1 Insert index tab here: 2. TAX CONSIDERATIONS IN ESTATE PLANNING (Then recycle this sheet.)
3 WILLS AND ESTATE PLANNING BASICS A Primer Tax Fundamentals for Will and Estate Planners These materials were prepared by Kim A. Karras of Brawn Karras & Sanderson, White Rock, Vancouver, B.C., for the Continuing Legal Education Society of British Columbia, October Kim A. Karras
5 2.1.1 A PRIMER TAX FUNDAMENTALS FOR WILL AND ESTATE PLANNERS I. Introduction...1 II. Basic Tax Concepts... 2 A. Adjusted Cost Base... 2 B. Fair Market Value... 2 C. Arm s Length and Non-Arm s Length... 3 D. Disposition... 3 E. Capital Gain... 3 F. Capital Property... 3 III. Lifetime Transfers or Gifts... 4 IV. Tax Consequences of Death... 5 A. Deemed Disposition and Capital Gains on Death... 5 B. Registered Retirement Savings Plans and Registered Retirement Income Funds Registered Retirement Savings Plans Registered Retirement Income Funds... 6 V. Planning Strategies to Minimize or Defer Tax... 7 A. The Spousal Rollover... 7 B. Use of Testamentary Trusts and Income Splitting... 8 C. Testamentary Spousal Trusts... 9 D. Insurance Trusts E. Charitable Gifts VI. Conclusion I. Introduction This paper has been prepared for the course titled The Basics of Wills and Estate Planning for Lawyers. The aim of the course is to provide you with the fundamental building blocks and essential information to create a basic estate plan and prepare a will as a component of that plan. 1 It is essential for any lawyer practicing in the area of wills and estate planning to have, at minimum, a basic understanding of fundamental tax concepts, as well as an understanding of the tax consequences of death. Failure to provide tax advice or to recognize when tax advice is required, and to direct a client to seek the necessary advice from an experienced professional may gives rise to a claim of negligence. It has been suggested that if a lawyer holds himself or herself out as doing wills and estate 1 CLE Course Brochure.
6 0.0.2 planning work, it is submitted that a member of the public can assume that they have a basic grasp of tax laws to provide that sort of elementary advice. 2 Estate planning and wealth preservation involve the reconciliation of family and business goals within the constraints imposed and incentives offered by the Income Tax Act, R.S.C. 1985, c. 1 (5 th Supp.). 3 Lawyers practicing in this area should be in a position to recognize theses constraints and incentives. The purpose of this paper is to review some basic tax concepts and to identify some fundamental tax considerations in estate planning which will assist you in both assessing and achieving your clients estate planning objectives. Is the plan you re putting in place going to work? You will not be in a position to determine this unless you recognize the tax consequences of death and you are able to estimate the tax liability that arises as a consequence of death and to identify ways in which this liability may be minimized or dealt with. The scope of this paper is an introductory review and is general in nature, restricted to the Canadian domestic taxpayer. It is intended to serve as a starting point for understanding tax fundamentals for estate planning. It is neither meant to be a comprehensive review of the law or of estate planning strategies. It is strongly recommended that you take the time to review the comprehensive materials that are made available to our profession, many of which are cited in this paper 4 and consult with tax specialists as required. II. Basic Tax Concepts As a starting point, it helps to be familiar with some basic tax concepts. A. Adjusted Cost Base The adjusted cost base ( ACB ) of property is usually the cost of the property plus any expenses incurred to acquire it, such as commissions, legal fees and taxes. It may also include capital expenditures such as the cost of additions and improvements to the property. It does not include current expenses such as maintenance or repair costs. The ACB is deducted from the proceeds on a sale or disposition of the property to calculate the gain or loss. The ACB is the tax cost that is used to determine the capital gain or capital loss realized on the disposition of a capital property. B. Fair Market Value Although the term fair market value ( FMV ) appears over a hundred times in the Income Tax Act (herein the Act ) it is not defined in the Act. FMV has, however, been defined by the courts: In Re Mann Estate,  5 W.W. R. 23 (B.C.S.C.), aff d,  C.T.C. 561 (B.C.C.A.), and  C.T.C. 222 (S.C.C.), the Court defined FMV as: 2 John E. Poyser, The Preparation and Execution of Wills: Everyday Issues and Changing Industry Standards (2005) 25 Estates Trusts & Pension Journal at British Columbia Estate Planning and Wealth Preservation (CLE Society of BC), para. 1.1 at For detailed discussions see: CCH Canadian Estate Planning Guide (CCH Canadian Limited); British Columbia Estate Planning and Wealth Preservation (CLE Society of BC) (hereinafter CLE Wealth Preservation ), chapter 1; British Columbia Probate & Estate Administration Practice Manual (CLE Society of BC) (hereinafter CLE Probate Manual ), chapter 11.
7 0.0.3 the highest price available estimated in terms of money which a willing seller may obtain for the property in an open and unrestricted market from a willing knowledgeable purchaser acting at arm s length. and in Henderson v. M.N.R., 73 D.T.C (F.C.T.D.) aff d 75 D.T.C (F.C.A.) as: the highest price an asset might reasonably be expected to bring if sold by the owner in the normal method as applicable to the asset in question in the ordinary course of business in a market not exposed to any undue stress and composed of willing buyers and sellers dealing at arm s length and under no compulsion to buy or sell. C. Arm s Length and Non-Arm s Length Similar to fair market value, the term at arm s length is used throughout the Act, but the Act does not contain any precise definition of the term. The Act deems that related persons do not deal with each other at arm s length. 5 This is the case regardless of how they actually conduct their mutual business transactions. The Act defines related persons for the purposes of the Act as individuals connected by blood relationship, marriage, common-law partnership, or adoption. 6 D. Disposition Section 251(1) of the Act provides circumstances where parties do not deal at arms length: (a) related persons do not deal at arm s length; (b) a taxpayer and a personal trust do not deal at arm s length where the taxpayer or any person to who the taxpayer does not deal at arm s length with, is beneficially interested in the trust; and (c) where paragraph (a) and (b) do not apply it is a question of fact whether persons not related to each other are at a particular time dealing with each other at arm s length. 7 The Act defines a disposition of any property to include any transaction or event entitling a taxpayer to proceeds of disposition of the property and any transfer of the property to a trust. A disposition does not include any transfer of property as a consequence of which there is no change in the beneficial ownership of the property. 8 E. Capital Gain A capital gain is the difference between the ACB and the FMV of a property. You have a capital gain when you sell, or are considered to have sold capital property for more than the total of its adjusted cost base and the outlays and expenses incurred to sell the property. 9 F. Capital Property The Act defines capital property of a taxpayer to mean (a) any depreciable property of the taxpayer, and (b) any property (other than depreciable property), any gain or loss from the disposition of which 5 Income Tax Act (Canada) ( ITA ) s. 251(1)(a). 6 ITA, s. 251(2); see also Interpretation Bulletin IT-4192 Meaning of Arm s Length. 7 Ross D. Tunnicliffe, Tax Fundamentals for Every Estate Plan; Basic Tax Concepts, Pacific Business and Law Institute Conference paper, June 8, ITA, s. 248(1). 9 Capital Gains Glossary
8 0.0.4 would, if the property were disposed of, be a capital gain or a capital loss, as the case may be, of the taxpayer. 10 Capital property is property that is acquired for investment purposes, or used in a business, that will give rise to a capital gain, and not an income gain, if it is sold at a profit. Capital property includes personal use property and listed personal property. The deceased taxpayer s personal use property is property used primarily for the personal use or enjoyment of the deceased taxpayer and his family. It includes such things as ordinary furniture, cars, and boats. Listed personal property is personal use property that is collectible such as a work or art, jewellery, a rare book, a stamp, a coin or a valuable antique. 11 III. Lifetime Transfers or Gifts A client wishing to minimize wealth on death (perhaps in an effort to avoid probate fees) might consider simply transferring or gifting all or a portion of his or her assets during his or her lifetime. One disadvantage of transferring assets is that the individual will effectively lose control and beneficial enjoyment of the assets transferred. By transferring the property to an inter vivos trust (a trust set up by a person while living) the individual may maintain both the control and benefits of the property transferred. The use and benefits of inter vivos trusts will not be reviewed in this paper but are discussed in Section IV of Rick Montens paper, Coordinating Inter Vivos Trusts, Joint Tenancies, Bare Trusts, and Insurance in Estate Planning, which is included in the materials for this course. It is important to recognize that transfers or gifts may give rise to potential adverse tax consequences whether transferring property to a third party or to an inter vivos trust. The estate planning lawyer needs to be aware of these tax consequences in order to properly advise his or her clients. As a practical matter, any outright gift of property should be documented by a Deed of Gift duly executed by the donor, which will serve as evidence of the donor s intention to make and deliver the subject matter of the gift. This kind of evidence will protect against future resulting trust claims, or other claims which allege that the gift was formally invalid or incomplete. 12 The general rule is that, except for certain transfers to a spouse or common-law partner, where an individual transfers capital property (for example, investments, stocks, mutual funds, or real estate) to a person who is at non-arm s length, the individual will be deemed to have received proceeds of disposition equal to the property s fair market value, thereby triggering any accrued and unrealized capital gains or recaptured depreciation. 13 This includes inter vivos gifts and transfers of property to an inter vivos trust. The main exception to the FMV proceeds of disposition rule is in respect of a transfer or gift of property from a taxpayer to his or her spouse or common-law partner, or to a qualifying inter vivos trust for such person. 14 Section 73(1) of the Act provides that a spouse can transfer an asset to a spouse or common law partner, or a trust for such persons, without giving rise to a taxable disposition. 10 ITA, s. 54 Definitions. 11 CLE Probate Manual at para Ross D. Tunnicliffe, CLE paper October 1999, Estate Planning for Aging Clients: Tax Planning; see also Rick Montens paper Coordinating Inter Vivos Trusts, Joint Tenancies, Bare Trusts, and Insurance in Estate Planning (included in the materials for this course). 13 ITA, s. 69; see also CLE Wealth Preservation at para ITA, s 73(1).
9 0.0.5 Where a client is contemplating transferring assets to a spouse, perhaps to create a jointure so that the asset passes to his or her spouse on his or her death, or in an attempt to allocate income derived from that asset to his or her spouse, it is important to be aware of the income attribution rules under the Act. Under the income attribution rules, income earned on capital that has been transferred or gifted to certain family members (a spouse or minor child) may be attributed and taxed in the hands of the individual that gifted the property. For example, if Mr. Jones transfers his rental property to his wife, either the full interest or 50% to create a jointure, all net rental income from that property will be taxed back or attributed to Mr. Jones. A detailed discussion of the attribution rules found in the Act is beyond the scope of this paper. One final point when transferring assets, the legal advisor must also be aware of and be in a position to advise his or her clients of other costs which may be borne as a result of the transfer, such as property transfer tax on the transfer of real property. IV. Tax Consequences of Death A. Deemed Disposition and Capital Gains on Death The Act provides that where, in a taxation year, a taxpayer dies, the taxpayer shall be deemed to have, immediately before the taxpayer s death, disposed of each property of the taxpayer and received proceeds of disposition therefore equal to the fair market value of the property immediately before the death, 15 thereby triggering any accrued and unrealized gains or losses in such property. The difficulty with this deemed disposition rule is that no actual income is created; the taxpayer s estate receives no actual proceeds to fund the consequent tax liability. The exception to the above rule is the rollover to a spouse or common-law partner or a trust for a spouse or common-law partner, or rollover of farm property from a parent to children or grandchildren. 16 The spousal rollover is reviewed later in this paper. A lawyer practicing in the area of estate planning must be aware of this deemed disposition rule. How will the tax liability be funded? Will the executor be forced to sell off estate assets? What planning may be put in place to minimize or defer the tax liability? B. Registered Retirement Savings Plans and Registered Retirement Income Funds It has been said that the provisions of the Income Tax Act are very complex and convoluted 17 in regards to the taxation of a Registered Retirement Savings Plan ( RRSP ) on death. The Income Tax Act rivals the Internet in the complexities of its interwoven parts. No better evidence of that complexity will be found than in the subsections of section 146 which spin an intricate web that must be traversed carefully in order to determine the tax consequences when a taxpayer dies owning a registered retirement savings plan ITA, s. 70(5); For a comprehensive review of the assets that a deceased taxpayer is deemed to have disposed of immediately before his death see CLE Probate Manual, Volume 1 at para ITA, s CLE Wealth Preservation at para page L. Newton, in Tax Treatment of an RRSP on Death (1998) 17 ETPJ 61 as quoted in CLE British Columbia Estate Planning and Wealth Preservation at para page 4-32.
10 0.0.6 Generally, the full value of property held under an RRSP will be included in the income of the deceased for the year of death even if the amounts are paid out of the plan to another person, unless the recipient is the spouse or common-law partner of the deceased or, subject to certain conditions, a dependent child or grandchild of the deceased. 19 This paper cannot review all of the rules applicable to registered plans on death. It attempts only to provide a general overview so that you may be aware of the issues that arise. 1. Registered Retirement Savings Plans An unmatured registered retirement savings plan ( RRSP ) is an RRSP that has not yet started to pay a retirement income. The general rule is that where the annuitant (the individual for whom an RRSP provides a retirement income 20 ) of the unmatured RRSP dies, he or she is considered to have received, immediately before death, an amount equal to the fair market value of all the property held in his or her RRSP at the time of death. 21 This amount and all other amounts the annuitant received from the RRSP during the year has to be reported in the deceased s Terminal T1 return for the year of death. 22 The beneficiary of the RRSP will not have to pay tax on any payments out of the RRSP. The estate pays the tax. If the estate does not have sufficient assets to pay the tax, the estate and the designated beneficiary are jointly and severally liable for the tax on the value of the RRSP at the date of death paid to the designated beneficiary. 23 An exception to the general rule is where the deceased has named the spouse or common-law partner as the sole beneficiary of the RRSP and the spouse includes the value of the RRSP in his or her income. In this case, the deceased is not considered to have received an amount from the RRSP at the time of death. The spouse or common-law partner can defer tax on the RRSP amount by transferring it within 60 before days after the ned of the year of receipt directly to an eligible registered plan or fund or to an issuer to buy an eligible annuity Registered Retirement Income Funds A taxpayer can either on maturity of an RRSP use the funds in his RRSP to purchase an annuity or before maturity transfer the funds in his or her RRSP to a registered retirement income fund ( RRIF ). 25 How the RRIF is taxed on the death of a taxpayer will depend on whether the deceased was the last annuitant of the RRIF. Generally, the annuitant is: (1) while the taxpayer who first acquired the RRIF is alive, that taxpayer; (2) after the taxpayer s death, the taxpayer s surviving spouse if the taxpayer designated his or her spouse as the beneficiary in the RRIF or elected in the plan to have his or her spouse as his successor annuitant CCH Canadian Estate Planning Guide, Volume 2 at para. 13, See definition ITA, s. 146(1). 21 ITA, s. 146(8.8), CLE Wealth Preservation para ITA, s. 56(1)(h). 23 ITA, s joint and several liability for taxes, CLE Wealth Preservation at para See also Interpretation Bulletin IT-500R Registered Retirement Savings Plan Death of an Annuitant, December 18, 1996; also CLE Wealth Preservation - Chapter 4 para to 4.85 and CLE Probate Manual Chapter See CLE Probate Manual, para ITA, s (1), CLE Probate Manual, para
11 0.0.7 The general rule regarding the taxation of an RRIF on the death of the last annuitant is basically the same as the taxation of an unmatured RRSP. If the deceased was the last annuitant of the RRIF, then the normal rule is that the deceased taxpayer is deemed to have received, immediately before death, as an amount out of an RRIF, an amount equal to the then fair market value of property in the RRIF (s (6)). The personal representative must include in the deceased taxpayer s Final T1 return, and pay tax on, that amount. 27 A. The Spousal Rollover V. Planning Strategies to Minimize or Defer Tax As already discussed, an inter vivos gift or transfer to a spouse, common-law partner or a qualifying trust for such person, will not give rise to a taxable disposition unless the transferor elects out of the rollover. Similarly, as reviewed above, on a taxpayer s death, there will be a deemed disposition of all capital property, subject to the rollover to the surviving spouse or common law partner (hereinafter for convenience, when referring to a spouse, this shall include both the spouse or common-law partner) or a trust for such person. The term rollover is not a term defined in the Act. Rather it is a term used by tax practitioners to refer to a provision in the Act usually, but not always, elective that permits a taxpayer to avoid or to defer the tax consequences that would otherwise flow from the disposition of certain types of property. 28 It has been suggested that the spousal rollovers are the most common tax deferral mechanism used in estate planning. These rollovers provide a significant incentive to transfer property to a spouse either during one s lifetime or at death so that the tax arising on death is deferred. 29 The spouse or spousal trust acquires the property at the deceased s cost for tax purposes resulting in a deferral of capital gains until such time as the surviving spouse dies or the property is disposed of. The spousal rollover is only available where: (1) the deceased and the spouse are residents of Canada prior to the death of the taxpayer; (2) the property passes to the spouse (or a spousal trust) as a consequence of the death of the taxpayer; and (3) it can be established that within 36 months from the date of death the property has become vested indefeasibly in the spouse or spouse trust. Property that passes to a spouse under a will or on intestacy qualifies for the rollover provision. The term vested indefeasibly is not defined in the Act. A property is considered to vest indefeasibly in a person when the person has a right to absolute ownership that cannot be removed by any future event. 30 Where shares transferred to a spouse on death are subject to a shareholder s agreement which 27 CLE Probate Manual, para. 11.2A. 28 CLE Probate Manual, at para. 11.8E. 29 CLE Wealth Preservation, at para Interpretation Bulleting IT-449R Meaning of Vested Indefeasibly.
12 0.0.8 obligates the personal representative to sell those shares after the holder s death, the rollover may be denied on the basis that the shares do not vest indefeasibly in the spouse. 31 The spousal rollover provisions apply automatically, however, the transferor spouse on an inter vivos transfer, or the executor of a will may elect for a property to be transferred at fair market value. 32 This is done on a property by property basis. It may be beneficial to do this in order to use capital losses or to utilize the taxpayer s available capital gains exemption. In some cases, it may be preferable to transfer the assets to a spouse trust instead of directly to a spouse since it allows the testator to maintain some control over the ultimate distribution to the residual beneficiaries, say the testator s children. To qualify for the rollover to a spousal trust, the terms of the trust must be such that the spouse is entitled to receive all of the income of the trust that arises before the spouse s death and no other person except the spouse may before the spouse s death receive or use any of the income or capital of the trust. B. Use of Testamentary Trusts and Income Splitting A trust is described as a legal arrangement whereby someone (the settlor) transfers property to another person (the trustee) to hold for the benefit of one or more persons (the beneficiaries). The beneficiaries are the ultimate recipients of the trust property. They may have an interest in the income of the trust, its capital, or both. 33 Under the Act, a testamentary trust is defined as a trust that arises as a consequence of the death of an individual. 34 Accordingly, any trust established by a taxpayer under the terms of his or her will and funded with assets flowing through the estate of the deceased will prima facie qualify as a testamentary trust. This paper is restricted to a general overview of the tax benefits of testamentary trusts; however, the general uses of such trusts are reviewed in Section III of Rick Monten s paper included in the materials for this course. 35 One of the significant benefits of using testamentary trusts is the ability to provide a structure that facilitates income splitting. Income splitting may be described as the allocation of income among family members to reduce the total amount of the tax paid by the family unit. The shifting of income from a family member in a high tax bracket to family members in lower tax brackets will result in greater after-tax income retained by the family. The use of spousal testamentary trusts may be used to provide a structure that allows a surviving spouse to income split with him or herself as reviewed below. While inter vivos trusts are generally taxed at the top marginal tax rates on all income generated by the assets held in the trust, testamentary trusts are taxed at graduated tax rates in the same manner as is an individual. Accordingly, the opportunity for a testator s beneficiaries to benefit from income splitting and to save tax may be lost by either making an inter vivos gift in anticipation of death or by providing for an outright gift to a beneficiary under the taxpayer s will, rather than creating testamentary trusts for the benefit of the testator s beneficiaries, his or her spouse, children or other issue. 31 See Greenwood Estate v. R. (1991), 1 C.T.C. 47 (F.C.T.D.), 94 D.T.C ITA, s 70(6.2). 33 Virginie Chan and Franois Morin, Distributions by Canadian Testamentary Trust Personal Tax Planning, Canadian Tax Journal, 2005, Volume 53, No. 4 at ITA, s 108(1). 35 Coordinating Inter Vivos Trusts, Joint Tenancies, Bare Trusts, and Insurance in Estate Planning.
13 0.0.9 A will can provide for separate trusts for each of the testator s children rather than direct gifts, giving the executor/trustee the discretionary power to allocate income and/or capital among the beneficiaries of the trust (for example, the testator s child and that child s children) in whatever amounts and to the exclusion of one or more of the beneficiaries. Each of the testamentary trusts would be taxed separately at graduated tax rates on their income. The trustee may accumulate income in the trusts and then distribute tax-paid capital to the beneficiaries in a subsequent year. The tax savings associated with accumulating $60,000 of interest income in a single testamentary trust and then distributing capital in the subsequent year to beneficiaries who pay tax at the top marginal tax rate is about $7,600 per trust per year. In the alternative, the trustees may pay income out to a beneficiary in a low tax bracket, or where a beneficiary is in a high tax bracket, allocate income to the beneficiary but elect on the trust return to have it taxed as trust income, 36 thus making a testamentary trust a highly effective vehicle for income splitting. A beneficiary who is a high income earner can enjoy the use of the trust income while taxes are paid on that income at the lower rates available to the trust. A testamentary trust with multiple income beneficiaries can be used to sprinkle income within a family unit. Trust income can be used to pay for the expenses of children in the household who have no other income of their own and are entitled to take advantage of the full personal tax credit. This allows for significant amounts of income to be earned on an effectively tax-free basis. 37 Where multiple trusts are used s. 104(2) of the Act must be kept in mind. This provision gives CRA the ability to tax several trusts as if they were a single trust where substantially all of the property of each trust has been received from a single person and the income of various trust accrue to the same beneficiaries or classes beneficiaries. It is important that failure clauses in testamentary trusts be carefully drafted so that each trust has slightly different beneficiaries. C. Testamentary Spousal Trusts As reviewed above, a taxpayer who was a resident of Canada immediately before death can transfer capital property on a tax-free basis to a Canadian resident spouse trust created by the taxpayer s will provided that: (1) the taxpayer s spouse is entitled to receive all of the income of the trust that arises before the spouse s death; (2) no person except the spouse may, before the spouse s death, receive or otherwise obtain the use of any of the income or capital of the trust; and (3) the property vested indefeasibly in the spouse trust within 36 months after the death of the taxpayer. 38 The spousal trust arising as a consequence of death is a testamentary trust and will be taxed at graduated marginal tax rates. An opportunity for a taxpayer to income split with his or her spouse may be lost if a bequest is made directly to that taxpayer s spouse rather than creating a testamentary trust for the benefit of the taxpayer s spouse. It is possible to administer a spousal trust so that it is entitled to the graduated tax rates in respect of its income notwithstanding the fact that the spouse beneficiary must be entitled to receive all of the income of the trust and would therefore normally be subject to tax on that income. The provisions of 36 ITA, ss. 104(13.1) and (13.2). 37 John E.S. Poyser, Qualifying and Non- Qualifying Testamentary Trusts, Estate Trusts & Pensions Journal, Vol. 24, Number 1 December 2004 ( Poyser ) at ITA, s 70(6); Interpretation Bulletin IT305R4 Testamentary Spousal Trusts.
14 the Act allow a trust to make a designation to retain a portion of its income for tax purposes even though it would otherwise be taxed in the beneficiary s hands. 39 Whenever a testamentary spouse trust, which enjoys separate graduated rates, has a lower marginal tax rate than the beneficiary spouse to who amounts have been paid or made payable, consideration should be given to making an election under the Act. As way of an example, let us assume that your client comes to you after recently being diagnosed with terminal cancer. She is 45 years old and is told she has, at most, one year to live. She owns two rental properties (say two condos in the same complex) each with a fair market value of $300,000 (assume an ACB of $150,000 each) which she owns clear title, having acquired the property many years before she was married. Your client is married with no children and her spouse is in the highest tax bracket. The net rental income on the two condos is $24,000 per year. Your client has been told by a friend that she should transfer the properties to her husband jointly so that she may avoid probate fees when she dies. Is this good advice? By transferring the property to her husband it will avoid $8,400 in probate fees at her death. The transfer, however, will result in property transfer tax payable at the time of transfer in the amount of $3,000 (transfer of property to a related person which is not the principal residence of either party attracts property transfer tax), as well as legal fees and land registration costs. The transfer will not, however, trigger a capital gain as the property will roll to the spouse at your client s ACB. Instead, if your client retains ownership of the two properties and establishes a spousal testamentary trust under the provisions of her will, the properties will rollover to the trust on her death. There will be probate fees payable on these properties forming part of her estate in the amount of $8, 400 (assuming value has not increased since the transfer). Her husband, however, who is also 45 and expected to live for many more years, will be in a position to elect to have the rental income taxed in the trust at a rate of 22% instead of his top marginal rate of 43.7%, resulting in a net savings of tax per year of $5,200. What would your advice be? D. Insurance Trusts Under the Insurance Act, an insured may in a contract or by declaration appoint a trustee for a beneficiary. 40 This declaration may be made in a will or in a separate trust document. On the death of the insured, the insurance proceeds will be paid to the trustee as the designated beneficiary who will hold the proceeds in accordance with the terms of the trust. Accordingly, trusts created by the insured in such a declaration are created as a consequence of the death of the insured and are testamentary trusts. These trusts will also enjoy the benefits of graduated tax rates and the ability to income split with the trust s beneficiaries. By designating the trustee as the beneficiary of the insurance proceeds, the insurance proceeds are kept separate from the deceased insured s estate thus avoiding probate fees. There is a detailed discussion of the use of Insurance Declarations in Section VII of Rick Monten s paper included in the materials for this course ITA, ss 104(13.1) and (13.2). 40 Insurance Act, R.S.B.C. 1996, c. 226, s. 51(1). 41 Coordinating Inter Vivos Trusts, Joint Tenancies, Bare Trusts, and Insurance in Estate Planning.
15 E. Charitable Gifts As estate planning professionals, I believe it is important for us to recognize that we play a vital role in the area of charitable giving. I believe we have a duty to assist our clients in not only reaching their estate planning objectives, but also in recognizing and achieving philanthropic objectives. There are a number of ways that our clients may do so, at the same time achieving tax savings at death when significant taxes may be triggered. When advising clients in estate planning, you may be asked to advise on the consequences of charitable giving both during your client s lifetime and upon death. A detailed review of the tax consequences of charitable giving is beyond the scope of this paper; however, it is important to note that legal advisors should be aware of both the tax consequences and the benefits of charitable giving. There are numerous rules relating to charitable giving during the lifetime of the client, pursuant to gifts under a testator s will and gifts to charitable organization by way of designations under insurance policies or registered plans. As advisors, you should be in a position to make your clients aware of the possibilities and the benefits derived from planned giving. VI. Conclusion It should now be apparent that the Act influences and effects estate planning. Taxes on death may be significant. A key reason to understanding the rules that apply upon the death of an individual taxpayer is to facilitate planning during the client s lifetime, but more importantly to avoid the pitfalls of poorly planned estate situations. In a Loss Prevention Bulletin published by the Canadian Lawyers Insurance Association it was suggested that lawyers might expect to be held liable for failing to discuss the tax implication of a testator s instructions, and that this is a matter which must be discussed fully with the client. 42 Care must taken where clients may be subject to tax in other jurisdictions, such as a US citizen resident in Canada. Advisors should be cautioned from the outset to confirm whether taxes levied by a foreign jurisdiction may impact on any estate plan. The plan may inadvertently trigger adverse consequence in the foreign jurisdiction. While undertaking estate planning, you must be in a position to recognize these issues and direct your clients to the appropriate advisors. In some cases, the rules relating to taxation on death can be technical and complex depending on the nature and extent of the client s wealth. Tax rules are continually changing. As an advisor, you need to be able to recognize that there are tax issues and, if need be, assist your clients in seeking advice from a qualified tax advisor. While not meant to be an exhaustive review of the law relating to taxation on death, it is hoped that this paper will alert you to the issues and encourage you to equip yourself with the appropriate knowledge. It s all about death and taxes. You cannot defeat death only delay the inevitable likewise with taxes. 42 Poyser at 38 citing (April 2000), 28 CLIA Loss Prevention Bulletin, No. 113.
TAX FUNDAMENTALS FOR THE ESTATE PRACTITIONER PAPER 1.1 Lifetime Dispositions and at Death General Principles These materials were prepared by Sadie Wetzel of Davis LLP, Vancouver, BC, for the Continuing
The family farm and Will planning Addressing farm succession in your Will RBC Royal Bank The family farm and Will planning 2 The following article was written by RBC Wealth Management Services The 2011
Tax Effective Cross-Border Will Planning Martin Rochwerg Partner Federated Press Cross-Border Personal Tax Planning February 27-28, 2012 DISCLAIMER 1. We are not U.S. lawyers or tax advisors. 2. This presentation
Tax & Estate Everyone knows that life has two certainties: death and taxes. Fewer know that the two often coincide. Canada has no official death, estate or inheritance taxes. However, without proper planning,
FILING TAX RETURNS FOR THE DECEASED AND THE ESTATE by Justin W. de Vries and Diane Vieira 1 This paper is intended to provide a general overview of the preparation of the tax returns to be filed on behalf
Sample Exam Questions for Taxation of Trusts and Estates STEP Canada The following questions are offered to provide a sense of the type of questions you might expect on the exam. They do not reflect an
Insert index tab here: 4. TAXATION OF PERSONAL TRUSTS (Then recycle this sheet.) TAX FUNDAMENTALS FOR THE ESTATE PRACTITIONER PAPER 4.1 Taxation of Personal Trusts These materials were prepared by Nicholas
The Use of Trusts in a Tax and Estate Planning Context Calgary CFA Society 2011 Wealth Management Conference Dennis Auger (KPMG LLP) and Sandra Mah (Gowlings LLP) September, 2011 Trusts - Useful Applications
BUY-SELL AGREEMENTS CORPORATE-OWNED LIFE INSURANCE This issue of the Legal Business Report provides current information to the clients of Alpert Law Firm on important tax changes regarding the stop-loss
Should You Be Trusted? Using Trusts in Estate Planning CBA NS ELDER LAW CONFERENCE NOVEMBER 15, 2013 PRESENTED BY: RICHARD NIEDERMAYER. All rights reserved. Not to be copied or used in whole or in part
Tax & Estate Common-law (including same-sex) partners taxation information Under the Income Tax Act (Canada), all common-law relationships, either opposite- or same-sex, are treated equally. For tax purposes,
Designating a Beneficiary One of the unique benefits of an RRSP account is its ability to designate how your investments are transferred to your beneficiaries upon your death. The RRSP assets can be transferred
Tax Efficient Probate Avoidance STEP Canada (Atlantic Branch) February 25, 2010 Presented by Richard Niedermayer, TEP, Partner, Stewart McKelvey and Heath Moore, CA, Partner, Grant Thornton Agenda What
Tax implications when transferring ownership of a life insurance policy May 2015 Jean Turcotte, B.A.A., LL.B., CLU Director, Tax, Wealth & Insurance Planning Group Sun Life Financial FOR ADVISOR USE ONLY
CERTIFIED SPECIALIST PROGRAM ESTATES & TRUSTS LAW DEVELOPMENTAL PHASES AND LEARNING CRITERIA 1. ESTATE AND TRUST PLANNING ESSENTIAL Familiarity with: the basic rules of taxation at death the purpose of
INCORPORATING YOUR BUSINESS REFERENCE GUIDE If you are carrying on a business through a sole proprietorship or a partnership, it may at some point be appropriate to use a corporation to carry on the business.
TAXATION ON DEATH: DEEMED DISPOSITIONS AND POST MORTEM PLANNING Professor Catherine Brown Faculty of Law University of Calgary Tax Law for Lawyers June 2010 i TABLE OF CONTENTS INTRODUCTION... 1 I. INCOME...
Trust Law Update 2015 Colloquium October 22 and 23 Sudbury New Tax Rules for Trusts and Estates Graduated Rate Estates ( GREs ) Life Interest Trusts ( Spousal/Joint Partner Trusts/ Alter Ego Trusts) Practice
Capital Gains and Losses March, 2008 Introduction This Information Update defines the general terms of capital gains and losses in the context of Canada s income tax legislation and how this can potentially
THE TAX-FREE SAVINGS ACCOUNT The 2008 federal budget introduced the Tax-Free Savings Account (TFSA) for individuals beginning in 2009. The TFSA allows you to set money aside without paying tax on the income
WHY YOU NEED A WILL - QUEBEC REFERENCE GUIDE Where there s a Will, there s a way. Better still, when there s a Will, it s your way. Having a Will drafted and executed is the best way to ensure that your
JOINT TENANCIES AVOIDING SOME OF THE PITFALLS Corina S. Weigl (416) 865-4549 M. Elena Hoffstein (416) 865-4388 Howard M. Carr (416) 865-4356 Laura West (416) 865-5463 April 2007 INTRODUCTION Joint ownership
Income Splitting An excellent way to shift income between family members WHY INCOME SPLITTING? One of the easiest ways for families to reduce taxes is through properly structured income splitting. Income
Personal Home and Vacation Properties -Using the Principal Residence Exemption Introduction Your family s home is generally known to be exempt from capital gains taxation, but what about the family cottage
INCOME TAX CONSIDERATIONS IN SHAREHOLDERS' AGREEMENTS Evelyn R. Schusheim, B.A., LL.B., LL.M. 2010 Tax Law for Lawyers Canadian Bar Association The Queen s Landing Inn Niagara-on-the-Lake, Ontario OVERVIEW
TAX, RETIREMENT & ESTATE PLANNING SERVICES WEALTH TRANSFER STRATEGY 9 Minimizing taxes on death Nobody likes to think about their death and who wants to pay more tax than they have to? But, with a little
Probate planning to minimize estate costs Probate serves as proof to financial institutions, financial advisors and the land registry office that your will has been certified by the court and that your
September 23, 2008 Tax and Estate Planning Issues for Canadian Citizens and Residents residing in the U.S. and Dual U.S.- Canadian Citizens Natalia Yegorova is an associate at Black Helterline LLP. Her
Sharing interests in a life insurance policy Important considerations All comments related to taxation are general in nature and are based on current Canadian tax legislation for Canadian residents, which
New Tax Regime May Upset Your Estate Planning November 3, 2014 No. 2014-49 If your estate plan includes creating a trust in your will or you are a trust beneficiary or an estate trustee, you may be affected
Estate Planning In Saskatchewan (Last Revised April, 2005, by Allan Haubrich) The following is general information only, regarding some of the issues relating to estate planning in Saskatchewan. You should
PLANNING FOR A DISABLED BENEFICIARY REFERENCE GUIDE This Reference Guide is intended to provide information and guidance for those whose estate planning objectives include providing for an individual who
IBA 2001 CANCUN COMMITTEE NP STRUCTURING INTERNATIONAL EQUITY COMPENSATION PLANS CASE STUDY CANADIAN APPROACH BY ALAIN RANGER FASKEN MARTINEAU DuMOULIN LLP Stock Exchange Tower Suite 3400, P.O. Box 242
Advisory Will and estate planning considerations for Canadians with U.S. connections Canadian citizens and residents may be exposed to U.S. estate, gift, and generation-skipping transfer tax (together,
Estate planning Creating and Preserving an Estate The estate of an individual can be described as all of their assets they own less all of their liabilities. Anyone with assets needs an estate plan. Estate
Preparing Returns for Deceased Persons 2015 T4011(E) Rev. 15 Before you start Is this guide for you? Use this guide if you are the legal representative (see page 5) who has to file an income tax and benefit
TM Trademark used under authorization and control of The Bank of Nova Scotia. ScotiaMcLeod is a division of Scotia Capital Inc., Member CIPF. All insurance products are sold through ScotiaMcLeod Financial
Community Legal Information Association of PEI, Inc. Making Your Will Community Legal Information Association of PEI, Inc. 902-892-0853 or 1-800-240-9798 firstname.lastname@example.org A will is a legal document that
TAX ISSUES FOR COMMERCIAL PRACTITIONERS PAPER 3.1 Share Structures and Rollovers These materials were prepared by Annie H. Chen of Richards Buell Sutton LLP, Vancouver, BC, for the Continuing Legal Education
June 2015 Your U.S. vacation property could be quite taxing by Jamie Golombek It seems everywhere we look, Canadians are snapping up U.S. vacation properties. Though your vacation property may be located
November 2014 CONTENTS Objectives of estate planning Maximizing the value of your estate Minimizing and deferring tax on death Transferring your estate Minimizing tax after your death Summary ESTATE PLANNING
INVESTMENT HOLDING COMPANIES > RBC DOMINION SECURITIES INC. FINANCIAL PLANNING PUBLICATIONS At RBC Dominion Securities Inc., we have been helping clients achieve their financial goals since 1901. Today,
The Proposed Tax-Free Savings Account The Conservatives 2006 election promises included a proposal to eliminate capital gains taxes where the proceeds were reinvested within six months. Taxpayers and financial
The Hidden Tax Time Bomb Transitioning the Family Cabin Disclaimer Please be advised that this seminar is being presented for information purposes only. We strongly advise that you receive formal accounting
Taxation of Personally Owned Non-Registered Prescribed Annuities This document explains the unique features of non-registered prescribed annuities. For a detailed discussion of non-registered non-prescribed
Advisory Charitable giving People support charities for a variety of reasons. Some donate to a hospital or health charity which has provided assistance to a close relative or friend. Or perhaps there are
NEW ERA IN ESTATE PLANNING Changes to the Taxation of Estates, Testamentary Trusts and Life Interest Trusts Barbara L. Novek Sweibel Novek S.E.N.C.R.L. L.L.P. June 11, 2015 Introduction New rules effective
Protecting an Inheritance from Creditors This paper was originally published by the Legal Education Society of Alberta, in the seminar, Protecting Assets, presented in Edmonton and Calgary in April 2005
WILL WITH TESTAMENTARY TRUST FOR FINANCIAL PROFESSIONAL USE ONLY-NOT FOR PUBLIC DISTRIBUTION. Specimen documents are made available for educational purposes only. This specimen form may be given to a client
CAPITAL GAINS AND TRANSFERS OF FISHING PROPERTY: 2006 FEDERAL BUDGET PROPOSALS Under the Income Tax Act of Canada, if a commercial fish harvester sells his or her fishing property for more than its tax
Estate Maximization Estate maximization is just what the name implies, the process of maximizing the estate that will be passed on to your heirs. You should first determine if maximizing your estate is
Estate planning tools for blended families: Trusts and other agreements Sandra L. Enticknap with the assistance of associate Katherine Xilinas and articled student Angela Rinaldis, all of Miller Thomson
April 2014 CONTENTS Annual tax planning issues Income tax deferral Incorporating your farming business Long-term planning issues Taxation of capital gains Maximizing your capital gains exemption claims
SELF-DIRECTED RETIREMENT SAVINGS PLAN APPLICATION CALEDON TRUST COMPANY LIRA Locked in Retirement Account* LRSP Locked in Retirement Savings Plan* RSP - Retirement Savings Plan - Member Plan RSP - Retirement
U.S. Tax and Estate Planning Issues May 2014 Cheyenne J.H. Reese Legacy Tax + Trust Lawyers For CFA Vancouver Copyright 2014 Do not reproduce without permission of the author U.S. Residency Issues A Non-U.S.
New Canadian Tax Legislation Hywel Jones Britannia Consulting Group 1 Introduction Trusts - Old rules New rules Case Studies Foreign Investment Entity rules What can you do? 2 Old Rules Deemed a Canadian
Planning For Trusts Faced With The 21-Year Deemed Disposition Rule Toolbox Seminar December 2, 2014 Presented by: William Bernstein Overview of Issues Reviewed 21-Year Deemed Disposition Rule Typical Use
Davis & Graves CPA LLP Jerry Davis, CPA/PFS 700 N Main Gresham, OR 97009 503-665-0173 email@example.com www.jjdcpa.com Bypass Trust (also called B Trust or Credit Shelter Trust) Page 1 of 9, see disclaimer
TAX TREATMENT OF CHARITABLE GIVING BY INDIVIDUALS IN CANADA 1 1. BASIC TAX RULES FOR INDIVIDUAL TAXFILERS 2 Basic tax credit In Canada, an individual taxfiler who makes a gift to a charity 3 is entitled
White Paper Estate Freeze Technique: Private Annuity www.selectportfolio.com Toll Free 800.445.9822 Tel 949.975.7900 Fax 949.900.8181 Securities offered through Securities Equity Group Member FINRA, SIPC,
retirement annuity contract Pension death benefits discretionary trust. IMPORTANT NOTES before completing this Trust, please read the following notes. 1. This documentation has been produced for consideration
The following is the Sample Will chapter, prepared by Peter Bogardus, Q.C. and Mary Hamilton for Wills Precedents An Annotated Guide, Continuing Legal Education Society of British Columbia, 1998- (looseleaf)
Spin-Off of Time Warner Cable Inc. Tax Information Statement As of March 19, 2009 On March 12, 2009, Time Warner Inc. ( Time Warner ) completed the spin-off (the Spin-Off ) of Time Warner s ownership interest
IR 288 June 2012 Trusts and estates income tax rules Types of trusts and how they re taxed 2 TRUSTS AND ESTATES www.ird.govt.nz Go to our website for information, services and tools. Secure online services
A presentation designed for: Cassell Consulting Ltd. and Mark Caster Susan Elliott Prepared by: Sun Life Sample Table of Contents This presentation contains 8 sections as follows: 1. Problem Description
The Wealth Plan For Mr. & Mrs. Sample Client John G. Griffin, CLU Chartered Financial Consultant April 2015 - Initial April 8, 2015 Mr. and Mrs. Sample Client Big Time Productions, Inc. 123 Smart Money
COMMON TAX MISTAKES IN ESTATE PLANNING MICHAEL CADESKY This chapter deals with the most common tax planning mistakes made in an estate planning context. The list is not exhaustive, and the selection of
CHAPTER 1 INTRODUCTION TO TRUSTS 1.1 Definitions The logical starting point is to define exactly what we mean by the term trust. A widely recognised definition is contained in Halsbury s Laws of Trusts:
PLANNED GIVING A GUIDE FOR CLIENTS Planned giving lets you continue to help others even after you are gone. Life s brighter under the sun Planned gifts are more essential than ever to organizations working
January 2015 Overview of Canadian taxation of life insurance policies Life insurance plays an increasingly important role in financial planning due to the growing wealth of Canadians. Besides the traditional
Clients want to know: How can I keep more of my retirement income? After reading this, you should understand: The strategies that enable pensioners to pay less tax Regardless of the source of retirement
TAX, RETIREMENT & ESTATE PLANNING SERVICES Your Will Planning Workbook Preparing your Will Glossary of terms... 1 Introduction... 2 Your estate... 2 Beneficiaries of your estate Your spouse... 3 Your children...
Joint accounts TAX & ESTATE BULLETIN The convenience of holding assets jointly has led to the increasing use of joint accounts as a means of transferring wealth between spouses or to successive generations
Segregated funds or mutual funds Do you know the differences? Although there are many similarities between these two investment products, there are also some important ways in which they differ. One important
Will Planning Guide The spirit of humanity from one generation to another Canadian Red Cross Terms of Reference Executor Somebody named in a will or appointed by a court to carry out instructions contained
Planned Giving: Tips and Traps Maria Elena Hoffstein and Katie Ionson Fasken Martineau DuMoulin LLP Congress 2014 AFP November 25, 2014 DM - 7540574 Agenda A. Tax Advantages of Giving B. Testamentary Gifts
RBC Wealth Management Services The Navigator Investment Holding Companies The Canadian tax system is designed to be neutral between investment income earned personally and investment income earned through
Planning your estate A general guide to estate planning Policies issued by: American General Life Insurance Company The United States Life Insurance Company in the City of New York What is estate planning?
Managing a Portfolio of Life Insurance Policies 2010 CIFPs National Conference June 14, 2010 James W. Kraft CA, MTax, CFP, TEP, CLU Important considerations This material is for information purposes only
US Estate Tax for Canadians RRSPs, RRIFs and TFSAs). The most common US situs assets are US real estate (e.g. vacation home) and shares in US corporations. Please see Appendix A for a list of other common