Estate Planning and Legal Aspects

Question 1

Can you contribute to an RRSP after death?

Answer 1

Yes - their legal rep can make an RRSP/Spousal RRSP contribution within 60 days of the end of the taxation year the taxpayer died.
This can be used to rollover the RRSP or to boost the Spousal RRSP amount while reducing taxes for the estate.

Question 2

What are the 3 main activities in the estate life cycle?

Answer 2

• Creating the estate
• Preserving/Conserving the estate
• Transferring the estate

Question 3

How is marriage governed?

Answer 3

Federal government has power over marriage and divorce
Provincial government has authority over solemnization of marriage

Question 4

How is a common-law relationship determined?

Answer 4

2 people in a conjugal relationship living together for at least 12 continuous months, or have a child together, or one partner has custody and control of the child and the child is wholly dependent.

Separation must be 90 days due to a breakdown in a relationship to null the cohabiting qualification.

Question 5

What are grounds for granting a divorce?

Answer 5

If the spouses have lived separate and apart for at least one year immediately preceding the determination of the divorce proceeding, and were living separate and apart at the commencement of the proceeding

Or a spouse has committed adultery or treated the other with physical/mental cruelty of such a kind as to render intolerable the continued cohabitation

Question 6

What is an annulment and how is it different from a divorce?

Answer 6

An annulment invalidates a marriage on grounds that have developed since the marriage was originally formed:
1) Void ab initio - invalid due to a material fact existing at the time of the ceremony (usually relating to capacity)
2) Voidable marriage - some fact arises or is revealed after the ceremony that may render the marriage invalid

Question 7

What factors are used to calculate the basic child support amount?

Answer 7

• Number of children
• Annual income
• Custody arrangements (sole custody when child resides <40% of time, joint custody otherwise)

Question 8

What adjustments, if any, can be made to the basic child support amount?

Answer 8

• Undue hardship - can allow the court to award more or less than the Schedule amount if amount causes undue hardship
• Special expenses - special child-related expenses can be added to the Schedule to cover all, or a portion of the amount if they are reasonable and necessary in light of the needs of the children and the means of the parents

Question 9

What factors are considered in making a spousal support order?

Answer 9

• The length of time the spouses cohabited
• The functions performed by each spouse during cohabitation
• Any order, agreement, or arrangement relating to the support of either spouse

*NOT the circumstances of separation

Question 10

How is spousal support paid and taxed?

Answer 10

Spousal support is taxable in the hands of the recipient and deductible to the payor. If this deduction is used, cannot claim the spousal credit.

To qualify for the above, the payment must be an allowance:
- Fixed, established in advance
- Required to be paid periodically
- The recipient must have discretion as to how to use the amount.

Question 11

How is spousal support calculated?

Answer 11

The Paras Formula: Proportion of combined income x child costs

Question 12

What are some restrictions on support in regards to testamentary freedoms?

Answer 12

Applications of intestacy rules may be restricted if he or she dies leaving behind dependents, who may then apply for relief from the estate under provincial relief legislation. The claim for relief becomes a claim BEFORE the residue of the estate, taking precedence over the instructions in the Will of the deceased and can restrict the distribution of estate assets.

Question 13

What is community property (aka net family property)?

Answer 13

Property that is associated with the marriage and that is subject to division upon relationship breakdown
This is calculated by (Net Worth as of Separation Date) - (Net Worth as of Marriage Date) = NFP

[NFP (Spouse A) - NFP (Spouse B)]/2 = equalization payment to Spouse B
Where Spouse A = spouse with greater value of assets.

Question 14

What are special rules regarding net family property?

Answer 14

• Matrimonial homes’ total values are always included in NFP
• Gifts or inheritances that a spouse got during the marriage are usually not included in NFP
• Businesses and business property are not included unless the non-owning spouse can prove that they’ve contributed to the acquisition and/or operation.

Question 15

When is a resulting trust formed?

Answer 15

A resulting trust is formed when one partner holds title to property, but it was the intention of both parties that the titleholder was really holding his or her partner’s share in trust. Either:

• The couple expressed their common intention, either in writing or verbally, or even by their conduct
• The non-titleholder can prove a direct contribution of money or money’s worth to the acquisition of the property

Question 16

When is a constructive trust formed?

Answer 16

A constructive trust can be imposed against the titleholder one-sidedly, given a few requirements:

1) The contributions of the claimant, either in money, money's worth or labour, must have enriched the legal titleholder.
2) The enrichment of the legal titleholder resulted from a corresponding deprivation to the claimant.
3) There was no legal justification for this enrichment
4) There was a causal connection between the claimant's contribution and the enrichment of the property

Question 17

How are pension entitlements divided upon separation?

Answer 17

For DBPPs, as future earned credits will be difficult to determine, the pension entitlement subject to division will be based on the commuted value of the pension as of separation date. If unvested, entitlement will be personal contributions + interest.

The division will be subject to a max of 50% the commuted value of pension benefits accrued during the relationship.

Question 18

What are the 3 types of domestic contracts?

Answer 18

1) Marriage contracts - details rights and obligations during marriage and possible separation, including support and division
2) Cohabitation agreement - used by common-law couples for the same topics as 1)
3) Separation agreement - details rights and obligations of both parties during their separation, additionally dealing with the custody and access of children

Question 19

What is the purpose of a Will?

Answer 19

A Will allows the testator/testatrix to control how their property is disposed of and distributed after death.
It also allows you to name the personal representative of your estate

Question 20

What are the different types of Wills?

Answer 20

1) Holograph - handwritten, required to be dated and signed
2) English Form - most common; must be signed by the testator/testatrix and 2 witnesses (non-beneficiaries/spouses)
3) Notarial - valid only in Quebec. Notary reads Will to testator/testatrix in the presence of 2 notaries (or 1 notary and 2 witnesses). Must be signed by owner and witnesses
4) International - variation of English Form with additional requirements to make it acceptable in other jurisdictions. An authorized person is required to witness and sign the Will, as well as witnesses, and attach a certificate to the Will

Question 21

What are the specific types of Wills that are sometimes used by spouses?

Answer 21

1) Mirror Wills - each spouse is the beneficiary of the estate residue of the other spouse
2) Mutual Wills - specific type of mirror will where there is an agreement that prevents either spouse from changing the Will without the consent of the other spouse.
3) Joint Wills - one Will prepared for both spouses

Question 22

What is the general structure of a Will?

Answer 22

• Initial Matters (eg. revocation of previous Wills, instructions to pay all debts, identifying the testator + executor)
• Disposition of Estate (eg. domestic articles aka “my stuff”, trust/estate residues, shares, specific bequests)
• Administration of Estate (eg. powers granted to trustee)
• Miscellaneous Provisions (eg. provisions for the purchase of estate assets by trustee)
• Guardianship of minor children (eg. choosing guardians, compensation, management instructions)

Question 23

How does compensation work for the executor?

Answer 23

The executor is entitled to some amount of compensation after the estate is wound up.
Determining the amount of compensation depends on the value and complexity of the estate, the execution, and the time commitments from the executor.

Usually the fees are in the range of
1% - 3% of the original estate assets, plus
1% - 3% of capital distributed, plus
up to 5% the income of the estate.

If estate establishes an ongoing trust, the executor may seek an annual management fee of 0.5% trust assets.

Question 24

What does a life interest in a property do?

Answer 24

A life interest in a property allows the indicated party to use the property for their specific lifetime.
Once the indicated party dies, the residual goes to a final beneficiary (aka the “Remainderman”).

Question 25

What is the Prudent Investor Principle?

Answer 25

If the testator/testatrix has confidence that the trustee will manage investments wisely, they can extend/expand the powers of the trustee to broaden their options in investments above those restricted by law.

If the investment portfolio of the deceased holds investments other than those permitted by the trustee legislation (eg. mutual funds), the trustee may be required to convert those investments to an acceptable category, unless the trustee was given the power to retain assets in specie (i.e., in kind).

Question 26

What is a Provision Against Ademption by Advancement?

Answer 26

The Provision Against Ademption by Advancement reduces a beneficiary’s bequest by the amount of a gift/inheritance given to them prior to the testator/testatrix’s death; this reinforces the equalization aspect of distribution.

If the testator/testatrix does not want these gifts prior to death to affect the distribution of his or her assets after death, they should include a specific provision against ademption by advancement in their Will

Question 27

What is a Power of Attorney (POA)?

Answer 27

A POA appoints another person to manage their affairs under specific circumstances.
A springing/contingent POA allows for the appointment to come into effect after a specified triggering event.

An Enduring POA allows for the maintenance of this appointment even under the incapacitation of the grantor.

Question 28

What is a Living Will?

Answer 28

A Living Will is a POA for personal care, aka a health care directive.
An appointment of a substitute decision-maker is called a proxy directive.

Question 29

What are the 4 Unities Requirements to form a Joint Tenancy?

Answer 29

PITT:
1) Unity of Possession - all must be entitled to own the entire property
2) Unity of Interest - all must have an identical interest in the party
3) Unity of Time - all must receive their interests at the same time
4) Unity of Title - all must receive their interest from the same instrument (eg. Will, Transfer of Deed)

Question 30

What happens when you die intestate?

Answer 30

When you die without a valid Will, the provincial surrogate court will appoint an administrator to act as the personal rep through the Letters of Administration.

The administrator is generally chosen through spouse > adult children > adult grandchildren > other descendants > father > mother > siblings
If no one is willing to step in, the provincial Public Trustee will act as the personal rep.

No one is permitted to touch the deceased’s property until an administrator is appointed.

Question 31

What does it mean for the estate to be a distributed per stirpes versus per capita?

Answer 31

Per stirpes means for each person from whom a family member descends (eg. if a 25% share is distributed per stirpes for your child “Joe” and he predeceased you, the 25% will be distributed to Joe’s children per capita).

Per capita means equally among all.

Question 32

What is Escheat?

Answer 32

If an individual dies intestate and has no descendants, ascendants, or collateral heirs (i.e., no relatives at all), the Crown, through the provincial government, becomes the ultimate heir through a process called escheat.

Question 33

What is probate?

Answer 33

Probate is the process of the provincial court validating the Will, thereby confirming the authority of the executors/administrators.

The letters probate documents the certification, and the probated Will becomes the valid Will used by institutions.

Probate may not be required in all estates, but is required in intestacy and an estate involving litigation.

Question 34

What are probate fees and how are they calculated?

Answer 34

Probate fees are charged by the province to review the estate and issue letters probate.

The differ provincially; in Ontario, they are on the value of assets less encumbrances, of:
$5 for every $1,000 of assets up to $50,000 (max. $250)
$15 for every $1,000 of assets over $50,000

Question 35

What is donatio mortis causa?

Answer 35

Donatio mortis causa is a gift that is completed on the donor’s death -“a gift made in contemplation of death”, therefore conditional upon the death itself.

Not included to calculate probate fees.
Real property cannot be subject to this gifting rule.

Question 36

What are the 3 certainties required to create a valid trust?

Answer 36

1) Certainty of Intent - Must be a clear intention to create a trust
2) Certainty of Subject Matter - Property to be held in trust must be clearly identified
3) Certainty of Objects - The beneficiaries of the trust must be clearly identified

Question 37

What is a precatory trust?

Answer 37

In a precatory trust, the transferor (settlor) is relying on the moral values of the recipient to carry out his/her wishes.
No true trust has been established - the recipient has absolute control over the property.

Question 38

What is the rule against remoteness of vesting for trusts?

Answer 38

The rule against remoteness for vesting (perpetuity rules) requires the trust property to vest with its beneficiaries at a maximum of 21 years of existence. (One exception: charitable trusts)

If the trust is set up such that the property is vested outside the perpetuity period of 21 years, the trust could be declared void from the beginning.

Question 39

What are some exceptions of testamentary trusts to be taxed at the highest MTR?

Answer 39

1) Estates designated as gradual rate estates will be subject to graduated (progressive) rate taxation for the first 36 months of their life, after which it will be subject to the highest rate.
2) Testamentary trusts that are set up for the benefit of individual(s) eligible for the DTC, electing it to be a qualified disability trust.

Question 40

What is the difference between mere power vs. trust power for discretionary trusts?

Answer 40

Mere power allows the trustee to distribute some or all of the income or property to beneficiaries at their discretion.
Trust power requires the trustee to distribute income and/or property.

Question 41

What is the taxation year-end for TRUSTS and what are penalties for missing filing deadlines?

Answer 41

With the exception of graduated rate estates, the taxation year-end is December 31st of the calendar year.

There is a penalty for not filing an information return by 90 days after December 31st of $25/day, with a minimum of $100 and a maximum of $2,500.

Question 42

What is a preferred beneficiary election?

Answer 42

For trusts, the preferred beneficiary election allows the trust to retain income while including it in the beneficiary’s income, therefore the beneficiary is the one who pays tax for it.

This election is only available for trusts with disabled beneficiaries.

Question 43

What is the common use for spousal trusts?

Answer 43

One common use for spousal trusts is the spouse as the income beneficiary and the children as the capital beneficiaries upon the death of the surviving spouse.
The income must be used for the spouse as it is one of the qualifiers to indicate the trust as such.

As it is a spousal trust, any deemed disposition would be rolled over to the trust and deferred until the death of the spouse.

Question 44

What is an alter ego trust?

Answer 44

An alter ego trust, only able to be formed by a settlor 65yo or older, allows the settlor to transfer property to the trust at cost and names someone else the income and capital beneficiaries upon the settlor’s death.
Upon death of the settlor, the property will be deemed disposed at FMV, bypassing probate, therefore acting as a Will.

A joint spousal trust is a type of alter ego trust with two settlors (spouses) who can use income/capital in their lifetimes.

Question 45

What is a protective trust?

Answer 45

A protective trust is when the settlor is the sole beneficiary, generally used to protect against those who hope to gain control over their property while alive. Assets revert to the settlor’s estate once the settlor dies with this type of trust in place.
No age limits on protective trusts.

Question 46

How do you set up an insurance trust?

Answer 46

To set up an insurance trust, you need it to be specify that the terms are intended to be a designation under the Insurance Act, or write out a separate trust agreement.

Once completed, the proceeds of the insurance policy will not be included in the estate, therefore bypassing probate, protecting it from creditors, and making the agreement difficult to contest.

The 21-year rule does not apply to insurance trusts as they are set up using insurance proceeds, not capital property.

Question 47

What is loco parentis?

Answer 47

Loco parentis, “in the place of the parent”, means the step-parent has assumed the responsibilities of a parent.
The implications of this is that the step-parent would have a continuing obligation for support of their stepchildren after death if the stepchildren were dependent upon the deceased.

Question 48

What are some special rollover provisions for farms and fisheries?

Answer 48

When a taxpayer bequeaths interest in capital farm or fishery to a child (or grandchild) resident in Canada, the proceeds of the disposition may be deemed the lesser of the ACB and its FMV.

If this rollover provision is used, the recipient’s ACB can be elected at some amount between the proceeds of disposition and the ACB.

Special care must be taken as opting out, or admitting a partial rollover, may be beneficial by way of the LCGE.

Question 49

What happens to the CPP benefit for a surviving spouse?

Answer 49

You get survivor’s benefit of 60% (>65yo) or a flat-rate plus 37.5% of the deceased spouse’s benefit (35-64yo) added to your own.
The surviving spouse can never get more than the maximum CPP benefit amount for that year.

Question 50

How do charitable donations using residual trust work?

Answer 50

In the case of a residual trust, the settlor retains the right to use and enjoy the gifted property as they are alive (life interest) and the charity receives a residual interest in the property (remainderman).

Once assets are transferred, an estate freeze has essentially been implemented, with capital gains accruing to the charity and not realized while the charity decides to dispose of the property (charities are not taxed on CGs).

Question 51

How do charitable donations work for assigned insurance policies?

Answer 51

Term policies: the premiums qualify for the donation credit when the policy is assigned
Whole life policies: the cash surrender value will qualify for the donation credit when the policy is assigned

Question 52

What are some methods of freezing an estate?

Answer 52

1) Selling/Gifting assets to beneficiaries prior to death - attribution rules, loses control
2) Transferring assets to an inter vivos trust - attribution rules for minor beneficiaries, maintains control
3) Creating a new holding company (Section 85) - maintain control, shares held in trust for minors, can use LCGE
4) Reorganizing the share structure of an existing corporation (Section 86) - maintain control, less steps, can use LCGE

Question 53

What is the unified tax credit?

Answer 53

The unified credit is a tax credit deducted from U.S. estate taxes available to U.S. citizens/residents/certain non-resident aliens.
The current unified tax credit is an exemption of $12,060,000 for 2022.

Question 54

What are situs assets?

Answer 54

Situs assets are all real and personal property normally located in the U.S. regardless of location of purchase and location at death.
If at time of death the worldwide estate of a Canadian resident is less than $12M US, the U.S. will only impose estate tax on U.S. real estate and personal property part of the business property of a permanent establishment in the U.S. (eg. U.S. corporate shares)

Question 55

What is included in the Canada - U.S. Income Tax Treaty in relationship to estate taxes?

Answer 55

• A small estate provision for non-resident aliens with worldwide estates <$1.2M, imposing estate tax only on real estate.
• A Canadian as a non-resident alien can claim a prorated portion of the max unified tax credit to offset U.S. estate taxes, based on the proportion of U.S. situs asset values to worldwide asset values. CANNOT be less than $13,000.
• A marital credit to allow for a non-resident alien to transfer assets to Canadian spouse upon death without incurring estate taxes, to the lesser of {prorated unified tax credit, amount of U.S. estate tax imposed on situs assets}
• A foreign tax credit generated from the capital gains from deemed disposition of U.S. property upon death.

Joint U.S. properties’ entire values are included in the estate of the deceased unless the surviving tenant proves to have paid a proportionate share in acquiring the asset (spouses are deeemd 50/50)

Question 56

What is a Henson Trust?

Answer 56

A Henson trust is a qualified disability trust that can be taxed at graduated rates like an individual so long as the beneficiary continues to be eligible for the DTC.

Question 57

What is the special provision for depreciable property upon death that applies to disposition from the beneficiary after distribution?

Answer 57

The special provision essentially disallows the property from being sold at a capital gain (50% tax) and instead at a recapture (100% tax).

The FMV (deemed proceeds) of the property is deemed to be the UCC of the property of the beneficiary instead of the ACB as per usual provisions. The ACB of the property for the beneficiary will be the original ACB of the deceased.
The ACB - UCC, then, will count as the CCA already claimed for the property.

Question 58

What is the taxation year-end for ESTATES and what are penalties for missing filing deadlines?

Answer 58

For deaths Jan 1 - Dec 15, filing deadline is Apr 30th (Jun 15 for self-employed). For Dec 16-Dec 31, it is 6 months after death.

If you file late and there is a balance owing, the penalty is 5% of the balance owing PLUS 1% for every month it is late to a max of 12 months.

Balance payment deadline is always Apr 30th of the following year.

Question 59

What document does the executor need to distribute assets?

Answer 59

A clearance certificate, which indicates that all taxes, CPP contributions, EI premiums, interest and/or penalties have been paid. Distribution of property prior to obtaining this certificate makes the executor liable for any unpaid amounts.

Question 60

What are some optional returns available to file for a deceased?

Answer 60

1) Rights and Things - amounts still owed to the taxpayer (must be filed by later of 90 days after CRA mails NOA or 1 year after date of death). Includes uncashed bond coupons, earned + unpaid bond interest, unpaid declared dividends, etc.
2) Business Income as a proprietor/partner - may have a fiscal year as a non-calendar year.
3) Testamentary Trust - may have a fiscal year as a non-calendar year.

Question 61

What are credits you can claim on EACH optional return?

Answer 61

1) Basic personal amount
2) Age amount
3) Amount for the spouse or common-law partner (NOT transferred amounts)
4) Eligible dependent amount
5) Amounts for infirm dependents who are 18 years of age or older

Question 62

What are credits you can split across optional returns?

Answer 62

1) Disability amount for the deceased
2) Disability amount for a dependent other than a spouse or common-law partner
3) Tuition, education and textbook amounts for the deceased
4) Tuition, education and textbook amounts transferred from a child
5) Cultural, ecological, and government gifts
6) Charitable donations that are not more than 100% of the net income that you report on that return
7) Medical expenses (net income calculation must be done on all returns this is applied)

Question 63

What is a Granny Trust (aka. an inbound trust)?

Answer 63

A granny/inbound trust is a foreign trust set for Canadian beneficiaries and a non-resident settlor.
To set it up correctly, it must be managed and controlled outside of Canada, and no Canadian contributors at any time.

The trust’s income and gains will accumulate and added to the capital of the trust, which then allows the beneficiary to receive capital free from Canadian income tax to the beneficiary living in Canada.

Question 64

What is an immigration trust?

Answer 64

An immigration trust is a non-resident trust established for the benefit of immigrants to Canada that offers the opportunity to avoid income tax and capital appreciation for assets held for up to 60 months

Question 65

What is the Saunders v Vautier rule as it relates to trusts?

Answer 65

The Saunders v Vautier rule states that if the trust beneficiaries are age of majority and of full mental capacity, they are absolutely entitled to all the property in the trust, therefore allowing the beneficiaries to demand payment from the trustee.

A way around this rule is for the trust to include a secondary beneficiary such as a charity to the trust document, because then the entitlements of the beneficiaries will be unknown until the trustee actually distributes the funds.