A PRACTICAL APPROACH TO MAXIMIZING CLIENT WEALTH EXCERPT #2 Canadian Wealth Management Guide Excerpt: [ 2538] Tax Planning the Will
CANADIAN WEALTH MANAGEMENT GUIDE A REAL LIFE EXAMPLE Determine for yourself whether or not the Canadian Wealth Management Guide is worth the investment. Check out the following pages that have been reproduced in their entirety from the Guide. You ll be impressed by their thoroughness and applicability. Written by Experts The Canadian Wealth Management Guide is the collaborative product of some of Canada s leading tax experts. David Louis JD, CA and Samantha Prasad Weiss BA, LLB, both with the law firm Minden Gross LLP, along with Robert Spenceley BA, MA, LLB, analyst with CCH Canadian, and Joseph Frankovic LLB, LLM, PhD, CFA, tax lawyer and member of the adjunct faculty of Osgoode Hall Law School, lead a host of contributors whose expertise make this Guide truly indispensable. David Louis JD, CA Samantha Prasad Weiss BA, LLB Robert Spenceley BA, MA, LLB Joseph Frankovic LLB, LLM, PhD, CFA Updated bi-monthly, the Canadian Wealth Management Guide is yours for $361 a year on CD-ROM (single-user license) $351 a year over the Internet (single-user license) TRY BEFORE YOU BUY Take advantage of our free trial offer, available on CD-ROM or over the Internet. For more information or to place an order, simply call the appropriate toll-free number below. Alberta: 1-866-470-1124 British Columbia: 1-866-894-5105 Ontario, Saskatchewan, Manitoba, Atlantic Canada, and Territories: 1-800-996-9914 Toronto: 416-228-6175 Quebec: 1-800-363-8304, ext. 267 Please quote Promo Code TA04078. 2
CANADIAN WEALTH MANAGEMENT GUIDE Virtually all professional advisors recognize that a properly-designed will is a vital component of estate and succession planning. While the importance of a will may be widely understood, vital and lucrative tax-planning opportunities are often missed. Your subscription to Canadian Wealth Management Guide will ensure that this doesn t happen - and that your clients wills are part of an integrated estate plan that minimizes the family s taxes. Canadian Wealth Management Guide reveals key strategies designed to ensure that you have covered the bases when it comes to crafting a tax-planned will for your clients. The strategies are described in a way that is easy to understand, so that they can be incorporated into correspondence and understood by your clients. The following excerpt shows specific examples. [ 2538] Tax Planning the Will While the importance of a will may be widely understood, countless thousands of wills overlook critical tax-planning opportunities.why? For one thing, lawyers who prepare wills are not necessarily tax experts. And because of increasing price competition, most people expect to pay only a few hundred dollars for a will. This means that there may be too little time spent understanding the family's financial structure. There are various ways that a will can impact on post-mortem tax planning, such as the provision of a lagged distribution on the death of the surviving spouse. Accordingly, a properly-designed will is a vital component of succession planning. The following are some suggestions for tax planning a will. To repeat, it should not be assumed that these will be fully considered by the person drafting the will. The importance of the spouse as beneficiary To the extent that assets have appreciated in value that is, so that there is untaxed capital gains these assets should generally be left to the spouse, or a qualifying spouse trust. That way, the property rolls over to the spouse (or spouse trust) without immediate tax. Otherwise, the assets will usually be treated as if they had been liquidated at current market values (an exception arises where qualifying farm property passes to children, grandchildren, and so on). Obvious candidates include real estate, shares of a corporation, investments which have gone up in value, and so on. Accordingly, in order to defer death tax, shares of a family business are usually left to a spouse, or more likely, a spouse trust. However, there can be tax exposure even if the asset has not actually appreciated in value. An example of this would be a rental or other property on which depreciation claims have been made. Also, many older tax-shelter investments, even if virtually worthless, may attract tax if they are in what is known as a negative cost base position; generally, where the personal cost of an investment is less than the overall tax losses claimed and cash or other distributions from the partnership. If so, these too should be left to the spouse. Don t forget that a second home may no longer be covered by the principal residence exemption so that if this is not left to a spouse, there could be capital gains tax on its appreciation as well. If qualifying small business corporation shares or farm property which is eligible for the enhanced capital gains exemption of up to $500,000 are held, a number of options will be available. If the exemption is available, the individual will generally want to use it up by the time he or she passes away. This can be done even if the shares are left to a spouse, because of Subsection 70(6.2) which allows an individual to elect into a capital gain on a property-by-property basis (e.g., one or more shares of a corporation). Also, the surviving spouse is potentially eligible for his or her own capital gains 3
exemption. If it is expected that, after death, there will be future appreciation in the shares which will more than fully utilize the surviving spouse's capital gains exemption, it may be a good idea to leave at least some shares to children (or grandchildren) if it is intended that they remain within the family. This could be done before death through an estate freeze reorganization, to meet the family's financial needs. Note: For the rollover in Subsection 70(6) to apply, capital property transferred or distributed to a spouse or spouse trust must vest indefeasibly in the spouse or spouse trust within 36 months of the taxpayer's death or, upon written application to the Minister within that period, within such longer period as the Minister considers reasonable in the circumstances. See further Interpretation Bulletins IT-120R5 Principal Residence and IT-449R Meaning of vested indefeasibly. The residence Consideration should be given to leaving a residence to a beneficiary who will be eligible to claim the principal residence exemption on it. Remember, married couples, together with unmarried children under the age of 18, are generally entitled to only one principal residence exemption among them. However, the principal residence exemption might be maximized, for example, by leaving the residence to an adult child who does not already have a principal residence. See further Interpretation Bulletins IT-120R5 Principal Residence. Low-bracket beneficiaries Consideration should be given to leaving incomeearning assets to beneficiaries who are in low tax brackets, such as grandchildren, a low-income child (or his or her spouse) and so on.this is because income from bequests to high-income individuals will, of course, be added to their other taxable income, thus resulting in a significant tax exposure. See further IT-510 Transfers and loans of property made after May 22, 1985 to a related minor and IT-511R Interspousal and certain other transfers and loans of property. The estate split An estate is treated as a separate taxpayer; therefore, it can take advantage of low-tax brackets, just like an individual. This means that, in effect, beneficiaries can income split with the estate. This opportunity has been made even more effective, due to a rule that an estate can choose to pay tax on income even though it is actually payable or distributed to beneficiaries. To take advantage of this rule, it is recommended that the will make it clear that the estate can continue for a number of years at least. For example, if the will simply leaves assets to beneficiaries outright, some estate planning practitioners question whether this favourable tax effect can continue longer than one year after death (after which the beneficiaries are normally entitled to a distribution of the property from the estate). In fact, the estate-split concept can be taken a giant step further by establishing several different trusts in a will. Each of these trusts can potentially be taxed separately so that the income-splitting advantages mentioned above can be multiplied. One word of warning, though: the CRA has the power under Subsection 104(2) to lump the trusts together where they ultimately accrue to the same beneficiary or group or class of beneficiaries. However, there are few reported cases where the CRA has successfully taken this position. Subsection 104(2) has no application to separate trusts each of which have different beneficiaries. The CRA, for instance, has confirmed that in its view, Subsection 104(2) would not apply where a testator creates separate trusts for each of his or her children. Under Regulation 900(2), the authority to make a designation under Subsection 104(2) is the responsibility of the Director of the relevant Tax Services Office. Factors that would be considered in making a determination include: Footnote See Technical Interpretation 9812985, January 14, 1999. whether or not there was a clear intent by the testator, as evidenced by the terms of the will, to create separate trusts; whether or not the trusts had common beneficiaries; whether or not the assets of each trust were segregated and accounted for separately (e.g., separate bank accounts, no undivided interests in 4
property, separate accounting. records for income received and capital and/or income disbursements); and; the conduct and powers of the trustees. The tax advantage of having multiple trusts with different beneficiaries is most apparent in the case of testamentary trusts. Since testamentary trusts are taxed at graduated tax rates, there will be a tax saving where a deceased's will creates a separate trust for each of his or her children. For example, an owner-manager's will might leave the shares of his or her corporation in a spouse trust, followed by the creation of multiple testamentary trusts for children/ grandchildren, in order to gain low tax rates on dividends paid on the shares. However, consideration should be given to whether postmortem planning procedures would be advisable after the death of the surviving spouse, and if so, the impact on the plan. Where trusts are set up in a will, and the trusts make a distribution of income, including capital gains, to a beneficiary, the trustee can elect that any portion thereof remain taxable to the trust rather than the beneficiary (Subsections 104(13.1) and 104(13.2)).This election would normally be made by the trustees where the trust has sufficient losses to shelter the income, as well as to obtain income splitting advantages mentioned above. See further Interpretation Bulletins IT-342R Trusts Income payable to beneficiaries, IT-381R2 "Trusts Deduction of amounts paid or payable to beneficiaries and flow-through of taxable capital gains to beneficiaries, and IT-406R2 Tax payable by an inter vivos trust. RRSPs and RRIFs Generally, a spouse should be designated as beneficiary of an RRSP (or RRIF). Otherwise, the entire balance or value may be included as taxable income in the decedent s final (terminal period) return. In fact, it is best to do this directly in the RRSP contract itself, rather than a will. In Ontario and elsewhere, this probably avoids probate fees by excluding the RRSP from the decedent s estate. In Ontario, for example, the probate fee on an RRSP will be 1.5% of the value of the plan, for larger estates. Of course, it is possible that a spouse will pass away before the testator or that the latter is divorced. If so, there is another taxreducing opportunity: if a child or grandchild who is financially dependent is designated, special rules tax the RRSP inheritance in the hands of the child or grandchild who will probably be in a lower tax bracket than the decedent instead of being added to the decedent's income in the year that he or she passes away. Furthermore, financially dependent children or grandchildren are able to purchase a special annuity which will enable them to defer this tax while minors (indefinitely if dependent because of mental or physical illness). This special rule has often been overlooked because, until recently, there were a number of other restrictions, which have now been removed: there is no longer an age limit for the beneficiary, the RRSP may pass to a child or grandchild even if there is a surviving spouse, and it is no longer necessary to show the child or grandchild was claimed by the testator as a dependent for tax purposes. But what does financially dependent mean? The CRA's policy seems to be that if the individual's income does not exceed the basic personal amount, he or she is considered to be financially dependent. If the individual s income exceeds this amount, he or she is presumed not to be financially dependent unless he or she demonstrates otherwise (the Income Tax Act itself reflects only the latter statement see refund of premiums definition in Subsection 146(1)). In IT- 500R, RRSP Death of an Annuitant, the CRA states that: Under the definition of refund of premiums, it is assumed, unless the contrary is established, that a child or grandchild is not financially dependent on the annuitant for support at the time of the annuitant s death if the income of the child or grandchild for the year preceding the year of death exceeded the basic personal amount under paragraph (c) of the description of B in Subsection 118)(1) for that preceding year. Under Subsection 146(5.1), a contribution can be made on behalf of the deceased taxpayer to a spousal RRSP within 60 days of the calendar year of death. See further Interpretation Bulletin IT-307R3 Spousal Registered Retirement Savings Plans. 5
2003 Federal Budget Proposal The 2003 Federal Budget proposed that, for deaths occurring after 2002, the income threshold used for determining financial dependency of a mentally or physically infirm child or grandchild increase to $13,814, indexed for deaths occurring after 2003. (The income threshold for non-infirm children and grandchildren was not changed by this proposal.) Debt forgiveness If someone is financially indebted to an individual and the individual wishes to forgive the debt, it is best to do this in the will. If the individual forgives the debt before he or she dies, there will be adverse tax consequences to the debtor if a debt was investmentor business-related (that is, the interest was potentially deductible to the debtor). Footnote See paragraph 80(2)(a). Association rules When leaving the shares of a corporation to beneficiaries, consider carefully the impact of the association rules, if the beneficiary and/or family members are also shareholders in an incorporated business. Unless care is taken, the result may be that, after death, the corporation may have to share its entitlement to the small business deduction (the low rate of tax for business corporations) and certain other tax benefits with that of the beneficiary's corporation. Alternatives may be to leave the shares to grand children, or a son or daughter-in-law (although the family law aspects of such a course of action must also be taken into account). See further Interpretation Bulletin IT-64R3 Corporations: Association and control After 1988. Corporations and partnerships If shares of a corporation or an interest in a partnership, whose value has appreciated are held, and these assets are to be left to someone other than a spouse, it should be remembered that, in many cases, it will be advisable to undertake some rather complex tax manoeuvres within the first year of the estate; otherwise, there could be double-tax exposure when the underlying corporation/ partnership assets are sold off. Unfortunately, many executors are not aware of these manoeuvres until it is too late as stated, the deadline may be one year after the individual passes away. In this situation, it should be ensured that executors are advised to seek professional tax advice. This should generally be done whenever shares or partnership interests are left to someone other than a spouse, and they have appreciated in value. (A similar situation may arise when the surviving spouse who is the beneficiary under a spouse trust passes away.) In addition, the will should give executors and trustees authority to make the various tax elections and designations that are required. Charities If the testator plans to make large charitable donations from his or her estate, it may be advisable to receive professional advice beforehand, as there are a number of tax-planning opportunities and pitfalls here. Subsection 118.1(4) provides that a gift made in the year in which the individual dies is deemed to have been made in the preceding year, to the extent that it was not deducted in the year of death. Subsection 118.1(5) deems gifts made by an individual by will to have been made in the year of the individual's death, including eligibility for Subsection 118.1(4). Accordingly, the donation can be claimed on the terminal year return, even though the transfer is made by the deceased s representatives rather than the deceased, and might not be made until a subsequent taxation year. As of 1996, qualifying donations (including carryforwards from the preceding five years) up to 100% of net income are eligible for credit in the year of death; as well, the return for the year preceding death may be reopened (or filed, if it has not been) to treat donations made in or carried forward to that preceding year as eligible for credit to the extent of 100% of net income. No doubt, while most of the gifts that will qualify for the 100% limitation will be made in a will, the Act is not worded so as to require that the gift be testamentary in nature. Estate planners utilizing life insurance to fund charitable gifts will want to carefully consider whether the estate should be made the beneficiary of the policy so that the donor can take full advantage of the 100% limit in the year of death. Previously, when drafting a will, care was to be taken that both the specific charity and the specific bequest were specified. If the choice of the charity or the value of the bequest was left to the discretion of the executor 6
of the will, the CRA took the position that Subsection 118.1(5) did not apply. To quote: [i]n the absence of each qualified donee being named in the will along with the amount each such donee is to receive, it is our general view that the gift will not be considered to have been made by an individual in the individual s will. See Technical Interpretation Document No. 9730365, February 25, 1998. However, in that Technical Interpretation, it was conceded that, in some circumstances, the residue would be accepted as a specified amount so long as a specified charity were to receive a specified amount. In Technical Interpretation (Document No. 2000-0055825, March 8, 2001), the CRA softened the above opinion (but did not reverse it) when it held that where the will stipulates that a specific amount is to be gifted to charity and provides a list of charities to which donations should be made but discretion is left to the executor to determine the amount to be given to each named charity, it is now its view that the donation would nevertheless qualify as a gift by will if the actions taken by the executor are reasonable and in accordance with the terms of the will and the donation is made to a charity that is a qualified donee (see Document No. 2000-0055825, March 8, 2001). In a recent technical interpretation released on April 11, 2002 (Document No. 2001-0090205), the CRA announced its full reversal of its 1998 position. The CRA now takes the position that as long as the amount of the gift can be determined (whether it is specific or determinable) and it is clear that it must be put to a charitable use, the gift will be considered to have been made by will. Therefore, the fact that a trustee, under the terms of the will, has full discretion to select a charity to whom the donation is to be made would not necessarily preclude the donation from otherwise qualifying as a gift by will given the broad wording of Subsection 118.1(5). It may be possible to gain substantial tax benefits before an individual passes away, by leaving the charity a residual interest in the property, while the individual retains the use and possession of the property during his or her lifetime. Planning Points: As discussed above, a donation to a charity under a will, even if left to the discretion of a trustee, should qualify as a charitable bequest provided that an amount can be determined (whether specific or a percentage of the residual of the individual's estate), and it is clear from the terms of the will that the trustee is required to make the donation and the donation is made to a qualified donee. Likewise, a gift of a residual interest in a testamentary trust will qualify under Subsection 118.1(5) if the trustees can not encroach on the capital of the trust for the benefit of another beneficiary. The Act has been amended so that RRSP, RRIF, and insurance proceeds donated to a charity by means of direct beneficiary designations will qualify for the charitable donations tax credit, in the year of death. This amendment is to apply in respect of an individual s death that occurs after 1998. For further Interpretation Bulletins IT-111R2 Annuities purchased from charitable organizations, IT-226R Gift to a charity of a residual interest in real property or an equitable interest in a trust, IT-244R "Gifts by individuals of life insurance policies as charitable donations, IT- 288R2 Gifts of capital property to charity and others, and IT-297R2 Gifts in kind to charity and others. Spouse trusts A spouse trust can be a very effective succession and estate planning vehicle. It combines the tax-deferral advantages of leaving assets to a spouse, with the ability to protect family interests. Where a successful business is involved, it is more usual to use a spouse trust rather than leaving the shares and other assets outright, in order to preclude the possibility of the surviving spouse changing the terms of his or her will, e.g., in the event of a remarriage. In addition, the appointment of suitable trustees may protect against mismanagement of the business or distributions which could jeopardize financially the viability of the ongoing business. Spouse trusts may be used for inter vivos (lifetime) gifts, or testamentary bequests. In order to qualify for rollover treatment, the trust must provide that: (i) the spouse is entitled to receive all of the income of the trust that arises before the spouse's death; Footnote However, a trust that retains income at the discretion of the spousal beneficiary does not lose its status as a spouse trust, since the spouse beneficiary nonetheless has a legal right to enforce payment of all of the income while the spouse is alive. See Document No. 7
2003-001451, June 2nd, 2003. Subsection 108(3) provides that, for these purposes, income of the trust is calculated under trust rules, with adjustments for certain dividends. And; (ii) 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. Footnote In addition, the capital property transferred or distributed to the spouse or spouse trust must vest indefeasibly in the spouse trust within 36 months of the taxpayer s death or, upon written application to the Minister within that period, within such longer period as the Minister considers reasonable in the circumstances. Several comments can be made in respect of these requirements: (1) As noted above, the spouse must be entitled to obtain all of the income of the trust during his or her lifetime. However, if the trust is combined with a corporation or other vehicle held by the trust, it is possible to effectively control the amount of income received by the trust and consequently, the amount to which the spouse is entitled. For example, where a corporation is held by a trust, the dividends paid on the shares may be regulated by the directors of the corporation. (In such circumstances, it may be prudent to ensure that control of the corporation is not held by the trustees themselves; otherwise, the spouse might assert that distributions should have been made by the corporation as a consequence of the duties of the trustees.) (2) The requirement that no other person can receive or obtain the use of capital does not mean that the spouse is entitled to receive the capital. In other words, as long as no one else may receive or obtain the use of the capital, the trust will not be disqualified. (3) In respect of the use of capital requirement, careful drafting is required in order to ensure that this requirement is not violated. For example, a loan to a relative might be interpreted as allowing someone other than the spouse to obtain the use of capital. Provisions in a trust that allow this could throw the trust offside. Although, CRA Document No. 962734, November 14, 1996 and paragraph 16 of IT-305R4 indicate stated that a loan to a non-spouse on commercial terms (e.g., commercial interest rates) would not taint a spouse trust. Document No. 2003-0019235, July 17, 2003, indicates that where the trust permits funds to be loaned (or any other form of assistance to be provided) to anyone other than the spouse for inadequate consideration, this would disqualify the trust, whether or not such a loan was actually made. The document appears to indicate that the will in question authorized the trustee to lend funds or provide any other financial assistance to any beneficiary with or without consideration. One problem arises where the trust provides for the payment of debt that does not exclusively relate to the surviving spouse. This may taint the spouse trust and therefore destroy the tax deferral that is potentially available. Note, however, that Subsection 70(7) and related provisions allow a tainted spouse trust to be purified, in respect of particular testamentary debts: certain debts that would otherwise taint the trust because someone other than the spouse is entitled to the trust's capital may be satisfied by specified assets, with the remaining assets qualifying for rollover treatment. For these purposes, eligible testamentary debt means any debt owing by the deceased taxpayer immediately before death and any amount payable in consequence of the taxpayer's death (other than any amount payable to any person as a beneficiary of the taxpayer's estate). Typical eligible testamentary debts include funeral expenses and income taxes payable for the terminal year and prior years. In general terms, the provision deems properties to pass to the trust at fair market value to the extent of the value of testamentary debts that are non-qualifying debts (generally, the deceased's testamentary debts other than estate or succession taxes, or debts secured by a mortgage). All other properties passing to the spousal trust will remain subject to rollover treatment. In particular, Subsection 70(7) permits the personal representative to designate one or more properties (including any money) to which Subsection 70(6) does not apply, with the result that such properties are deemed to have been disposed of for proceeds equal to their fair market value at the time of the deceased s death. Property which is not so designated is eligible for the tax-free rollover to a qualifying spouse trust.the properties so designated (or listed) must have an aggregate fair market value at least equal to the non-qualifying debts to be paid out of the trust property. Although these special rules may effectively untaint a spouse trust, care should be taken in this area. 8
Footnote For example, per paragraph 19 of Interpretation Bulletin IT-449, some debts may taint the trust in a manner that cannot be remedied by Subsection 70(7), for example, a contingent liability to make good any deficiency that may arise in another trust created under the same will. One solution is to draft the will so as to allow the executors to split assets into two trusts, one which qualifies as a spouse trust and another which doesn't. Appreciated and other assets that would otherwise result in a tax liability would go to the spouse trust. Liabilities, bequests to other parties, and so on can be paid out of a second trust. (See further Interpretation Bulletin IT-305R4.) While spouse trusts are a preferred succession planning provision, care should be taken. Under Ontario family law at least, an equalization right is available, notwithstanding the terms of the will. Where shares of a family business are left in a spouse trust, the owner-manager will want to attempt to ensure that the surviving spouse does not opt for this right, thus undermining the succession plan. In the absence of a domestic contract, perhaps this is best done by an open discussion of the terms of the will, including whether the spouse trust will provide for adequate distributions. In addition, where freeze shares or other equity are left in the spouse trust, the directors of the corporation might attempt to turn off the tap on dividends so that, in extreme situations, no income can be received by the spouse trust. Accordingly, the choice of directors may be important. See further Interpretation Bulletins IT-120R5 Principal Residence, IT-305R4 Testamentary Spouse Trusts, and IT-449R Meaning of vested indefeasibly. Rights and things By virtue of Subsection 70(2), where a deceased at the time of death has rights or things which, if they had been realized or disposed of during the taxpayer s lifetime, would have been included in computing income, the value of such rights or things must be included in the final return of the deceased. Although the phrase rights or things is not defined in the Act, examples may include work-in-progress of a solepractice professional, dividends that have been declared but not paid, unused vacation leave credits, unmatured bond bonus coupons, and so on. The CRA has indicated that a bonus which is payable to an owner-manager of the corporation qualifies as a "right or thing" provided that it was declared before death. Where, however, the employer has a contractual obligation to pay a bonus annually or on some other periodic basis, but the bonus for the period has not been declared as at the date of death, the amount is considered to be a periodic payment of remuneration taxable under Subsection 70(1). Footnote See 1991 RCRT, Q. 27. In simple terms, rights or things can be thought of as amounts to which the taxpayer became entitled before the taxpayer s death and which, if collected or otherwise realized, would have formed part of the deceased s income. Normal accounts receivable from the business or property of the deceased are not considered rights or things; however, they are included in the deceased's income in the terminal year either in the computation of profit from the business or property under Section 9, or by virtue of paragraph 12(1)(b). Where there is doubt whether the nature of income is a periodic payment subject to Subsection 70(1) or a right or thing under Subsection 70(2), it is the CRA's policy to generally resolve the issue in favour of the taxpayer (see IT-210R, paragraph 2). As a general rule, it is preferable to have the amounts considered rights or things because the amounts can be taxable to the deceased's beneficiaries (and not the deceased) in the circumstances described below. Subsection 70(3) provides that where rights or things of a deceased taxpayer are distributed or transferred to beneficiaries within one-year or within 90 days of the mailing of the notice of assessment in respect of the final return, whichever is later, the value of such rights or things may be excluded from the deceased s final return. Instead, the value of such rights or things may be included in computing the beneficiaries' income at the time those rights or things are realized. (Given the tax burden involved, the personal representative should not make the Subsection 70(3) election without the beneficiary's consent; the personal representative should also verify that he or she has the power under the will to make the election.) There are two principal advantages in using Subsection 70(3) in this manner. Firstly, the rate of tax payable on rights or things may be lower if they are transferred to the beneficiaries of an estate; that is, the total income may be spread over several beneficiaries resulting in a lower rate of tax. Secondly, the tax burden attached to 9
the rights or things can be deferred until they are realized by the beneficiary. A dividend is realized when it is received by the beneficiary. Unpaid salary, vacation pay, commissions, etc., are realized when the beneficiary receives the amount from the deceased's employer. If the rights or things are not transferred to a beneficiary as described above, the rights or things can be included in a separate return under Subsection 70(2).The separate return includes only the value of the rights or things and assumes that the taxpayer was another person. In other words, income splitting is allowed to the extent of the value of the rights or things because they are not included in the regular terminal return with the deceased's other income. This is beneficial because the marginal tax rate which will apply to the rights or things will normally be lower than the tax rate applicable to the other income in the regular terminal return. Additionally, most personal tax credits may be claimed in the separate return, including the basic personal credit, the married person s credit, the dependent person credit and the age credit, notwithstanding that the full amount of such credits can also be used in the regular terminal return. Note that, because it is the value of the right or thing that is included in income, certain expenses may be deducted by the personal representative. For instance, the personal representative may be entitled to deduct, from the interest received on a bond, interest paid on a loan taken out by the deceased to buy the bond. Just some of the reasons for making this Guide your planning partner. Feature: Focus on investors. Benefit: The information is aimed to give advice on generating and maximizing one s wealth, for individuals, private corporations, and public corporations. Feature: Written in a non-technical manner. Benefit: Information in the service can be transmitted directly to clients or incorporated into correspondence. Feature: Practical rather than theoretical. Benefit: Readers can see how the law applies to them currently in any given situation. In order to file the separate return, the deceased s personal representative must elect to do so by the later of (1) one-year after the day of death, and (2) 90 days of the mailing of the notice of assessment for the terminal year. As noted, the separate return is not applicable where the rights or things were transferred to the deceased's beneficiaries in the circumstances outlined above. The rights or things election can be revoked in writing by the personal representative within the time allowed for the filing of the election as noted above (Subsection 70(4)). See further Interpretation Bulletin IT-212R3 Income of deceased persons Rights or things. The commentary on this topic is current as of January 2nd, 2005. 10
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CANADIAN WEALTH MANAGEMENT GUIDE See inside for excerpt: [ 2538] Tax Planning the Will @ The Canadian Wealth Management Guide is available in CD-ROM and online formats. Other tax planning guides available from CCH Canadian Limited: Tax Planning for Small Business Guide Canadian Estate Planning Guide 97M3 The CCH design is a registered trademark of CCH Incorporated.