ESTATE PLANNING Flashcards
INCOME TAX ON DEATH
Asset
Non-depreciable (Investments)
FMV ➡️ beneficiary
ACB ➡️ Spouse/spousal trust
Depreciable (land, buildings)
FMV ➡️ beneficiary
UCC ➡️ spouse/spousal trust
*** No Cdn gift or inheritance taxes but foreign estate taxes/duties may apply
*** ToSI does not apply to CG realized on death
JOINT OWNERSHIP
A/ Tenants in Common
- equal rights of possession, enjoyment and title to property regardless of pro rata interest
- each can sell their int. w/o permission of the other
*** on Death, property int. is transferred according to their Wills.
B/ JWROS
- equal share and access to property
- on death, JWROS
TAX DEFERRAL PRIOR TO DEATH
METHODS:
1) Gift/sale of assets
2) Estate Freeze
- intervivos trust does not form part of estate.
- holding co; transfer of growth assets (common shares) to non- growth frozen assets (P/S)
TAX DEFERRAL PRIOR TO DEATH - 1) GIFT/SALE OF ASSETS
Gift/sale of assets - if transferred to family deemed at FMV - simple - reduce probate - income tax (CB/recapture) - lose control of asset - future growth accrues to children attribution
EXCEPTIONS:
A) spousal or spousal trust transfers
B) QFFP transfer to child
C) Tax-deferred transfer of assets to a Cdn corporation
2) TRANSFER OF ASSETS TO A CORPORATION
SECTION 85
- Elected Transfer Price (ETP) anywhere b/n ACB and FMV
- proceeds to transferor ➡️ cost of property to corporation ➡️share/non-share taken back by transferor from corp.
- to defer max. gain, elect @ minimum (tax cost)
- FMV of property transferred to corp must = shares taken back from corp.
- CONSIDER LCGE
3) ESTATE FREEZE - s85
- Freeze all or part of the value of growing assets at current FMV so future growth accrues to next generation and not to taxpayer at disposition at death
- cash
- GIC
- Primary home
- property transferred to spouse
- portfolio of securities transferred to children
- shares of operating company transfered to children
- **TOSI
- creditor protection (dividends can be paid to Holdco & loaned back to Opco on a secure basis)
Estate Freeze - S85 - HOLDING COMPANY
Eg. Mr. Freeze
- ACB = $1000
- FMV= $900K
- Expected Growth = $3,000,000
- Shares of QSBCS
- Remaining LCGE = $800K
HOW IT WORKS:
1) Mr Freeze’s children set up a Holdco = children pay a nominal amount for common shares of Holdco.
2) Mr. Freeze transfers his shares of Growth Ltd. to Holdco using s85 (
= consider transfer of $801,000 (ACB + unutilized LCGE)
3) Mr. Freeze takes back preferred shares (which do not grow) in value (non-participating/frozen) and may pay dividends (as source of income. They are redeemable/retractable (redeemable @ holder’s option (to set FMV); at $900K (FMV of shares given up).
4) Future growth accrues w/ children who own common shares.
CONSEQUENCES OF ESTATE FREEZE s85
- No immediate tax Proceeds $801,000 ACB = $1000 CG = $800K (sheltered CG exemption; AMT may apply
- Future liability known as preferred shares do no grow in value
Proceeds (on transfer or death) = $900,000
ACB = $801,000 *** increased ACB reflects crystallization of LCGE
Future capital gain to Mr. Freeze CG = $99,000 - Future growth accrues to children who own common share of Holdco.
- Mr. Freeze can retain control if prefered share have sufficient votes
- Mr. Freeze has source of income as P/S pay dividends and are retractable (redeemable at his option)
TOSI for Estate Freeze
- Sale of shares by Mr. Freeze:
None b/c it’s a QSBCS eligibile for LCGE. - Dividends rec’d by children, aged 25 and 27:
YES b/c kids are > or = 25 and since > = 90% of Holdco’s income is deried from related business. Doubtful they own > or = 10%. May be exempt if they work in the business for 20 hrs/week. - Divdends rec’d by Mr. Freeze:
None b/c he meets both the business test and the excluded share test
ESTATE FREEZE - s86
- Share = Share exchange
- File Articles of Incorporation
- Automatic rollover; no election required; no new company or holdco rquired
- Cost for cost
- *** CANNOT UTILIZE LCGE
*** SHARES ONLY
- all assets are in original corporation and exposed to operating risk
s86 - HOW IT WORKS
1) File Articles of Amendment
2) Mr. Freeze exhanges his OLD common shares @ ACB for newly authorized preferres shares that
a) do not grow in value (non-participating/frozen)
b) but may have voting rights to maintain control
c) may pay dividends (source of income)
d) are redeemable/retractable @ FMV $900K (FMV of common shares gave up)
3) Newly authorized common shares are then issued to his children for nominal amount. Future growth accrues to children.
- If shares are owned by a trust; they are not considered owned by the beneficiaries.
TAXATION ON DEATH
1) personal tax credits
2) PRE (principal residence exemption)
3) LCGE available on year of death
4) no AMT
5) net CL and ACL are deductbile against “any income” in year of death and preceding year
6) medical expenses deductible for any 24 month period including day of death
7) homebuyer’s plan unpaid balance included in income (spouse can assume liability)
8) reserves are not deductible (unless transferred to spouse)
9) spousal rsp contribution available for year of death
CHARITABLE DONATIONS - FITS IN YEAR OF DEATH AND ESTATE DONATIONS
A/ Donations in year of death
- limit is 100% of individual’s income + unclaimed gifts carried forward
- any excess can be claimed for previous year (100% of income)
B/ Donations in Will and designation donations (RIF, RSP, TFSA, Life insurance)
- deemed to be made by estate
C/Graduated Rates Donations
- must be made inv. by the estate on or as a consequence of death
- gifts ater 36 month period ends but within 60 months of death ; taxation on year of donation made or last two taxation years of deceased ind.
ESTATE DONATIONS - OTHER RULES
Other Rules
- All estates can claim dnations in current year or carryforward (5 years, 10 yrs for ecological land)
- not GREs , donations cannot be allocated to a taxation year of the ind. or an earlier year of the estate
- Where estate donates property that was deemed to be disposed (transferred) immediately BEFORE death, any change in FMV will be a gain or loss of the estate.
TAX DEFERRAL OPPORTUNITIES AT DEATH
1) Surviving spouse or TT spousal trust can receive inv on a tax deferred basis on death. (ACB to spouse w/o any tax implications)
2) Transfer of QFFP to chidren on a tax deferred basis
3) Testamentary Trust; Qualified Disability Trust (QDT) graduated rate estates limited to 36 months after death pay tax @ MTRs.
TYPES OF TAX RETURNS ON DEATH
1) Returns for prior years not filed
2) Terminal return from January 1 to DOD
Optional Returns - filed 1 yr after death no later than 90 days of NOA
i) Rights or things: amounts due but unpaid at tme of death (eg matured but uncashed bonds, dividends undeclared but unpaid, unpaid commission, salary/vacation/CPP OAS)
ii) Income from TT designated as a GRE
iii) Income from a proprietor or partnership (if died after end of fiscal period)
WHY FILE?
- can claim personal tax credits on each tax return
Eligible Funeral Arrangements
- Max. contribution towards funeral arrangements earn tax free income (Max $35K; $15K furneral and $20K cemetary)
- Returned funds in excess of contributions are taxable to recipient
Terminal tax return
- Must be filed for the period of January 1 to the date of death.
- This return must be filed by April 30 or June 15 if Company.
Charitable donations summary
Four basic categories
1) Cash: 15% of $200; 29% or 33% after limited to 100% of net income in year of death.
2) Assets: stocks, art, real estate are gifts in kind.
- Donor can elect ACB or FMV. Taxes will be determined on capital gain and recapture of depreciable assets.
- Donation limit is based on 100% of net income and year of death and the preceding year.
- no $1000 ceiling for PUP
3) Life Insurance:
- assigning an existing policy
- changing the beneficiary for an existing policy
- purchasing a new policy
4) Other gifts: not part of will; promise now and delivered when the individual dies.
Eg) charitable annuity; income is rec’d by individual and charitable tax credit is based on iInsurance premiums paid.
Death benefit
Death benefit to the surviving spouse is included in the spouse’s income however up to 10,000 of the death benefit is tax free.
Wills Between spouses
1) Reciprocal/mirror: two separate wills per spouse
2) Mutual Wills: agreement not to amend will
3) Joint Wills: one will (2 testators)
Codicil; document Amending will
Beneficiary change due to marriage divorce or change of executor
Memoranda
1) Legal memorandum is executed prior to Will.
2) Precatory Memorandum is executed after the will.
Terminology
Lapse is when person name to receive the gift is not alive.
Ademption is when a specific property is gifted to a beneficiary under the wheel but the property is not owned by the testator at the time of death. Example piano sold or broken.
Abatement is after the payment of all taxes, there is insufficient value to transfer funds to the legacy.

Mortis casa is a gift made on the deathbed.

Other classes that may be inserted in the will
1) family law considerations
2) investment discretion clause
3) Tax election clause
4) transfer of registered assets for example spousal RSP
5) Life interest in a specific asset clause for example leaving a surviving beneficiary a specific asset rather than an out right legacy.
6) encroachment clause i.e. minors
7) Guardian appointment clause
8) common disaster clause to prevent double probate fees if testator and beneficiary died at the same time.
9) Burial or cremation request
Assets that do not flow through the wheel
- Beneficiaries
- Joint with right of survivorship
- Assets in a living or inter vivos trust
- Business interests covered by a buy-sell agreement
- Assets covered by a prenup
- Shares or debt obligations of a private corporation
Per Stirpes
Distribution of an estate down the lines of descent.  eg to child them grandchildren
Per capita
Distribution by head or equal share
Second marriages
- In most provinces remarriage terminates existing will.
- second marriages; a jointly owned property a couple could purchase life insurance on each other to buy out the other spouse is half of any property that is jointly owned and the money within go to the deceased children or estate.
Life insurance and estate planning for businesses
*** Life insurance premiums paid are not tax-deductible but the benefit paid to the estate or beneficiary is not taxable.
- crisscross insurance owned on individual partners: Use proceeds to buy the deceased shares from the estate. Surviving owner buys business interest from disabled/deceased owner.
- Share Redemption/Corporate owned insurance: Death shares redeemed (death benefit minus ACB) ➡️ capital dividend account (tax-free) ➡️ survivor to purchase shares / criss-cross OR share redemption where surviving owner owns 100% of shares.
What Happens at death for Buy-sell agreement?
- premiums paid are not tax-deductible
- proceeds are received tax free. 
- Criss cross agreement: Proceeds above a ACB are treated as taxable gains.
- share redemption: excess of the paid up capital value of the shares is treated as a dividend.
If there’s no mandatory buy sell agreement, interest may be rolled tax-free to surviving spouse resulting in a tax deferral.
