Difficult Estate Questions

Question 1

Split Custody arrangement

Answer 1

Is an arrangement where there are two or more children and each parent has custody of one or more of the children. With a split custody arrangement:

• one or more children live with one parent more than 60% of the time during the year; and
• one ore more children live with the other parent more than 60% of the year.

With a split custody arrangement, each parent determines the amount of basic support that he/she has to pay based upon his/her income and they number of children of which he has custody

The parent with the obligation to pay the greater amount of basic support would pay to the other parent an amount of basic support.

Question 2

RDSP - when must payment begin from an RDSP

Answer 2

by the end of the year in which the beneficiary attains 60 years of age.

Question 3

RDSP - how are payments calculated

Answer 3

payments are subject to a maximum annual limit determined by reference to the life expectancy of the beneficiary and the FMV of the property of the plan.

Question 4

Since when has an RDSP been availbale

Answer 4

2008

Question 5

Specified Disability Savings Plan

Answer 5

Is a RDSP Plan for which:

• a medical doctor has certified in writing that the beneficiary of the RDSP is, in his or her professional opinion, unlikely to survive more than 5 years
• the holder of the RDSP has elected in prescribed form and provided the election, along with the medical certification, to the issuer of the RDSP, and
• the issuer has notified the Minister of Human resources and Skills Development of the election (now ESDC Employment and Social Development Canada).

A specified Disability Savings plan will not be required to repay an assistance holdback amount.

Without a valid election, each withdrawal from an RDSP comprises a taxable portion based on the relative proportions of taxable assets and non-taxable assets in the plan.

With a valid election, withdrawals made at any time following an election will not trigger repayment of the CDSG provided the total taxable portions of the withdrawals do not exceed $10,000 annually.

Accordingly, total annual withdrawal may not exceed $10,000 due to non-taxable portions.

The proportion of a disability assistance payment that is non taxable is the same as the proportion that the total of the contributions not yet paid from the plan is to the total value of the plan’s assets.

The maximum withdrawal from a specified Disability savings plan is calculated as:
*(taxable amount of $10,000 / (1 - (contributions/plan assets).

Any unused portion of the $10,000 taxable withdrawal limit for a year that is not used can be carried forward to the following year.

Question 6

RESP investment to be transferred to an RDSP, what conditions must be met?

Answer 6

The legislation to implement Budget 2012 allows investment income earned in an RESP to be transferred on a tax free basis to an RDSP if the plans share a common beneficiary.

In order to qualify for this measure, the beneficiary must meet the existing age and residency requirements in relation to RDSP contributions.

As well, ONE of the following conditions must be met:

• the beneficiary has a severe and prolonged mental impairment that can reasonably be expected to prevent the beneficiary from pursuing post secondary eduction
• The RESP has been existence for at least 10 years and each beneficiary is at least 21 years of age and is not pursuing post secondary education.
• The RESP has been in existence for more than 35 years.

These are the existing conditions for receiving an accumulated income payment (AIP) from an RESP.

Question 7

Transferring or selling qualified farm property to family

Answer 7

The ITA includes special provisions that allow for the rollover of a family farm where the taxpayer has bequeathed, sold, or gifted that property to his child, grandchild, or great grandchild. This provision was intended to support the continuation of family farms in Canada.

Provided that certain conditions are met, the taxpayer can elect his deemed proceeds of disposition to be any amount between the ACB and FMV at the time of disposition. These deemed proceeds are the ACB or the new owner. A taxpayer may be able to make use of the Capital Gains exemption for qualified farming property.

Thus, there are two tax advantages available to the taxpayer:

• the capital gains exemption
• the rollover to a child/grandchild.

The lifetime capital gains exemption is an income tax exemption, available to an individual, from taxation of capital gains realized on the disposition of qualified property; qualified small business corporation shares, qualified farm property and qualified fishing property.

The LCGE limit is the maximum amount of taxable capital gains eligible for the Lifetime Capital Gains exemption. For 2015, the maximum amount of capital gains eligible for the lifetime capital gains exemption is $813,600 and the LCGE is $406800 and it is indexed annually to the CPI.

A taxpayer’s unused lifetime limit is calculated as:
((maximum amount for the LCGE - capital gains on disposition of qualifying property) x the capital gains inclusion rate)

A CNIL Cumulative Net Investment Loss is calculated as:
(the greater of ($0 and (the aggregate of investment expenses - the aggregate of investment income for all taxation years after 1987)))

Question 8

A taxpayer’s unused lifetime limit is calculated as:

Answer 8

The LCGE limit is the maximum amount of taxable capital gains eligible for the Lifetime Capital Gains exemption. For 2015, the maximum amount of capital gains eligible for the lifetime capital gains exemption is $813,600 and the LCGE is $406800 and it is indexed annually to the CPI.

A taxpayer’s unused lifetime limit is calculated as:
((maximum amount for the LCGE - capital gains on disposition of qualifying property) x the capital gains inclusion rate)

The taxpayer’s capital gain deduction is calculated as:
(lesser of (unused lifetime limit and (taxable capital gains - CNIL)))

Question 9

CNIL

Answer 9

A CNIL Cumulative Net Investment Loss is calculated as:
(the greater of ($0 and (the aggregate of investment expenses - the aggregate of investment income for all taxation years after 1987)))

Question 10

The taxpayer’s capital gain deduction is calculated as:

Answer 10

The taxpayer’s capital gain deduction is calculated as:

lesser of (unused lifetime limit and (taxable capital gains - CNIL))

Question 11

Cross Sell agreement at not at arm’s length (so a cross sell agreement with family)

Answer 11

If the shareholders or partners in a buy-sell agreement were not dealing at arm’s length, and they established a purchase price that was less than the FMV at the time that the agreement was signed, the proceeds of disposition will be deemed to be the FMV at the time of death, not the value specified in the agreement.

The shares will become part of the deceased’s estate. However, the ACB for his estate will be the FMV at the time of death.

When the estate sells the shares to the survivors, the disposition will take place at proceeds equal to the contract price.

The estate will realize an allowable capital loss calculated as:

(((Proceeds - ACB) x number of shares) x capital gains inclusion rate)))

The estate will only be able to use this allowable capital loss if it realizes capital gains upon the disposition of other estate assets.

If the deceased were to have a net capital loss arising in the year of death, the deceased’s representative could choose to:

1) carry the net capital loss back and deduct it from any taxable capital gains realized in the 3 preceding years; or
2) add it to any net capital losses carried forward from previous years, deduct the total of all capital gains exemptions claimed, and deduct the balance from any taxable income in the year of death of the year immediately preceding death in what amounts the representative chooses.

This alternative is not available to the estate.

Question 12

Bill C-60 legislation to implement First time Donor’s super credit proposed in Budget 2013, expected to pass June 26 2013.

Answer 12

is a non-refundable tax credit that will supplement the Charitable donations tax credit with an additional 25% tax credit for a first time donor on up to $1000 of donations. Only donations of money will qualify for the First Time Donor’s Super Credit.

A first time donor is an individual who, and whose spouse or common law partner, have never claimed the Charitable Donations

Question 13

What conditions must be met in order for life insurance proceeds to qualify as a charitable donation

Answer 13

• the policy must be a Canadian life insurance policy under which, immediately prior to the taxpayer’s death, the tax payer’s life was insured
• the proceeds must be transferred to a qualified donee as a direct consequence of the death of the taxpayer, in fulfillment of the insurer’s obligations under the policy
• immediately prior to the taxpayer’s death, the donee was neither the policyholder under the policy nor an assignee of the taxpayer’s interest under the policy;
• immediately prior to his death, the taxpayer’s consent was required to change the recipient of the transfer (this usually means that the taxpayer must have been the policy holder immediately prior to his death); and
• the transfer must occur not more than 36 months after the individual’s death.

Question 14

Charitable gift annuity

Answer 14

In the case of a charitable gift annuity, the taxpayer giver a charity a lump sum in exchange for a promise of future annuity payments, usually for life. The charity will benefit if the donor dies before the annuity payments exhaust the capital provided by the donor.

In a self-insured charity gift annuity, the charity itself guarantees the payments, and if the donor exceeds life expectancy, the charity will have to continue making the payments out of its own pocket. However, if the donor dies before the end of his life expectancy, the commuted value of the remaining annuity payments belongs to the charity. Depending on the donor’s actual lifespan and investment performance, the charity can expect to end up with about 50% of the original contribution, which it can use for its charitable purpose.

In the case of a reinsured gift annuity, the charity uses about 75% of the lump sum provided by the donor to purchase a life annuity from a life insurance company, and retains the remaining 25% for its charitable purpose. If the life annuity has a guarantee period and the donor/annuitant dies prior to the expiry of this period, then the residual payment will also belong to the charity.

Under the ITA, the amount of the donation for tax purposes is calculated as:

(the greater of ($0 and (the original contribution to the charity - the value of the payments))

Question 15

Personal use property acquired as part of an arrangement in which the property is donated as a charitable gift.

Answer 15

Certain charitable donation arrangements have been designed to exploit the $1000 deemed ACB for personal use property and to create a scheme under which taxpayers attempt to achieve an after-tax profit from such gifts.

The $1000 deemed ACB and deeded proceeds of disposition for personal use property will not apply if the property is acquired as part of an arrangement in which the property is donated as a charitable gift.

Question 16

Types of property that can be donated

Answer 16

The charitable donations tax credit is available for donations of RRSP, RIF and insurance proceeds that are made as consequence of direct beneficiary designations.. Also personal use property.

Question 17

Net capital loss - deducting in year of death

Answer 17

Two options:

1) carry the net capital loss back and deduct it from capital gains realized in 3 preceding years.
2) add it to any net capital losses carried from prior years, deduct the total of all capital gains exemptions claimed, and deduct the balance of any taxable income in the year of death or the year preceding death in whatever amounts the representative chooses.

Question 18

Capital property bequeathed to a beneficiary, their deemed ACB and UCC

Answer 18

The ACB and UCC to the beneficiary are both normally equal to the deemed proceeds of disposition.

However, in the case of depreciable property, the ITA includes special provisions if the ACB for the deceased exceeds FMV immediately prior to death.

If this occurs, then:

• the deemed ACB of the beneficiary will be the original ACB of the deceased.
• the deemed UCC of the beneficiary will be the deemed proceeds to the deceased, which is the FMV.
• the difference between the deemed ACB and the deemed UCC for the beneficiary is deemed to be the CCA already allowed to the beneficiary.

This ensures that the full amount of CCA that was claimed by the deceased prior to death can be recaptured either in the hands of the deceased or in the hands of the beneficiary if the property recovers in value before the beneficiary disposes of it.

Question 19

dividend - declared before death of taxpayer, but not paid

Answer 19

Dividends that were received in the year of death must be reported on the final return of the deceased. Dividends that were declared, but were not yet paid by the date of death, can be included on the final return of the deceased, or it can be included on an optional return for rights and things. Optional returns provide the opportunity for income splitting.

Question 20

Rights and things

Answer 20

are amounts that were not yet paid at time of death but, had the taxpayer not died, would have been included in the taxpayer’s income when he received them.

Some of the more common rights and things include:

• salary, commissions, or vacation pay that were for a pay period that ended before the date of death, but that had not been paid prior to death
• uncashed matured bond coupons.
• bond interest that had been earned to a payment date before death, but that had not yet been paid or reported in previous years; and
• unpaid dividends that were declared before the taxpayer’s death.

If the personal representative chooses to file a return for rights and things, all rights and things must be reported on that optional return, and cannot be reported on the final return.

Question 21

Eligible dividend

Answer 21

is generally a dividend paid from the corporation’s income that was subject to tax at the general corporate income tax rate.

The earnings in CCPCs up to the small business limit of $500,000 would usually be eligible for the small business deduction. Accordingly, most of the retained earnings would not be eligible for payment as an eligible dividend. So a CCPC keeps track of any retained earnings that were subject to tax at the general corporate income tax rate in an account called the general rate income pool (GRIP).

Question 22

GRIP

Answer 22

General Rate Income Pool

is the amount of retained earnings of the corporation that is taxable income of the corporation that has not benefited from the small business deduction or certain other special tax rates.

A CCPC can pay eligible dividends only to the extent of its GRIP.

Question 23

Ineligible dividend

Answer 23

is a dividend that is not paid from the corporation’s GRIP and that is not eligible for the enhanced dividend tax credit.

The dividend gross up for ineligible dividends is 118%

The federal conversion rate for the dividend tax credit on ineligible dividends is 11.0169%. The individual taxpayer can claim a provincial tax credit; the conversion rate for which varies from province to province.

Question 24

Claiming non-refundable tax credits on the final tax return

Answer 24

When filing the final returns for a deceased taxpayer, his personal representative may be able to claim certain non-refundable tax credits on behalf of the deceased as follows:

• he can claim the full amount of the basic personal amount, provided that the deceased lived in Canada from Jan 1 until the date of death. If the deceased lived outside of Canada for part of that time, the tax credit may have to be prorated:
• if the deceased was 65 years of age or older at the time of death, and had income less than a maximum threshold amount, then he can claim a full or partial age amount, depending on the deceased’s net income for the year.
• he may be able to claim a full or partial spousal amount, depending on the income of the surviving spouse for the year of death.
• He can claim the pension amount, up to a max amount, to the extent the deceased taxpayer had eligible pension income.

The max amount of eligible pension income for the pension income tax credit is $2000.

Question 25

Optional tax return - 3 types of amounts that can be claimed:

Answer 25

1) some amounts can be claimed in full on each optional return and the final return, including:

• basic personal amount
• age amount
• spousal amount
• personal amount for an eligible dependent; and
• amount for infirm dependents age 18 or older

Note that these amounts do not have to be prorated according to when the taxpayer’s death occurred during the taxation year. However, all of these amounts except for the basic personal amount may be reduced because of the net income of the deceased or dependent.

2) Some amounts can be split between the returns, including:

• disability amount for the deceased
• disability amount for a dependent other than spouse or common law
• tuition fees and education amounts for the deceased
• tuition fees and education amounts that are transferred from a child of the deceased
• cultural, crown, or ecological gifts
• charitable donations that are not more than 100% of net income
• medical expenses

Cultural, ecological, and crown gifts can be split between the final and optional returns, provided that the total amount claimed is not more than it would have been if the amounts had been claimed on the final return only.

3) Some amounts can only be claimed on the return which the related income is reported, including:

• CPP contributions
• EI Premiums
• pension income amount
• employee home relocation loan deductions
• stock option and share deductions; and
• social benefit repayment

Question 26

How many optional returns can be filed for a deceased

Answer 26

3

• Return for rights and things
• Return for business activity
• Return for testamentary trusts