A TAX PRIMER FOR ESTATES

Date: 28 Oct, 2019

At the outset, we are a law firm and we do not provide tax advice.  However, we strongly urge our clients at the earliest possible date to retain the services of a qualified and designated accountant to assist in filing the various tax returns that are necessarily filed as a result of the death of the testator.

This is not simply the tax return covering the last year of the life of the deceased.  There generally is a requirement that the estate file one or more returns to cover the income and expenses of the estate.

The topics discussed below are pointed out in the most simplistic (relatively speaking) of terms possible and are only raised as a method of ensuring that an executor indeed does follow our advice and retain the services of a qualified accountant.

There is no capital gains exemption for real estate owned by an estate.  We are all well aware of the fact that our principal residence during our lifetime is shelter from any capital gains the home enjoys.  Our principal residence may have appreciated significantly as has been enjoyed by most properties in the GTA over the last decade.  However, this capital gain exemption does not extend to an estate.  The amount by which a property appreciates in value from the date of death until its liquidation is treated as a capital gain and taxed.  If their increase is significant, a great deal of tax may be incurred.  This is important when making decisions regarding the administration of an estate.

One year limitation for capital loss carryback.  The death of a tax payor triggers tax under Section 70.5 of the Income Tax Act.  A tax payor is deemed to have disposed of all of his capital property at its fair market value immediately before his or her death.  The taxpayer’s estate is responsibile for the payment of any tax payable by the deceased on the gains so reported.  There are some exceptions, the primary one being a rollover to a spouse.  In general terms, to qualify for a spousal rollover, the property transferred as a result of death must be transferred or distributed to either the deceased taxpayer’s spouse or common law partner or a qualifying spousal trust.  However, for the spousal rollover to be successful, it must be done within 36 months of death.

There is a double taxation problem dealing with shares held in a private company.  There are a number of planning technics available to reduce or eliminate the risk of double taxation on private company shares.  These need to be actively looked at and an executor who is managing an estate that includes such shares must seek competent tax advice on a prompt basis.

There can be complications when an estate is in the midst of litigation and an executor or an estate trustee during litigation must be alive to these problems and seek the court’s guidance.

Graduated rate estate status (“GRE”).  An estate generally is taxed at the highest marginal rate and is granted virtually no deductions that the deceased had while alive.  One exception is the creation of a GRE.  To do so, the estate must designate itself in its very first Income Tax Return as the individuals’ GRE and the estate must qualify and continue to qualify as a testamentary trust.  A GRE may not receive a loan or advance from one of the beneficiaries.  A GRE has the following benefits and these only exist for a three year period.

  1. Graduated tax rates – a GRE is taxed at a graduated rate applicable to individuals rather than the highest marginal rate which presently is 53.3% in Ontario. (thank you Justin Trudeau)
  2. Non calendar year end – a GRE is not required to have a December 31 year end.
  3. Charitable Donations – their treatment is far more flexible when made by a GRE.
  4. Capital loss carryback- the benefit under section 164 (6) of the Income Tax Act is only available to an estate that is a GRE.
  5. No part 12.2 tax – GREs are exempt from this tax which can apply when an estate has non-resident beneficiaries and earns certain types of Canadian source income.

The Moral – get a good accountant.

An estate freeze what is it and why should it be done

Date: 17 Oct, 2019

There is a very common tax-planning method called an estate freeze. The tactic is endorsed by the Canada Revenue Agency — as “garden-variety tax planning,”

The following is an example of an estate freeze.

Ms. Successful has built a company, now worth $30 million. She expects it will grow significantly in value by the time of her death, but if she gives the company to her children at that time, they’ll have a huge tax bill. One-half of capital gains are taxable when capital properties are willed to the next-in-line andmore than 25 per cent of accrued capital gains would be owed on the death of a taxpayer in the top income bracket.

So, Ms. Successful freezes the estate. First, she exchanges her $30 million in common shares for $30 million in preferred shares with a fixed redemption amount of $30 million, meaning the value of the preferred shares cannot exceed $30 million. The preferred shares are granted sole voting and control rights.

In exchanging the common shares for preferred shares, the Ms. Successful secures $30 million but denies herself the gains produced as the company grows. Ms. Successful’s children then purchase common shares — initially with zero value — in which that growth is captured. The children “buy” shares for $0, and worth nothing so no tax is triggered.

Ms. Successful continues to control the company and lives off the $30 million, while the company grows to $200 million and the common shares owned by the children increase in value. Without the freeze, that capital transfer would include a $50 million tax bill, but because of the freeze, no common shares are transferred whenshe dies and that’s a tax savings of $45 million. The successors will pay capital gains tax but not until they dispose of their shares, which could be many years later.

Estate freezes are a very valuable tool to assist in legitimate succession planning. Freezes are not reserved for the rich but used by the average business owner.

Estate freezes facilitate the transition of businesses between generations or key employees in an orderly and tax-neutral way.

The mechanics of the estate freeze vary widely, but they usually involve an owner who has enough value in their business to retire on and wants to sell it or bequeath it — either to family, employees, management or others with a connection to the business — allowing them to buy in at a nominal price.

An estate freeze doesnot reduce tax but merely defers it and is a solution to the liquidity issue arising if the shares were sold or transferred and money was owed to Canadian Revenue Agency with all the cash locked up in the shares. These risks result in most businesses not surviving a transition in ownership.

An estate freeze allows one to open the door to new people, who can then get in on that ground floor without having to spend money they do not have.

Remember that most small businesses have access to an exemption of $867,000 for capital gains tax on shares. The societal criticism of estate freezes is it allows high-net-worth families to avoid significant amounts of tax on inter-generational transfers of capital.

Estate freezes can be further embellished by Ms. Successful no longer taking a salary after the freeze. Any payment she receives from the company can be used to redeem or buy back her $30 Million in preferred shares. If she lives long enough, all of her preferred shares will have been redeemed by the company further reducing if not eliminating any tax on her estate’s interest in the company.

Executors Duties

Date: 24 Jul, 2019

The primary purpose of an executor is to bring in the assets of the estate, pay all of its debts and then to distribute those assets in accordance with the terms of the Will. On paper, a relatively straight forward and simplistic set of rules. However, the reality often is far more complicated and can involve conflicts with those nearest and dearest to you. The duty placed upon an executor is a fiduciary duty. In other words, a trust relationship. An executor is placed on a high pedestal, built upon a foundation of trust. If you breach that trust relationship, you can be removed as an executor, forced to pay the unnecessary legal and other costs incurred by the estate as result of your misdeeds and be responsible for your own legal fees. An executor is required to act in a prudent and careful fashion guided by what a prudent business person would do in the same situation.

Duties of executor also known as the estate trustee

Date: 24 Jul, 2019

Even if named, do I have to act as an Estate Trustee?

The answer is no. At the outset, even if you have been appointed in a Will or are the most obvious candidate to apply to be appointed as estate trustee in the absence of a Will, you are not bound to take up that responsibility. At the very beginning, you can resign and/or decline to so act. However, if you pick up the mantle and begin to act as an estate trustee, and certainly if you apply and are so appointed by the courts, you can only be removed from that position by an order of the court.

All of the responsibilities of an estate trustee, once you assume that responsibility are yours and you must fulfill them it to the best of your ability.

The most common scenario in which a person will decline their appointment as estate trustee, is for an estate that has a negative value. Even though an estate trustee’s fees are paid in priority to any creditor, it rarely is worth the aggravation and effort to carry out those duties. Often if the net worth of an estate is one that is suspect, a preliminary unofficial inventory will be a prospective executor’s first duty.

Rest Easy – Multiple Wills Are Just Fine

Date: 03 Feb, 2019

Faithful readers of this blog will be aware of the earlier decision of Justice Dunphy of the Ontario Superior Court of Justice, who held as a result of a “basket clause” found in a standard precedent for Primary and Secondary Wills that the Secondary Will was invalid.

All one needs to know is that as a result of Justice Dunphy’s decision, thousands of Wills created across the province by hundreds of law firms may very well have been invalid. This led to lawyers across the province, including our firm, sending out letters and emails to their clients warning that the estate planning that had been done on their behalf may need to be redone. Luckily the executors of the Milne Estate decided to appeal.
On January 24, 2019, the Ontario Divisional Court reaffirmed the validity of the Will that had been criticized and invalidated by Justice Dunphy.

While the precedent that our firm had been using was a slightly different form than that criticized by Justice Dunphy, it is now academic. The court accepted that the very premise of Justice Dunphy’s criticism of the Will in which he stated that a Will was in essence a Trust was undercut by the Divisional Court.

Bottom line, the Estate Bar and its clients across the province can breathe a sigh of relief as there is no need for an update, there is no need for changes, the existing Wills that our firm had prepared for you are as valid as the date upon which they were originally drafted.

That is not to say that reviewing the factual basis upon which your Wills were drafted, is not a valid exercise.

If things have changed, if the people you had initially felt were appropriate executors no longer hold that title in your mind, then you should return and speak to one of our lawyers. Well done to the appeal counsel and to the Divisional Court in pouring oil upon troubled waters.

Benjamin Orders

Date: 17 Oct, 2018

What is an estate to do when a beneficiary cannot be found. While relatively rare, this does occur and it has been the author’s experience that in the absence of specific instructions in the will, this can lead to significant costs. There are specialized beneficiary hunters and as one can imagine they are not cheap. Such an effort is required before the court will assist.

One remedy is an application to the court for what is commonly known as a “Benjamin” order. The name arises from an almost 120 year old decision from England. However it has been adopted by a number of Canadian Courts and most relevantly in Ontario by the decision in Kapousouzian Estate v. Stink.

In a recent decision by Justice Rady in Steele v. Smith the judge examined the circumstances. Suffice it to say, the court looked at numerous factors including the lengths that the executors had gone toto try and find the missing beneficiary. The effect of a “Benjamin” orderis a declaration that the missing beneficiary had pre-deceased the testator and as such the will would be interpreted through that lens. In the Steele decision it would mean that the remaining beneficiary would receive the missing beneficiaries’ share.

The Public Guardian and Trustee, a Government agency opposed the “Benjamin” order asking that the monies be paid into court while further searches were made for the missing beneficiary. In the Steele decision, the executors were ultimately successful. Primarily, because they had made extensive efforts to find the missing beneficiary.

One alternative to consider is when a will is being drafted to provide the executor with discretion, after reasonable and extensive efforts to locate a missing beneficiary to simply have their bequest or interest in the estate eliminated. The circumstances in which such a clause is warranted would include naming a beneficiary that the testator had long been alienated from.

A Strategy to Reduce or Eliminate Probate Fees.

Date: 27 Jun, 2018

HOW TO USE A TRUST TO SAVE THOUSANDS OF DOLLARS IN PROBATE FEES.

This strategy is driven by 2 primary goals.

To arrange for an orderly estate succession (what happens after you die) and minimize estate administration tax, also known as probate fees. An additional benefit can be a reduction in exposure to potential creditors.

SOME BASIC PRINCIPALS.

A “Testator” is the formal name of the person making the will, the whose death activates the will.

A “third party asset holder” is usually an institution that is holding an asset for someone. A prime example would be a bank maintaining a bank account for the testator. Another common third party asset holder is the Province of Ontario which maintains a land registry system controlling the registration of owners of real estate.

The “Attorney” in Powers of Attorney does NOT mean a lawyer, rather it is the person granted the authority to act on your behalf while you are alive.

“Probate” is the process by which the Superior Court of Ontario formally appoints someone to represent the estate, the executor or estate trustee and seals and certifies that a will is indeed a person’s last will and testament subject to a later claim.

  • The main purpose of “PROBATE” is to both formally appoint an individual as the estate trustee, also known as “executor” and, in the case of such an appointment with a will annexed, it certifies to the world that this indeed is the late testator’s last will and testament.
  • Simply put, it is the method by which, for all third party asset holders, a will is certified to be the last will of the deceased and can be acted upon.
  • However, the Province of Ontario, in return for the granting of Probate, formally known as a Certificate of Appointment of an Estate Trustee, either with or without a will annexed, will levy an estate tax roughly equal to 1.5% of the value of the assets being probated.
  • By a combination of a series of documents and transfers which are set out in greater particularity below, the need to pay this probate tax is reduced and/or eliminated.
  • In the era of million dollar homes being common place, the probate fees saved can easily exceed $10,000.00 or more. Another benefit is that it avoids the laborious and time consuming process of applying for probate in many instances.
  • Probate, especially one centered in the City of Toronto is a process that can easily take in excess of 6 months during which the administration of an estate can be suspended. Even determining what the assets are can be caught in this lengthy never never land.

The documents involved include the following:

  • Primary will. This is the will in which assets that cannot be protected from tax are subject to probate fees. An example would be a liquid asset that the testator did not want to add any additional ownership names to. Another example are registered investments such as RRSP or RRIF of which only the testator can be the owner, and it does not make sense to have a named beneficiary.
  • Secondary will. This is one of the two primary document engines that accomplish the entire thrust of this process. A secondary will is the will that deals with those assets to which probate need not apply. An example would be shares in a privately held corporation or property held in trust for the testator by others. This would include a piece of real estate owned jointly owned with others, often family members but with a trust agreement confirming that beneficial ownership remains solely in the hands of the testator.
  • Power of attorney for property. This is a crucial document and, in its absence the only alternative is an extremely expensive court application for the appointment of a guardian of property. Of course, one must recall that the essential difference between a power of attorney and a will is that the power of attorney grants power and is only effective during the life of the grantor, but a will disposes of assets and only takes effect upon death.
  • Power of attorney for personal care. This is the document that grants to the attorney the ability to make vicarious decisions for one’s health which includes residence as well as medical decisions.
  • An extensive multi page trust agreement. The other primary document along with the secondary will. In this agreement, both the beneficiaries and the trustees sign and acknowledge that the assets that are specified in the agreement, which will often include the primary residence of the testator and various liquid assets irrespective of ownership still remain solely and beneficially owned by the testator until death. Upon death, these assets fall into the secondary will (and if you recall, this is the will that is not subject to probate and probate fees) and are so distributed.
  • Transfer(s). Title to any real estate one wishes to be covered under the aforementioned trust agreement and secondary will would be transferred. Here one would typically convey a family home into the name of the parent(s) along with some of the trusted children as joint tenants. Upon the death of the last of the parent(s), title remains solely in the names of the surviving children. However, the children are acting merely as trustees and the trust agreement mentioned above confirms that the home is to be dealt with in accordance with the terms of the secondary will.
  • Trust declaration for the purposes of land transfer tax. This affidavit is required so no land transfer tax is triggered by the transfer of real estate.
  • Transfer of liquid assets. If liquid assets, such as savings accounts are to have trustees added to them as owners, these are listed in the aforementioned trust agreement and further will require transfers to be done by both the beneficiary and trustees at the institution.

We have to point out what can go wrong. Primarily, the inter-relationship between the beneficiary (usually the parent) and the trustees (usually the child(ren)). While formal beneficial ownership always remains with the donors or testator, in the event of a conflict with a child, this may require the intervention of a court to enforce the terms of the trust agreement.

The trust agreement is the lynch pin and the formal declaration by all concerned that irrespective of the transfers, the beneficial owner remains the donor, usually the parent(s). This process is not appropriate when there is no close and reliable relationship between beneficiary and trustee. However, in the instance of a close family network, especially as the donors become older, this is a practical and beneficial process for all concerned.

Also the trust agreement protects the assets from being claimed by ex-spouses of trustees or their creditors. It also permits the trustees who may own their own primary residence to maintain the capital gains exemption for everyone’s residence.

The cost is generally similar to the fees we charge in administering an estate. The probate fees are an outright saving. If you are interested in learning more about this approach please contact Nelia Senra, our estate clerk at nelia@dalestreimanlaw.com or 905-455-7300 ext. 226

Weird Will Wonders # 1

Date: 31 Jan, 2018

You must be very careful in choosing the witnesses to your will. A normal will,(in other words, not a handwritten holographic will which is an entirely different topic,) requires a will to be signed by the person making the will and in front of two witnesses who must also sign their name.

However, no beneficiary or their spouse may be a witness. If they are, to paraphrase, Section 12 of the Succession Law Reform Act “where a will is witnessed by a person to whom or whose spouse is a beneficiary, the inheritance is void as it concerns the witness, their spouse or any person claiming under either of them”. So, be careful, it is important that the witnesses are completely unrelated and also in no way a beneficiary under the will.

Weird Will Wonders # 2

Date: 31 Jan, 2018

What happens to your will if after you sign it, you marry? Unless some magic words are used in the will upon a subsequent marriage it goes poof, it disappears, it becomes void, it becomes invalid. The magic words are along the lines “I make this will in contemplation of my marriage to Kim Kardashian…” In those circumstances, your will will survive your marriage to Kim Kardashian.

Weird Will Wonders # 3

Date: 31 Jan, 2018

What happens to your will if after you make your will you get divorced? In those circumstances the will is interpreted as if the person that you divorced had died immediately before you. So, if you name your wife as the executor and the beneficiary of you will and then you divorce her, unless you use some magic words your will will be interpreted as if your now ex-wife had died just before you. It is important to note, this is a divorce, not separation.