is due at the same time as the terminal tax return.

3.   Graduated Rate Estate (GRE) return. Discussed below. To be treated as a GRE, the Executor must designate the estate to be a GRE in a T3 trust return. The first GRE return is due at the same time as the terminal tax return. Subsequent returns are due in accordance with the T3 deadlines (3 months after tax year-end). 

For more information on optional returns, see the CRA site here.

Graduated Rate Estate

An estate is considered a trust for tax purposes. Subject to certain exceptions, trusts are taxed at the highest marginal rate. However, a GRE allows the estate to be taxed at graduated rates instead and they have more flexible donation rules. Also, in order to avail the estate to certain tax elections and options, the shares of private corporation must be held by a GRE (discussed below).

An estate must be designated as a GRE. In order to qualify as a GRE, the following criteria must be satisfied during the entire duration of the GRE:

                 i.          the estate arose on and as a consequence of the individual’s death no more than 36 months after the death;

               ii.          the estate is at that time a testamentary trust;

             iii.          the deceased’s Social Insurance Number is provided in the estate’s Trust Return for each taxation year of the estate during the 36-month period after the death of the deceased;

              iv.          the estate designates itself as GRE of the individual in its Trust Return (GRE Return) for tax year of death; and

                v.          no other estate designates itself as the GRE of the deceased.[3]

A GRE, and its preferential tax treatment, will only last up to 36 months from death. It can be terminated earlier if it distributes all assets, or if the estate no longer satisfies all the above requirements.

Corporations: Options to avoid double taxation

If the deceased owned shares in a private corporation at death, then there may be double taxation (tax at the deemed disposition at death, and tax upon extracting the funds from the corporation to pay the beneficiaries). There are certain strategies to avoid this double taxation.  The two most common are:

1.  Loss Carryback 164 Election. The deemed disposition at death will increase the adjusted cost base of the shares to fair market value. The Estate (GRE) then redeems the shares in the corporation, creating a deemed dividend and a capital loss. This capital loss is then carried back to net against the capital gain at death. The 164 election to carryback the capital loss must be included on the terminal return, meaning this option must be completed within 1 year after death.

2.    Pipeline (post-mortem). A pipeline requires a new corporation to be created (NewCo) in addition to the private corporation already owned by the deceased (PrivCo). The NewCo will acquire the shares of the PrivCo from the Estate (GRE) in exchange for a promissory note or preferred shares. Later on, NewCo will then use the assets originally in PrivCo to pay off the promissory note.  The is no “deadline” for this transaction but there is a timeline. The NewCo and PrivCo must exist for at least 1 year (we recommend longer, such as 3 years). The assets should not be distributed to the beneficiaries until after the 1-3-year period. Therefore, it is better to start this process sooner than later.

Both options are complex and carry risks and benefits. The above explanations are very generalized overviews. The risk of double taxation, and the complexity associated with avoiding it, means a tax practitioner should always be consulted as soon as possible if an estate includes shares of a private corporation.

Rollovers: Spouse and Farm or Fishing Property

Upon death, the deceased is deemed to have disposed all his or her capital property at fair market value. This will often trigger tax for capital gains and recapture (if depreciable property).

However, there are two main exceptions where the property is deemed to be transferred at cost instead:

·      Rollover to a spouse, common-law partner, or qualified spousal trust. To qualify for this rollover, the property must vest indefeasibly in the spouse, common-law partner or trust within 36 months after death. The “default” rule is that the transfer will occur at cost if it qualifies (no election required) but the Executor may elect out of this default rule and the transfer will then occur at fair market value.

·      Rollover of farm or fishing property from parent to child. To qualify for this rollover, the property must be qualified farm and fishing property[4], the recipient child must be a Canadian resident immediately before the deceased died, the property must have transferred to the child as a consequence of the deceased’s death, and the property must vest indefeasibly in the child within 36-months after death. The “default” rule is that the transfer will occur at cost (no election required) but the Executor may elect to have the transfer occur at any value between cost and fair market value.

In both exceptions, it is possible for the Executor to elect for the transfer to occur not at cost. This is usually done to trigger capital gains tax which can then be offset with the deceased’s lifetime capital gains exemption. For the capital gains exemption to apply, the property must be eligible property and the deceased must still have a capital gains exemption balance at death.[5], [6]

CONCLUSION

Acting as Executor can be time-consuming, onerous and complicated. This article aims to highlight the deadlines that must be met and to demonstrate that administering an Estate can take a long time, even for the most organized. Therefore, it is generally better to start earlier than later.

The McLennan Ross Wills & Estates Group and Tax Group would be happy to assist you in dealing with your Executor’s duties as well as the various tax issues that may apply to the estate. Please contact our office.

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[1] A Grant of Probate will usually be required for dealing with bank accounts exceeding a certain amount and for any land transfers.

[2] Family members include spouses, adult interdependent partners, minor children and dependent adult children.

[3] This means that any testamentary trusts or insurance trusts also resulting from the death of the deceased cannot be designated as a GRE. There can only be one GRE per deceased person.

[4] There are certain requirements to qualify as farm and fishing property, such as the property must be used principally (50%+) for farming or fishing, and that the taxpayer (or certain family members) have been engaged actively and continuously in the farming or fishing. The requirements are quite technical and may be complex in their application, so we recommend a tax practitioner confirm the property qualifies before attempting to take advantage of this rollover.

[5] Note, paragraph 110.6(14)(g) of the Income Tax Act gives some relief. So long as the relevant corporation met the test for “small business corporation” at any time in the preceding 12-months prior to death, then the shares are deemed to be “qualified small business corporation shares”.  The definition of “small business corporation” is under subsection 248(1) and requires the corporation to be a Canadian-controlled private corporation with certain criteria met. Again, the requirements are quite technical and may be complex in their application, so we recommend a tax practitioner confirm the property qualifies before attempting to take advantage of the exemption.

[6] Note, claiming certain losses will decrease the balance of the lifetime capital gains exemption of a person.

New Trust Reporting Requirements: It’s Almost Time

By Lydia Roseman, Student-at-Law and MaryAnne Loney

Budget 2018 announced, and Budget 2019 confirmed, that trust reporting requirements are changing in 2021. While it may have felt far away at the time, 2021 is now almost upon us. If they have not already, it is time for trustees to start thinking about the implications of these changes. They need to ask themselves, are the benefits of a trust worth the effort and risks?

The new reporting requirements

The proposed changes primarily affect express trusts, that is trusts created by specific intent, usually in writing. As it stands right now, these trusts are generally only required to file if certain circumstances arise during the taxation year, for example if the trust earns income, disposes of capital property, or makes distributions to beneficiaries. In other words, if nothing changes for the trust then nothing is reported. 

Starting in 2021, except for a few specifically exempted types of trusts (such as mutual fund trusts or trusts that qualify as registered charities), express trusts resident in Canada must:

1. file income tax returns annually in the form of a T3 Trust Income Tax and Information Return (T3);
2. report all the settlors, trustees and beneficiaries of the trust; and
3. identify any persons who exert control over the trustee’s decisions concerning income and capital (“protectors”).

This new information will be filed as a new schedule (yet to be released) with the T3. The information reported on the settlors, trustees and beneficiaries includes each individual’s taxation identification number (usually their social insurance number), birth date, address and jurisdictions of residence.

Increased risks associated with the new reporting requirements

Failing to comply with these new requirements can mean harsh penalties. Filings that are late or fail to provide the required additional information are penalized $25 a day for each day the filing is late, from a minimum of $100 to a maximum of $2,500. Additionally, if the failure was made knowingly, or due to gross negligence, an additional penalty of 5% of the maximum value of the trust property (minimum $2,500 penalty) will apply. 

Collecting this information may be an extremely onerous process, especially where there is a broad group of beneficiaries, so consider starting the process sooner rather than later.

Further, this change could have much further reaching implications.

Once the CRA has this information, a whole new set of other potential taxation issues arise. For example, the increased availability of beneficial ownership information of corporations means the CRA can crack down on related shareholders and associated corporations. Theoretically, beneficiaries of trusts that they did not even know existed could now be facing major tax implications from association rules. 

As a result, this could impact a trustee’s obligation to disclose the existence of a trust to beneficiaries.

In Valard Construction Ltd. v. Bird Construction Co, 2018 SCC 8, the Supreme Court held that a trustee’s fiduciary duty includes an obligation to disclose the existence of a trust to a beneficiary wherever a beneficiary would be unreasonably disadvantaged not to be informed of its existence. While this case arose in the commercial context, the case has already been cited for its general principles of trust law in other contexts.

If a court were to hold that unforeseen tax consequences to a beneficiary taxpayer were an unreasonable disadvantage due to not being informed of the existence of a trust, the trustee could be personally liable for a breach of its fiduciary duty. 

Trustees should, therefore, consider disclosing the existence of trusts now to any beneficiaries, including discretionary beneficiaries, that are currently unaware they are beneficiaries.

Conclusion

Given the above, trustees should consider whether it would be preferable to wind up their trusts. There are many reasons, including tax reasons, why parties will continue to use trusts. However, many of the tax advantages of using trusts have been eliminated over the last several years and family circumstances will have changed. Added with the hassle and risks associated with the new reporting requirements, some trusts settled several years ago may no longer make sense.

These conversations must happen soon so restructuring can be completed before the next taxation year begins.

The lawyers from the Wills and Estates Group would be happy to assist you in determining whether it makes sense to continue any trusts and/or assist with any reorganization or wind-up which may be advisable.

Electronic Signing for Wills, Personal Directives and Power of Attorneys

by Michelle Fong

On May 15, 2020, Ministerial Order 39/2020 was issued that allows for electronic signing of estate planning documents under certain circumstances.

Wills

Formal Wills[1] can be signed by all parties separately if all the following criteria are met:

      i.         An active Alberta lawyer must have been involved (legal advice and services) in regards to the Will, including the making, signing and witnessing of it; and

     ii.         Witnesses and the testator (or the person signing on behalf of the testator) all sign while connected by an electronic method of communication where they can see, hear and communicate in real time. Effectively, this means video conferencing.

Personal Directives and Powers of Attorney

Personal Directives and Powers of Attorney can be signed by all parties separately if all the following criteria are met:

    iii.         An active Alberta lawyer must have been involved (legal advice and services) in regards to the personal directive or power of attorney, including the making, signing and witnessing of it; and

   iv.         Witnesses and the maker/donor (or the person signing on behalf of the maker/donor) all sign while connected by an electronic method of communication where they can see, hear and communicate in real time. Effectively, this means video conferencing.

     v.         If you choose to use the Personal Directive form set out in the Regulations (Schedule 1), you must add the following wording at the end:

“Note regarding signatures: In certain circumstances, persons are deemed to be in each other’s presence while connected to each other by an electronic method of communication in which they are able to see, hear and communicate with each other in real time. See section 5(1.1) and 5(1.2).”

However, even if you do not use the form set out in Schedule 1, it would be prudent to include this disclosure on the Personal Directive regardless. There is no form set out in the Power of Attorney Act but it is also recommended to include this disclosure in the Power of Attorney.

These electronic signing measures are temporary and will end 60 days after the Public State of Emergency Order lapses[2] or when it is terminated by the Minister or Lt. Governor.

Our McLennan Ross Wills & Estates Group would be happy to assist you with your Will, Power of Attorney and Personal Directive.

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[1] Holographic Wills remain effective (fully handwritten). 
[2] Order in Council 080/2020