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What would happen if you died yesterday?

R. Daren Baxter, Q.C. TEP, Partner McInnes Cooper

T. Chris Thomson, LL.B. TEP, RVP Wealth Planning

Advanced strategies reviewed

• Estate planning for the masses

• Impact of our legal system

• Having an approach

• Testamentary trusts – for most this is the extent of “advanced”

Advanced strategies reviewed

• Testamentary trust: Tax savings high-rate individual (NS)

• Example: $1,000,000 investment portfolio produces $50,000 incomeOutright to high-rate beneficiary:

• $50,000 x 50% (NS): $25,000 tax

In testamentary trust instead:• $10,000 x 1.6% : $ 160 tax• $ 20,000 x 22.70% : $ 4,540 tax• $ 10,000 x 27.5% : $ 2,750 tax• $10,000 x 34.50% : $ 3,450 tax• $50,000 income $ 10,900 total tax• Annual tax saving: $ 14,100

• Beneficiary can still receive the income (net of tax)

Trust

Beneficiary

Pay income to beneficiary – after trust’s

low tax

Advanced strategies reviewed

Federal testamentary trust proposals

• Budget 2013 announced intention to hold public consultations on the application of progressive rates to testamentary trusts and estates

• Declared reasoning was neutrality of tax system (compared to tax treatment of inter vivos trusts) and protection of revenue base (against multiplication of testamentary trusts, unreasonable estate administration delays, OAS clawback planning)

• Finance announced on June 3, 2013 a series of proposals with respect to testamentary trusts and estates and opened a written consultation process that ends on December 2, 2013

• The proposed measures will apply in 2016 (no grandfathering) and touch upon several provisions in the Act, not just the application of progressive tax rates

Advanced strategies reviewedFederal testamentary trust proposals

• Main change is the elimination of graduated rates – application of current top flat rate of 29% (rate applicable to income over $135,054 in 2013) – section 122

• Trusts and estates affected:– Trusts created by will– Estates after 36 months of existence (flat top-rate estates)– Grandfathered inter vivos trusts (pre-June 18, 1971 trusts)

• Trusts not affected:– Preferred beneficiary trusts– Trusts for minor children

• Trusts created by will or flat top-rate estates will also be forced to have calendar year taxation years and fiscal periods 104(23)(a), 249(1)

• Non-flat top-rate estates will have a deemed year end when they become flat top-rate estates (i.e. after 36 months have expired since date of death)

Advanced strategies reviewed

Federal testamentary trust proposals

• Other tax measures proposed affecting trusts created by will and flat top-rate estates• Quarterly instalment rules will apply 104(23)(e)• AMT basic exemption of $40,000 will be removed 127.53(1)• Part XII.2 tax will apply 210• ITCs will not be able to be allocated by trust to beneficiaries 127(7)• All the above restrictions already applicable to inter vivos trusts• Administrative measures previously only applicable to testamentary trusts will also be

eliminated for trusts created by will and flat top-rate estates• Refunds of overpayment of tax 164(1.5)• Filing of notices of objection 165(1)• Debt forgiveness agreements 80.04(6)(a)(ii)• Reassessments at taxpayer's request 152(4.2)

Advanced strategies reviewed

Federal testamentary trust proposals• Possibility for a trust to distribute assets to beneficiaries on tax-deferred

basis depends on status of the trust as a personal trust - currently, a testamentary trust is automatically a personal trust. Under the new proposals, a trust created by will and flat top-rate estates must meet the same requirements as inter vivos trusts to qualify as personal trusts

• Interest in trust not acquired for consideration payable to the trust or a contributor 248(1)

• Proposals confirm that spousal rollovers on death will not be affected

Advance strategies reviewed

• So where does that leave us?

Advance strategies reviewed

• Some might suggest that we are here:

Topics

• Response to proposed testamentary trust rules• Preferred corporate structure• Estate freeze• Wasting freeze• Investment company and 55(2) trap / solution• Alter ego trust / Joint partner trust• Rights and things return• Capital loss carryback

Response to proposed testamentary trust rules

• Don’t lose sight of non-tax reasons for testamentary trusts

• Plan to continue estate for 36 months to benefit from marginal tax rates– Allocation among beneficiaries without immediate

distribution– Income from allocated assets allocated to specific

beneficiary– Leave income allocation and timing of distributions to

trustee

Common business structure

• Access to capital gains deduction likely not available

• Full capital gain taxed on death

• Limited creditor protection

Company

O/M

Business Portfolio

Preferred corporate structure

Opco

Business Portfolio

Trust

InvestcoDiscretionary dividend shares

• Surplus cash moved to Investco as tax free inter-corporate dividend as earned

• Investment assets separated from business risks

• Shares of Opco QSBC

• Individual has only contingent interest in trust

• Nothing for creditors

• No value in hands to be taxed upon death

Common shares

Estate freeze

• Preferred shares required to effect estate freeze on tax deferred basis

• Existing value remains in hands of O/M

• Future growth to Trust

Opco

Business Portfolio

Trust

Investco

O/M

Wasting estate freeze

• Use “wasting shares” for freeze

• Pay dividends first on Investco preferred shares

• Next, waste company shares to CGD limit

Company

Business Portfolio

Trust

Investco

O/M

Wasting estate freeze

• By death:– No preferred

shares of Investco

– Company preferred shares sheltered by CGD

– All residual value in Trust

Opco

Business Portfolio

Trust

Investco

O/M

Common plan - 55(2) divisive reorganization trap

Upon death of parents, trust assets divided among children

Family Trust

Investco

Portfolio

Child Child Child Child

55 (2) divisive reorganization trap

Children will want to separate their interests into separate companies

55(2) will deny tax deferred separation

Investco

Portfolio

Child 1

Child 2

Child 3

Child 4

55(2) divisive reorganization (“butterfly”) rules

• Inter-corporate dividend to newcos on divisive reorganization treated as capital gain where– Inherent gain in corporate assets– Otherwise tax free inter-corporate dividend (including

deemed dividend on redemption)– Transaction otherwise results in reduction of capital

gain, but for inter-corporate dividend– An unrelated persons obtains an increased interest in

any company

• 55(5)(e) – siblings are not related for this rule

Planning opportunity - effect division reorganization during parent’s life

• Separate trust for each child, controlled by parent

• Each company has ¼ interest in portfolio

• Nominee corporation controls portfolio

1

Corp 1

2 43

Corp 3Corp 2 Corp 4

Portfolio

Alter ego trust / Joint partner trust• Alter ego trust

– Settlor must be 65 years old– Settlor entitled to all income of the trust prior to death– No person other than settlor entitled to income or

capital prior to death of settlor– No election filed not to be alter ego trust

• Joint spousal or common-law partner trust– As above, but both settlor and spouse / common-law

partner entitled to income prior to later death and no one other than settlor and spouse / common-law partner entitled to capital prior to later death

Alter ego trust / Joint partner trust• Taxation

– Assets roll into trust on a tax deferred basis– Trust taxed as inter vivos trust

• If 75(2) applies, tax attributes to settlor

– Deemed disposition at FMV in trust on last death

• Common uses– Incapacity planning / Continuity of control– Inter vivos creditor protection– Avoid estate litigation – Privacy– Probate tax avoidance– Technique to move situs of assets

Alter ego trust / Joint partner trust

• Preferred shares rolled to Alter ego trust or Joint partner trust

Company

Business Portfolio

Trust

Investco

O/MAlter ego trust

Private company planning - probate tax• Constitution Act, 1867 limits taxation authority of

province to direct taxation within a province– Probate tax on property may only be applied to property within

the province

• Shares are situate in the jurisdiction where they may be effectively dealt with as between the company and the shareholder – Normally where the share transfer register is maintained

as required by corporate legislation

• CBCA allows registered office to be situate anywhere in Canada– Alberta probate tax maximum $400

Private company planning – Rights & Things return

• Separate return may be filed for rights & things of taxpayer owned at time of death– May claim another set of personal tax credits

• Alternatively, the right or thing may be transferred in kind to a beneficiary on a rollover basis– Within time for filing separate return– Beneficiary taxed when rights & things actually

realized

Private company planning – Rights & Things return• Rights & Things include:

– Declared but unpaid dividends, unused vacation leave credits, work in progress of most professionals, and inventory of many farmers

• Planning opportunity – declare but do not pay a dividend until after death of taxpayer– Dividend taxable only when becomes payable– File a separate return for rights and things– Benefit of marginal rate (tax savings of $10,000 on a

$30,000 dividend in Nova Scotia)

Can the costs of probate/estate tax be added to the ACB of capital property causing a larger loss to carry back to terminal year?• Brosamler (2012 TCC 204) – Taxpayer successful in

increasing ACB of real property in estate by pro-rata amount of probate and legal fees. Increased ACB increased the capital loss carried back to the estate.– Necessary to incur probate fees to sell the property

• CRA Round Table 2012 Ont. Tax Conf. Q.17 – Brosamler unique in its facts. Whether estate taxes incurred outside of Canada will increase ACB will depend upon the facts.

Loss reduction where gain in the estate following a loss on the redemption of shares

• Capital loss carryback is ground by loss denial rules• CRA Roundtable 2012 Ont. Tax Conf. Q. 14 – If the

estate realizes gains during the first taxation year, those gains must be applied against the loss on share disposition…will result in amount of loss stopped by 40(3.61)…which reduces the 164(6) election.

• Solutions: (1) Avoid gain in first tax year of estate; or (2) Distribute property to beneficiaries on a rollover basis under 107(2) prior to sale

Questions?

This material is general in nature and subject to change without notice. Every effort has been made to compile the information from reliable sources however no warranty can be made as to its accuracy or completeness. Before acting on any of the information contained herein, please seek professional advice based on your personal circumstances. Services and products may be provided by an Assante Advisor or through affiliated or non-affiliated third parties. Insurance products and services are provided through Assante Estate and Insurance Services Inc.

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