Estate Planning

Question 1

What does it mean to die “intestate”?

Answer 1

To die without a will.

Question 2

Over what property does a will have no bearing over?

Answer 2

Property held in joint tenancy

Property held by you as a trustee

Property that is held by you which is subject to a claim by a third party (for example, under matrimonial law)

Question 3

Who is an executor?

Answer 3

The person who, or institution that will be charged with ensuring your estate is distribute according to your wishes.

Question 4

What are the two types of wills (plus extra option in Quebec)?

Answer 4

1. Formal Will - typed and signed by you in the presence of at least two witnesses. Witnesses cannot be beneficiaries or spouse.
2. Holograph Will - written entirely in your own hand writing and signed by you. Not necessary to have a witness to your signature.
3. Notarial Will (Quebec only) - created by a notary and normally signed in the presence of only a single witness.

Question 5

Why would it not be effective to simply own all assets in joint tenancy, with you spouse for example, and have no will?

Answer 5

The surviving spouse will need a will.

If you die at the same time and it is not known who died first, the youngest will be presumed to survive and all joint assets will transfer to the youngest, and then be transferred to the youngest’s beneficiaries. If the children die at the same time as well - assets will go only to the youngest’s spouse’s family.

Question 6

Describe tenancy in common

Answer 6

Ownership of an asset by two or more individuals, without the right of survivorship. co-owners can own unequal of equal interests in an asset. Upon death, ownership passes according to the will of the deceased.

Question 7

What are the two essential requirements to make a gift legally enforceable?

Answer 7

1. Evidence of the donor’s intention to make a gift
2. Physical act of some sort to give effect to the intention.

Eg - Passing a piece of jewelry and saying “I am giving you this as a gift”

Question 8

What happens from a tax perspective if you give a gift of property to someone?

Answer 8

You are deemed to have disposed of it at it’s fair market value, and the fair market value on the date of the gift becomes the new owner’s cost.

Question 9

When do the attribution rules apply?

Answer 9

If income-producing property, or money which is used to purchase income-producing property, is transferred or loaned to a related minor, either directly or indirectly, or by means of a trust, the income from the property will normally be attributed back to the person giving the gift or loan. The capital gains from the property will be considered capital gains of the minor.

In transfers to a related minor or to a spouse, any income earned from the original income (secondary income) will be considered income of the minor or spouse. An example would be where dividend-producing shares are transferred to a minor or spouse, and dividends are used to purchase more shares. The dividends from the additional shares would be income of the minor or spouse.

Question 10

What is a trust?

Answer 10

A trust arises when a person (settlor) transfers legal title to property to another person (trustee) with instructions on how the property is to be used for the benefit of a named person (beneficiary).

Settlor and trustee can be the same person.

The essence of a trust - trustee has control over the property while the beneficiary is the real owner.

Question 11

What is an inter vivos trust?

Answer 11

One that is created when you are alive

Question 12

What is a testamentary spousal trust?

Answer 12

Can be used to defer income taxes on a settlor’s estate, as this trust, like the spouse, can take advantage of “spousal rollover” provision that allows capital gains taxes otherwise payable by the deceased’s estate to be deferred until the surviving spouse dies or sells the assets.

Could also be created when a parent ultimately wants the child to inherit their estate, but wants the spouse taken care of during their lifetime.

Could be used to reduce ongoing income tax payable by the spouse by splitting income received from a deceased’s estate with income the spouse might generate from their own investment.s

Question 13

How can an inter vivos trust be used in the case of second or subsequent marriages?

Answer 13

Often occurs if the is a disparity in wealth between the about to be wed spouses and there are children from a previous relationship of the wealthier spouse.

Wealthier spouse could set up an inter vivos trust for the benefit of the children before the new marriage, and the assets will be isolated from claims under the Family Relations Act and the Wills Variation Act by their intended spouses.

Question 14

What are the tax implications of transferring property to a trust?

Answer 14

Taxable Capital Gain = 50% x (FMV at transfer date - ACB)

Transfers to a spousal trust can be done at ACB without triggering any capital gains.

Question 15

Describe a section 85 rollover

Answer 15

The Income Tax Act contains several provisions that allow a taxpayer to transfer title of an asset on a tax-deferred rollover basis. Section 85 is one such provision. It’s commonly used by taxpayers to defer all or part of the embedded tax liability that would otherwise arise when transferring eligible property to a taxable Canadian corporation (see “What is eligible property?”).

As part of the transfer, the transferor must become a shareholder of the receiving corporation, taking back at least one share of the transferee corporation as part of the consideration for the asset transferred. There’s a pre-determined range within which the parties can choose the elected transfer price (ETP).

Question 16

What are the conditions of section 85 rollover?

Answer 16

1. Transferee must be a taxable Canadian corporation
2. Consideration must include shares of the transferee corporation
3. Property being transferred must be eligible property
4. The transferor and transferee must jointly elect

Question 17

What is eligible property in a Section 85 rollover?

Answer 17

1. capital property* (depreciable and non-depreciable);
2. eligible capital property;
3. resource property; and
4. inventory (excluding real or immovable property).
   * Generally excludes real or immovable property owned by non-resident.

Question 18

What a a section 86 rollover?

Answer 18

Capital reorganization of a company - allows a one to exchange common shares for newly issued preferred shares, with value equal to the value of the assets of the corporation.

Question 19

Explain difference in section 85 and 86 rollovers

Answer 19

Section 86 of the ITA lets Hugh exchange his common shares for preferred shares bearing an aggregate par value equal to the appraised value of the business. This reorganization would be permitted on a tax-deferred basis. Immediately after, new common shares could be issued to Hugh’s adult children, or to a discretionary trust for their benefit.

Since Hugh would then hold fixed-value preferred shares, any future growth in the value of the company would accrue to the common shares held by the trust. Once the freeze has been implemented, it’s possible to know Hugh’s maximum capital gains tax on death, allowing for better planning.

Another variation of the estate freeze could proceed under section 85(1). Here, Hugh would contribute his common shares in the operating company for preferred shares in a new holding company.

Again, common shares would be issued to Hugh’s children, or a trust for their benefit, allowing future growth of the company to accrue outside of Hugh’s death tax exposure.

For the rest of Hugh’s life, the preferred shares can be redeemed to provide funds for retirement. The share redemption will further reduce the value of assets that are taxable in his estate. But it would also erode his voting control of the company, so it’s crucial to structure the shares in the frozen company according to Hugh’s objectives.

Question 20

What are the different tax returns that need to be filed on death?

Answer 20

1. Terminal Tax Return - includes all income earned by the deceased up to the date of death. Also includes the net capital gain recognized under the deemed disposition rules.
2. Rights of Things - to report income that are earned, but not received at the date of death. ie - dividends declared but not received, bond coupons matured but not cashed, employment salary, commissions, and vacation pay owed at the date of death, for a pay period that ended before the date of death, unpaid bonuses, CPP and OAS payments received after death.
3. Business parter of proprietor - for income from the business from the end of the business fiscal year to the date of death.
4. Testamentary trust - for income from a trust from the end of the trust fiscal period to the date of death.

Question 21

What is probate tax based on?

Answer 21

The total value of the assets that flow through the will.

Question 22

When must a U.S. estate tax return be filed?

Answer 22

If a deceased Canadian resident who is not an American citizen owned U.S. situated assets exceeding $60,0000 fair market value at death.

Question 23

What is the US exemption amount?

Answer 23

Estates up to $5.43 million. This is prorated for Canadians, based on the value of their US assets compared to worldwide assets.

Question 24

What are some US estate planning strategies?

Answer 24

1. Use life insurance to cover the U.S. estate tax bill.
2. Sell your U.S. assets prior to death
3. Individuals with substantial US holdings may wish to consider using a Canadian holding company to hold US assets
4. Reduce value of estate below the threshold
5. Hold Canadian mutual funds that invest in the US market
6. Hold the asset in joint ownership

Question 25

If a married person with children dies without a will, to whom will the assets be distributed?

Answer 25

Preferential share to spouse, and remainder divided between spouse, children, and grandchildren.

Question 26

How much can an employee give a spouse as a tax free benefit on death?

Answer 26

$10,000

If given to someone else (i.e. child) they can use the remainder of $10,000 exclusion if available.