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Estate Trustees and Costs of Litigation: Try not to take it personally?

Posted by Steve Frye Posted on 29 Aug 2018

In the work I do, I am asked to provide expert testimony to support litigation. In some cases, I am often quite surprised to what extent parties will continue to litigate matters that appear to be “no-wins” or for small dollar amounts. Depending on the circumstances, parties have taken the personal brunt of litigation costs that may far exceed the amount in question, due primarily to their own intransigence.

A recent decision of the Ontario Superior Court illustrates that estate trustees are not personally immune to the vagaries of costly litigation, particularly when it appears to involve imprudent behavior.

Three siblings (Joan, Brian, and John) were trustees of their father’s estate. As estate trustees, Joan and Brian brought an action against their brother John over one asset Joan and Brian alleged was an asset of the estate. The asset in question was a painting by a noted French landscape artist (the “painting”) which was stated to be worth “approximately $30,000”.

In Newlands Estate, 2017 ONSC 7111, the Court ruled in favor of John, determining that the painting was not an asset of the estate and declaring that Joan and Brian were obliged to convey ownership of the painting to John personally upon receipt of $30,000 from John. Notwithstanding the foregoing, in a subsequent application for costs, Newlands Estate, 2018ONSC 2952 Joan and Brian sought a declaration that the painting fell into the residue of the estate, sought damages against John related to his alleged breach of fiduciary duty to the beneficiaries of the estate and negligence and costs of the application from John on a substantial indemnity basis.

In its analysis, the Court noted that almost half a million dollars had been spent on a painting worth, at most, $30,000; the applicants, in their capacities as co-Estate Trustees, and John had spent about 50/50 of the total. At issue on this application was the matter of costs and “on whose dime”.   Further it noted that, before the application was commenced, John, acting on his father’s wishes, had offered to pay the agreed upon value of the painting ($30,000) to the Estate. He also offered to resolve some other issues regarding the administration of the Estate. The applicants did not provide a formal response to this offer.

Reflecting on the foregoing and other facts of the case, the Court concluded that the application was being used by Joan and Brian as a means of expressing some form of vexatious behaviour toward John, for some reason(s) beyond the issue of the painting’s ownership.

Though orders for substantial litigation costs to be paid personally by an Estate Trustee are not common, the Court concluded that John was entitled to costs on a substantial indemnity basis (which meant payment by Joan and Brian personally).

Happy Reading

Pension Plan Lump Sum Payouts

Posted by Steve Frye Posted on 14 Aug 2018

This fact scenario is based on a situation presented to me recently and I appreciated the opportunity to being “re-educated” on the tax treatment of pension plan lump sum payments.

A taxpayer’s spouse retires as a teacher and elects to start receiving her guaranteed pension. A couple of years later, the spouse passes away from cancer and the taxpayer being the beneficiary of his spouse’s pension plan elects to receive the pension monthly instead of a lump sum. The taxpayer passes away unexpectedly three years later. Approximately a year later, thanks to a tip from the deceased taxpayer’s sister, the taxpayer’s beneficiaries became aware of the fact that the deceased taxpayer had not fully collected on the guaranteed pension, left by his spouse and the taxpayer’s beneficiaries received a payout on the pension shortly thereafter.

The estate claimed the proceeds of the lump sum payout on the taxpayer’s terminal return, with the expectation of applying a capital loss co-incidentally created on the deemed disposition of property owned by the taxpayer to offset the income from the payout. The Canada Revenue Agency (“CRA”) denied the Estate’s filing position on the payout.

The beneficiaries thought it was because there was some delay between the taxpayer’s date of death and ultimate payout. I didn’t think it could go on the terminal return but it could form part of a rights and things return, separate from the terminal return. Regrettably, I was reminded of CRA’s position on lump-sum payouts under this scenario.

Sometime ago, the CRA was asked for its view on the treatment of a pension which had been designated to a non-spousal beneficiary outside of the will of the deceased pensioner, a similar fact scenario to the above.  In particular, the CRA was asked whether a lump sum payment from the pension was a “right or thing” for purposes of the Income Tax Act (the “Act”). The Act provides that a separate return may be filed for rights or things held at the time of a taxpayer’s death.  The advantage to filing a “rights and things” return is that low marginal rates and various personal credits can effectively be claimed twice, so as to reduce the overall tax burden of the deceased.

The CRA noted that it will not normally object to a lump-sum payment out of a pension plan that is paid to a beneficiary being reported on the terminal return of the deceased in accordance with the Act as a right or thing where the pensioner died prior to being entitled to receive retirement benefits under the pension. So the CRA did not consider the above facts to be analogous as the pensioner had begun to receive payments under the pension. In this scenario, the “right or thing” associated with the final payout was not the deceased taxpayer’s, it belonged to the beneficiaries,

In the CRA’s view, the lump-sum payment would not be a right or thing for purposes of the Act and would instead be taxable to the beneficiary (ies) pursuant to the Act.

Happy Reading

Business Succession Planning and the Next Generation

Posted by Steve Frye Posted on 01 Aug 2018

All business owners face the task of trying to determine what to do with their businesses when they retire or in the event of a sudden death: sell to the next generation, sell to a 3rd party or sell the assets and wind-up the business. According to the Canadian Federation of Business, only about half of business owners have a succession plan. Not having a plan can create a lot of turmoil as you would expect.

If there is a next generation to consider and there appears to be interest, owners are often encouraged to start gauging their children’s interest and competency in the business when they are teenagers or young adults by bringing them to work at entry-level jobs in the business.

However, according to a recent Harvard Business Review blog, this approach to planning for the next generation may be considered “short-sighted” in some regard (my words). In fact the opposite was suggested. Children should be encouraged to try to build a career outside the business before they are encouraged to come into the family business.

With the belief that family business owners bring their kids into the company early on and “damage” them, by perhaps making it too easy for them or not setting them up properly to succeed, the suggestion was made that owners should be encouraging their children to develop their skills and competencies on the “outside” and then interest them in coming back to well defined roles in the family business, which maximizes the best use of their acquired skills and experience.

Creating a next-generation development program to develop the necessary skills and competencies and helping the next generation find their right roles in the business was suggested as essential elements in business succession planning. Getting the group dynamic right, that is how they work together and communicate, helping them find their voice in the organization, perhaps with the help of non-family members in the business, and giving them room to operate – “know the rules of the room they are in, be it the family room, the owner’s room or boardroom” – were also suggested as essential elements to business succession planning.

Happy Reading

TFSA's and Residency

Posted by Steve Frye Posted on 18 July 2018

Recently, one of my blog colleagues wrote on the residency rules regarding tax free saving accounts (TFSA’s). Generally, as an owner of TFSA, if you leave Canada, the accumulated funds may remain in the TFSA without Canadian tax consequences. You can’t make any further contributions but you can make withdrawals.

What if in a scenario recently presented in a round table discussion with the Canada Revenue Agency (“CRA”), the CRA subsequently reassessed the TFSA for several taxation years on the basis that the TFSA was allegedly taxable on the income earned from carrying a securities trading business. As reported quite extensively in the press recently, under the application of the tax rules, if a TFSA carries on a business then it must pay income tax on its business income.

As the plan holder, you contend that the central management and control of the trust rested with you and was exercised outside of Canada since you were actively trading securities, and was making all the key investment decisions for the trust. Therefore, the trust was not resident in Canada and was not taxable in Canada on the income earned.

The CRA disagreed with that interpretation, and contended the trust would always be resident in Canada since its real business was carried on in Canada. The CRA acknowledged the TFSA is a self-directed, trusteed arrangement giving the primary responsibility for managing the investments for its non-resident plan holder, not to the corporate trustee. Nevertheless, the TFSA trustee was a corporation licensed under the laws of Canada or a province to carry on in Canada the business of offering trustee services to the public.

The CRA contended that a trust will always reside where its central management and control takes place, which is Canada, given all the duties and obligations imposed on the trustee under the Act. For the same reason, the residence of any trust governed by an RRSP, RRIF, RESP, or RDSP will also be located and remain in Canada.

 

Happy Reading

Life Insurance and Contingent Ownership

Posted by Steve Frye Posted on 03 July 2018

Ownership of assets into ‘joint tenancy with right of survivorship” is a mechanism of ownership transfer commonly used for estate planning to address such issues as probate fee and tax avoidance.

Recently, this blog site very capably addressed the issues surrounding “joint tenancy” of life insurance in particular (“Life Insurance Joint Tenants” by Corina Weigl May 4, 2018), said issues to include partial loss of ownership and control over the policy, exposure to creditor claims of both owners and (in the likely event one owner survives the other) exposure to change of beneficiary contrary to original intentions.

There is an alternative to joint ownership which is particularly suited to life insurance, that being contingent ownership.

Take the circumstances of a mom in business who has accumulated some wealth, a portion of which she knows she will not spend in her lifetime. She has an adult daughter and a granddaughter who is a minor. The mom purchases a suitable life insurance policy on her daughter’s life which requires payments equivalent to the wealth she wants to transfer to the next 2 generations. She can name her daughter as contingent owner and her granddaughter as beneficiary. This in effect sets up a tax free and probate free transfer of wealth to the next generation(s).

Naming a contingent owner means no loss of ownership during the mom’s lifetime and full control of the policy such as changing contingent owners or beneficiaries in her lifetime.

When the mom passes, the daughter can take over ownership and maintain the policy (most likely fully paid at that point). With the appropriate advice, the daughter can withdraw funds from the policy (as part of some additional planning with the granddaughter) and/or borrow money with the policy as collateral.

Recognizing that the option of contingent ownership is not suited to all circumstances, it is worth considering as an alternative to joint ownership. In any case, as always consult with your pros.

Happy Reading

Inheritances and Taxes - Be Careful Where You Step?

Posted by Steve Frye Posted on 25 June 2018

Frequently, I am reminded how careful one has to be with making sure that tax-free inheritances generally maintain their status throughout all steps to liquidate and realize the proceeds. Here is a case in point.

In Owen v The Queen (2018 TCC 90), the taxpayer’s father resided in the United States of America and had a US individual retirement account (“IRA”). The taxpayer’s father passed away. The taxpayer and his siblings were beneficiaries of the estate, which included the IRA account.

The taxpayer’s share of the IRA account was rolled over to an IRA in the taxpayer’s name and funds from that IRA were subsequently distributed to the taxpayer. When the funds were distributed, funds were withheld for US income taxes.

On a reassessment, the Canada Revenue Agency (“CRA”) added the amount to the taxpayer’s income for tax purposes but also took into account of the US taxes withheld and allowed a foreign tax credit. The taxpayer appealed from that assessment, arguing that the amount from the IRA should not be subject to tax because it’s an inheritance.

The Court agreed that the taxpayer had received the amount in dispute as the result of his father’s death, and that generally, receipt of amounts distributed from an estate does not trigger tax. The Court noted, however, that the taxpayer had received the amount in dispute from an IRA, and not (directly) from his father’s estate. With citations from applicable tax legislation on both sides of the border, the court determined the distribution came from a “foreign retirement arrangement”, which is subject to tax on both sides of the border. Essentially, the IRA distribution would be treated in much the same way as if it were a distribution from his father’s RRSP. The court denied the appeal accordingly. Ouch!

I am sure the taxpayer had good reason to do what he did with his father’s money before liquidating it but that extra step led to an unintended consequence. Never a bad idea to check and double check where you step.

Happy Reading!

Income Splitting Loans: What's the Use?

Posted by Steve Frye Posted on 06 June 2018

We have blogged about income splitting arrangements available to individuals who wish to loan funds to his/her lower income spouse or adult child, or in the case of minor children, a discretionary family trust. Such loans would be used to invest in income producing properties such marketable securities, mutual funds, real estate income trusts (to name a few). The income from these properties less the interest paid on the loans would be claimed by the spouse, beneficiaries of the trust etc.

For these plans to work as designed, we have blogged about how the loan must carry the appropriate rate of interest (i.e. at least the prescribed rate of interest pursuant to the Income Tax Act) and the interest on the loan must be paid by a certain date every year.

What has not been written about very much about is how one has to be careful about the use of the funds borrowed to maintain full interest deductibility. Generally, the Income Tax Act allows a taxpayer to deduct interest expense on borrowed money that is used to earn income from a business or property.

The use of the borrowed money is determined for the taxation year or period in which the interest deduction is being claimed, commonly referred to as “current” use. Current use must be for the purpose of earning income for it to be “eligible” for interest deduction. To maximize interest deductibility so the income splitting plan works as efficiently as possible, the current use of the borrowed money should remain eligible throughout the period.

When property acquired with borrowed money is disposed of and the proceeds are used to acquire another property, the current use of the proceeds is relevant. Former use is not. This is a principle that has been developed by the courts and the Canada Revenue Agency.

In a recent case tax court case Van Steenis v. The Queen (2018 DTC 1063 (TCC)) this principle was extended to “return of capital” in mutual fund trust units. The taxpayer received a significant portion of the investment money as return of capital. The taxpayer continued to own the units, but some of the return of capital went for personal and “ineligible” use. The CRA denied part of the interest deduction to the extent the use of the returned capital was ineligible. The Tax Court agreed.

In addition to exercising care over making the interest payments when they should be made, be also mindful of how the borrowed money is used on a continued basis to preserve maximum interest deductibility.

Happy Reading

The Cost of Winning, Sort of

Posted by Steve Frye Posted on 23 May 2018

In my practice, I have been engaged on valuation matters which, on occasion despite the efforts of all those involved, go to trial to have a trial judge settle for the parties. Most trials are expensive and the actual outcome is not always certain, no matter how strong one side of the matter or case might be. It has been my experience that even if one happens to be on the “winning” side or appears to have won more than lost, the costs of litigation cannot be fully recovered for one reason or another.

In a recent decision of the Ontario Court Seguin v. Pearson, 2018 ONCA 355, it appears that the non-recoverability of litigation costs is extended to estate litigation, even if one appears to win the case, sort of…

This was a Court of Appeal case in which Ms. Seguin asked the Court of Appeal to set aside the dismissal of her action to invalidate her father’s two most recent wills and to set aside an inter vivos transfer of his house into joint tenancy with Ms. Pearson. Ms. Seguin alleged that her father’s actions were the product of undue influence.

The Court of Appeal did agree that the trial judge erred in his articulation of the test for undue influence applicable to testamentary gifts. More specifically, the Court pointed out the trial judge erroneously applied the test for undue influence for inter vivos transfers to testamentary gifts.  The test for undue influence for testamentary gifts involves a determination of outright and overpowering coercion in making the gift.

Nevertheless, while the Court of Appeal agreed with Ms. Seguin on points of law, it determined the application of the appropriate test for undue influence would not have changed the trial judge’s assessment of the fact evidence. There was no substantive evidence of undue influence, in the trial judge’s determination and the Court of Appeal found no legal reason to reverse the trial judge’s determination.

In addition, Ms. Seguin sought leave to appeal the trial judge’s determination of costs, arguing that the trial judge erred in failing to order that all of the appellant’s trial costs be paid from her father’s estate. The Court of Appeal disagreed with Ms. Seguin. The Court of Appeal agreed with the trial judge that he had the discretion to order the payment of all he appellant’s costs from her father’s estate. The trial judge determined that it would be unfair to do so. Ms. Seguin was entirely unsuccessful at trial and payment of her costs from the estate would effectively leave Ms. Pearson with nothing. The Court of Appeal saw no reason to disagree with the trial judge’s discretion in this regard.

Happy Reading.

A Gift is a Gift

Posted by Steve Frye Posted on 09 May 2018

We often write about the benefits (and some pitfalls) of gifting, before and after death. Personally, when I recommend gifting, I assume that unless there are specific outcomes required to realize on the gift, a gift is exactly that, a gift – something transferred voluntarily without expectation of getting it back because you changed your mind.  A recent court case appears to support this assumption.

According to Johnston v. Song, 2018 ONSC 1005, a couple began living together. She moved into his home which he owned for approximately 2 years. Subsequently she became pregnant with their child and he asked her to marry him, with ring and all. She said yes but as it turns out, they never married.

About a decade later, he voluntarily transferred ownership of the home from himself to the both of them as joint tenants.  She left him about a month later.

According to his evidence, he had no idea or inkling of this impending separation when he made the deed transfer. Essentially, the Court understood why he wanted to “change his mind” subsequent to the separation, but his evidence was that, at the time of transfer to joint tenancy, he knew and intended that if he were to die, ownership would pass to her – a common estate planning technique. More to the point, there was no evidence that he was reserving the right to undo the transfer in the event of separation.

In fact, there was no evidence to show that when he transferred title into joint tenancy, he was reserving to himself any ownership right or any right to undo that transfer, The Court concluded that at the time of the transfer, he intended the transfer as a gift without reservation.

A gift is a gift!

Happy Reading

Trust Reporting: New Requirements Coming Soon!

Posted by Steve Frye Posted on 25 Apr 2018

Under the current rules, a trust only needs to file an annual tax return but generally does not need to file the return if it does not earn an income or make any distributions in the year. (Notwithstanding that the Canada Revenue Agency has increased its demand for “nil returns” to be filed under certain circumstances). Further, there is currently no requirement for the trust to report the specific identity of all of its beneficiaries.

The recent Federal Budget refers to this current situation as an information gap that can apparently be exploited by taxpayers engaging in aggressive tax avoidance and/or criminal activities of the “white collar” variety.

The Budget proposes that most trusts will be required to report on the identity of all trustees, beneficiaries, and settlors of the trust, as well as the identity of each person who exerts control over trustee decisions, effective 2021. The proposed requirements will apply to most trusts resident in Canada as well as non-resident trusts that are currently required to file a tax return in Canada.

Trusts to which the proposed reporting requirements apply will need to file a return each year regardless of whether there was distribution of income or not.  A new beneficial ownership schedule will be added to the return and must also be completed if required. Failure to comply with the new reporting requirements will be met with penalties.

The overall compliance burden for trust reporting will increase shortly. Trusts will be forced to share information not previously shared, which could be awkward for some trusts (non-resident trusts) in particular. Lack of awareness of these new requirements (or unwillingness to provide the information) may lead to significant non-compliance problems.

Happy Reading

Executors Remuneration

Posted by Steve Frye Posted on 11 Apr 2018

Occasionally, I (like many of fellow bloggers for sure) get asked – what is appropriate remuneration for an executor or executrix to administer an estate – often in circumstances where remuneration is not specified or even referred in the deceased’s will or otherwise. Bottom line, what are the guidelines and how much is enough?

A recent court case in the Supreme Court of British Columbia Le Gallais Estate (re) 2108 BCSC 388 dealt with this issue in the context of unique circumstances.

In this case, Ms. Le Gallais had a long-time friend, who was also her solicitor, draw up the will, and had her named executrix. The friend also managed Ms. Le Gallais’ financial and personal affairs under power of attorney until her death.

Ms. Le Gallais’ funeral arrangements were pre-planned with no memorial. Her estate consisted of financial assets including cash, securities and proceeds of a life insurance policy. The estate’s value was approximately $1.6 million.  As the deceased had no family or other heirs, the entire estate was to be shared equally among several charities specifically named in the will.

The solicitor/executrix presented a claim for executor’s remuneration for an amount approximating $39,000, equal to 2.5% of the estate’s assets and a separate claim for legal services provided for approximately $17,500. These claims were contested by the beneficiaries.

The Court referred to estate case law which sets out certain criteria associated with an estate that need to be considered in the determination of executor remuneration such as the magnitude of the estate, its complexity, time spent on the estate, and desired outcomes. Generally speaking, executor remuneration should not exceed 5% of the capital assets.

With the evidence heard, the Court determined that the executrix was entitled to $25,000, noting that while the estate was of a certain magnitude, it was not very complex and risky. Further the Court noted that the executrix was quite familiar with the deceased, her extended family circumstances and the nature of her financial affairs.

As to the matter of the claim for legal services provided, the Court found the services described were not reasonable in the context of a solicitor’s estate-related work. The Court felt that some of the services charged were more properly characterized as executors’ work and in fact duplication of work. In the end, the Court reduced the claim to approximately $5,500.

Every case (or estate) is different. This case is a good reminder that executor remuneration should be determined in a fair and reasonable fashion with reference to appropriate guidelines.

Happy Reading

RRSP's and Early Withdrawals

Posted by Steve Frye Posted on 27 Mar 2018

Registered retirement savings plans (RRSP’s), introduced in 1965 by the way, are a great vehicle for retirement savings and a keystone found in most retirement and estate plans. It is one of the few ways to earn an income-tax reduction in your earning years (the amount you contribute is tax deductible). Income tax is paid on RRSP money when it is withdrawn, when you are likely in a lower-tax bracket.

Traditionally, most folks would contribute to their RRSPs’ every year until age 71, when they must turn an RRSP into either a registered retirement income fund (“RRIF”) or an annuity. Early withdrawals were considered punitive (and discouraged) under the general assumption that when doing so, the individual withdrawing the amount was in a high tax paying bracket when making the withdrawal.

But the times they are changing!

These days, folks are taking early retirement for health and/or other reasons, often without pension plans and may not have another sources of taxable income except maybe CPP benefits and/or OAS income until they turn 71 when their RRSPs are converted to RRIF’s.  In these instances, it would make sense to make some RRSP withdrawals in these low taxable income years, as the tax savings can be substantial.

I understand a strategy which is becoming more common for folks over 65 in the circumstances above is to convert an appropriate amount of RRSP into a RRIF when they become eligible to apply $2,000 of eligible annual retirement income toward the federal pension credit, plus the appropriate provincial credits, and then use some of the money if they can to eliminate some debt or other obligations, all in a lower tax environment.

To stretch the point a bit, an argument could be made for early withdrawals if someone is not expected to have a very long life expectancy to help cover immediate medical and other expenses.

Early on, I was trained to think early RRSP withdrawals was a no-no. I can see now that sort of thinking does not apply to all and in fact not the most tax effective way to manage one’s affairs leading up to age 71.

Happy Reading

Spousal Support and Beyond

Posted by Steve Frye Posted on 26 Mar 2018

I was traipsing thru some estate journals and articles recently and I stumbled upon the reporting of a recent matrimonial case which gave me pause, and to many practitioners in estate and matrimonial matters, I am sure.

Practitioners have long held the view that entitlement to spousal support under most matrimonial settlements do not survive the death of the spouse receiving the support.  As one Justice noted in a recent case in Saskatchewan, “The obligation to pay spousal support is ended when the beneficiary of that support dies. The concept is just basic common sense…. There appears to be no juristic or moral reason to continue the obligation in the absence of any need.”

That is until very recently!

In the facts of Re Marasse Estate (Alberta) decided in  November, 2017, approximately 3 months after spousal payments began as agreed to between the parties to a separation agreement, the spouse receiving support payments died. Only a few payments out of the total required were made. Remarkably, the estate of the deceased spouse applied for the balance of spousal support payments.

Consistent with previous jurisprudence in this area, the paying spouse argued that the obligation to pay spousal support ended when the recipient spouse passed away.

Nevertheless, the Court held that the agreement between the parties created a basis to continue support for the following reasons:

(1) There was a clause in the agreement providing that the terms of the agreement could be exercised by the parties’ heirs, executors, etc.

(2) There were no clauses which set out events or matters, financial or otherwise which might lead to a change in terms or obligations thereof.

(3) The agreement was comprehensive as to distribution of property, personal and matrimonial.

For these reasons primarily, the Court declared that the payer spouse’s obligation for payment to the estate of the deceased payee spouse under the Agreement would continue in full.

I am looking forward to reading more about this and its impact on matrimonial settlements. In the meantime, just out of interest, mention this case to a colleague or a friend and ask for a reaction. You will be interested in the results.

Happy Reading

What To Do When a Loved One Dies?

Posted by Steve Frye Posted on 21 Feb 2018

Believe it or not, this is the title of a recent release from the Canada Revenue Agency (“CRA”). Is there really a softer side to the CRA?

Let’s face there is a lot to do after a loved one dies, and a lot of it not related to tax. But from experience, it does not take long for the subject to come up, which reminds me of the time I was approached by a family member while I was trying to get a few moments of silence over a deceased’s casket at a wake. A story for another time perhaps!

Anyway, the CRA just published a useful checklist of what to do related to taxes and tax filings – some of the highlights are:

  1. Gather all of the deceased’s tax information as soon as you can, (particularly before premises and belongings are disposed of).
  2. Notify CRA of the date of death by calling them or complete Information sheet RC4111 What to do Following Death
  3. Request that CRA stop benefit and credit payments such goods and services tax and working income tax benefit payments, if applicable. This will eliminate the need to refund these payments at a later date.
  4. Advise Service Canada of the date of death – this stop CPP, OAS and GIS payments if applicable.
  5. Get yourself named as the legal representative, if applicable or get in touch with the legal representative as soon as possible.
  6. If you are the legal representative you can refer the same information sheet noted above or Guide T4011 Preparing Returns for Deceased Persons to assist with filing out the final tax return. It will deal with due dates, (removing some of the anxiety with the completing the process), how to report income after death etc.

This might appear to be basic stuff. Some of this may be handled by people you have engaged to assist you with post-mortem services. But, at the very least, this will assist you with getting control of the process which is often a source of comfort to folks during the grieving period.

Happy Reading

Post-Death Decline in the Value of RRSP or RRIF: What Happens?

Posted by Steve Frye Posted on 24 Jan 2018

Generally, when an annuitant of a Registered Retirement Savings Plan (“RRSP”) or a Registered Retirement Income Fund (“RRIF”) dies, the Canada Revenue Agency (“CRA”)  will consider that the annuitant received, immediately before death, an amount equal to the fair market value (“FMV”) of the property held in the RRSP or RRIF at the time of death. This amount and all other amounts the annuitant received from the RRSP or RRIF in that same year have to be reported on the annuitant’s income tax return for the year of death.

What happens if there a post-death decline in value of the RRSP or RRIF when the final distribution is made?

If the final distribution from the RRSP or RRIF is made in the year of death, the decline in value can be claimed as a deduction on the terminal return. If the distribution is made in the year after year of death, the annuitant’s legal representative can file a T1 Adjustment for the deduction.

In both cases, the administrator of the plan must fill out the CRA approved form to document the decline in value and the annuitant’s legal representative files a copy of the form with the terminal return (if in the year of death) or with the T1 adjustment (if in the year after year of death).

If the final payment from the RRSP or RRIF was made after the end of the year following the year of death, some or all of the post-death decline in value may not be allowed to be deducted. However, the CRA has the authority to waive this condition depending on the circumstances.

Similar rules apply to pooled registered pension plans.

Happy Reading

Withdrawal of RRSP Over-Contributions After Death

Posted by Steve Frye Posted on 09 Jan 2018

When an annuitant of a RRSP makes over-contributions (or unused contributions) to his or her RRSP and wants to withdraw them without penalty, the Canada Revenue Agency (“CRA”) will permit the annuitant to withdraw the over contributions and claim a deduction accordingly, as long as the CRA can be shown that the annuitant intended to fully deduct the contributions in the year made or the year before, or the contributions were not made with the express intention to withdraw them later and claim the deduction.

Assuming the appropriate filings are made with the CRA, the annuitant is expected to include the over-contributions made in income in the year of withdrawal but the annuitant can claim a deduction for tax purposes for the amount of the over-contributions withdrawn.

What happens if the annuitant dies without having withdrawn the over-contributions made to his or her RRSP in the preceding year?: Can the deceased annuitant’s estate claim a deduction for the over-contributions against the income included on the tax return in the year of death?

According to the CRA, generally yes, provided all conditions are met.

Regardless of the circumstances, the CRA will look for the over contributions not deducted to be included in the full value of the annuitant’s RRSP in computing the deceased annuitant’s income in the year of death.

However, the CRA confirmed that, but for the death of the annuitant, the conditions described above would have been satisfied, a deduction for the over-contributions could be claimed in the final the terminal return of the deceased annuitant. The estate would not make the usual filings for confirm the deduction because they do not apply in this circumstance. What CRA recommends is that the estate contact them, either by phone or in writing, to establish the amount of the deduction to be claimed and simply insert the deduction on the appropriate line of the terminal tax return.

Happy New Year and Happy Reading

Trust Allocations and Gifts to Family Members

Posted by Steve Frye Posted on 08 Jan 2018

A common estate planning technique is to structure a family trust which owns the shares of a small business corporation in such a way that allows each beneficiary (most commonly being members of the taxpayer’s immediate family – spouse and/or children) to participate in the sale or disposition of the business, thereby utilizing their life time capital gains exemption and potentially saving several hundred thousand dollars in taxes payable on the disposition of shares of the business by the trust. I note that the government proposals introduced in July 2017 on tax reform included a proposal to severally limit this planning opportunity but it now appears (for the moment) that the government has retracted this proposal.

This plan is not always executed at the time the taxpayer’s passing. The sale of business can take place anytime and often does, for instance at retirement.

There a number of matters to be wary of in such an arrangement, to avoid attribution of the sale proceeds back to the taxpayer for tax purposes, such as making sure that the funds are properly distributed to each beneficiary as directed by the trustee(s) and making sure each beneficiary reports their portion of the sale on their respective tax return. I always make the point that the allocated proceeds belong to each beneficiary and should be deposited to their respective bank accounts accordingly. Discussions and subsequent actions to be taken with regard to the ultimate use of funds should be dealt with separately.

A recent tax court case decision (Laplante c La Reine 2017 CCI 118) really highlights the need to complete such transactions to the end and exercise care in doing so.

In this case, the taxpayer’s family trust sold the shares it owned of a small business and the sale proceeds were distributed by check to 7 beneficiaries, all members the taxpayer’s family. However, all the checks were endorsed back to taxpayer who was a trustee and each beneficiary signed a gift certificate signifying a donation. Some of this but not all of it was documented in the corporate minutes of the company. Each beneficiary reported the sale on their respective tax return and claimed the small business capital gains exemption. Each beneficiary had some alternative minimum tax to pay, which the taxpayer looked after personally.

The Canada Revenue Agency (“CRA”) reviewed the transaction and determined that, based on the facts and evidence gathered that, the return of said funds to the owner operator was essentially a “simulation” (i.e. act of deception) The CRA essentially took the position that the beneficiaries were essentially nominees of the taxpayer and had a legal obligation to remit the amount received from the trust to the taxpayer, triggering in CRA’s opinion, the attribution rules. The CRA re-assessed the taxpayer for taxes on the full amount of the capital gain.

The taxpayer appealed the re-assessment and lost. There were some specific legal issues associated with these transactions which the taxpayer may have avoided and complicated his case further, but notably the court also relied on evidence from certain members of the family who admitted that the taxpayer had asked the beneficiaries to “give” their capital gains exemption on more than one occasion leading up to the sale. It appeared that the taxpayer was intent on keeping the money.

Bottom line, if you intend to distribute the wealth you created to your beneficiaries, follow thru on it completely, and then have the beneficiaries take advantage of the related tax savings and move on. Have that “what are you going to do with the money” discussion at a later date.

Valuators – 2018 Might be a Very Good Year

Posted by Steve Frye Posted on 15 Aug 2017

 I mentioned in my last blog that the government is proposing measures to limit the application of the lifetime capital gains exemption (“LCGE”) to owners of eligible small business corporations, based on age and “reasonableness”. Subject to certain exceptions, the proposals ensure that property held by a trust will no longer be eligible for the LCGE.

Under the current proposals, there are transition rules which will permit a one-time multiplication of the LCGE to designated beneficiaries in 2018 for gains accrued in a family trust. Many of these trusts will not want to miss this opportunity. That valuations of the underlying business interests completed for this exercise will be carefully scrutinized is almost guaranteed.  Therefore, valuations will have to be carefully applied and supported, not only for the date chosen in 2018 but also for the date when the trust was formed.

The Canada Revenue Agency (“CRA”) or a Court may accept that there may be a significant difference in the determination of value as long as the valuations at the time the trust was formed and at the chosen date in 2018 took in all facts and circumstances into consideration. In other words, a real effort to value the property or properties in question was made and the valuations were performed in good faith.

Some time ago, I wrote that engaging a valuation expert is not an absolute requirement of the CRA but the use of an independent professional valuator may show the good faith referred to above and provide the necessary support in the event of a dispute or disagreement.

Most of all, maintaining a file with the supporting documentation for the valuations is highly recommended.  Valuations performed at the time the trust was formed and at the chosen date in 2018 with proper support are less likely to be viewed by the CRA or the Court as self-serving than supporting valuations performed after a re-assessment has been issued.

Notwithstanding the fact that the nature and extent of these proposals may change, it is not too early to start planning for might be the inevitable, including finding and retaining a good valuator.

For Whom the Bells Toll: It Tolls for Family Trusts?

Posted by Steve Frye Posted on 01 Aug 2017

As we continue to absorb the draft legislation (together with explanatory notes and consultation paper) introduced by the Department of Finance to overhaul the system of taxation for private companies, some things have are becoming clear. If essentially enacted as currently drafted, the legislation will likely spell the end of family trusts for tax planning arrangements, particularly in the private company setting.

Traditionally, for tax planning purposes, family trusts are created and structured to permit:

Income splitting or “sprinkling”

Family members as beneficiaries of the family trust to receive income from the business, regardless of their participation in the business (active or passive). The government is proposing a number of measures to limit income splitting to essentially adult family members who have some direct connection to the business thus eliminating the use of a trust for such purposes. Incidentally the proposed rules are somewhat qualitative in nature, which will likely lead to more compliance issues.

Capital gains exemption splitting

Family members as beneficiaries of the family trust claiming of the lifetime capital gains exemption (LCGE) in the event of a 3rd (or arms’ length) sale. The government refers to this as the “multiplication of access to the LCGE without constraint”. The government is proposing measures to limit the application of LCGE based on age and “reasonableness”. Subject to certain exceptions, the proposals ensure property held by a trust will no longer be eligible for the LCGE.

I do note there are transition rules proposed which will permit “income sprinkling” until the end of 2018 and a one-time multiplication of the LCGE for accrued gains in a family trust. We expect the pros to be very busy in the fall in this regard.

Continued use of trusts for family law, succession planning and corporate governance purposes may still be appropriate after 2018 but the creation of trusts for tax planning arrangements will be of limited use indeed. I am hearing the bells already.

Happy Reading

Estate Planning – Can You Just Give Some of it Away?

Posted by Steve Frye Posted on 04 July 2017

A recent article in the press reminded me of a trend in estate planning which appears to be taking more favor in recent times. It is not very complicated, can lead to considerable tax savings and other benefits while you are with the living. I am referring to the gifting of cash or assets during your lifetime.

Many people who consult me and other members of my practice are often surprised to learn that there is no gift tax in Canada. So cash given to your heirs, say children or grandchildren while you are alive is not generally subject to tax to either party.

After some careful evaluation of their potential estate, several of my clients have found themselves in the enviable position of having cash and assets they will not need in their lifetime. I understand by the way this has been recently termed as “never money”. If they hung on to these assets, it is likely costing them higher taxes annually, and these “never money” assets will likely cost the estate more fees (probate being a big one) and taxes, when they pass.

So many have decided to give these assets away to their heirs while they are alive. The heirs have used the funds in a manner that will likely cost less tax: For example pay down some personal debt, apply it as a deposit on a house, or turn around and invest in non-registered or registered investments.

The other benefit is these clients get to watch their heirs enjoy the gift and/or have some say on they will use it. At least they got to monitor what their heirs were doing with it. I have a client who decided to do this sometime ago, with advice from professionals and told me recently with tongue in cheek that she finds herself getting invited to family dinners on a more regular basis that in the past.

Gifting in this fashion has several benefits but must be done so in a careful manner. I would strongly urge you to see professional advice before doing so but I think you will find it is some to some of the easiest estate planning you can do, if you can do it.

Happy Canada Day and happy reading.

The Prescribed Rate is About to Change – for Real this Time?

Posted by Steve Frye Posted on 20 June 2017

The prescribed rate is the minimum interest rate prescribed by the Canada Revenue Agency (“CRA”) that should be charged on various non-arm’s loans such as those made by you to your spouse or child (through a family trust). Such loans are a common device to split income with others in your family. The money is often used to invest in income-producing properties and the income is taxable in the hands of the loan recipient, as long as the loan recipient faithfully pays the interest on the loan at the minimum prescribed rate on an annual basis.

In a blog I wrote about 4 years ago, I suggested that the prescribed rate was about to change, or so we believed at the time and several times since. At the risk of sounding like the proverbial shepherd boy who cried “wolf, wolf”, we believe it will happen soon.

The CRA has just announced the third quarter rates and they will not change from the second quarter. It is currently 1%. The prescribed rate is based on the T Bill rate, which is hovering at around .54% recently. Nevertheless, interest rates in general are expected to be on the rise soon (Bank of Canada rate, mortgage rates etc.) and with that we can expect a rise in 90 day Canadian Treasury Bills yield (“T Bill rate”) over the next couple of quarters.  As this rate edges up beyond 1%, it is CRA’s policy to round up to the next full percentage, hence 2%.

If you set up a loan in the next few months the charge rate will be 1%. After the prescribed rate change it will be 2%. A $500,000 loan might cost $5,000 more a year.

If you are contemplating such a plan or have had a plan recently presented to you, the time to act is now, really.

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