ESTATES I

Question 1

ESTATE PLANNING INTRO

Answer 1

Your estate is whatever you own and have rights to, less your debts. As your estate grows, so does the need to plan what will happen to it when you die.

Planning an estate involves decisions now: buying insurance, giving gifts and making your assets grow. But it doesn’t stop there. As your life changes — you get married, have children, get divorced, inherit money — and as tax and estate rules are modified, you must update your estate plan.

Question 2

Main Objectives to Estate Planning

Answer 2

The orderly distribution of the estate, including identification of heirs and up-to-date wills and/or trusts.

The minimization of taxes and costs. (Taxpayers are allowed to arrange affairs in order to minimize but not evade — taxes.)

The protection and support of dependants.

Question 3

TAX SAVING TECHNIQUES

Answer 3

TAX-SAVING TECHNIQUES

Tax-saving techniques are designed to permanently eliminate or reduce the payment of certain amounts of tax.

Tax-saving techniques include:

Income splitting

Interest deductibility

Tax-free employee benefits

$824,176 (2016) lifetime capital gains exemption (LCGE) for QSBCS (Qualified Small Business Corporation Shares) and $1 million (2016) for QFFP (Qualified Farm and Fishing Properties). The combined QSBCS and QFFP exemptions cannot exceed $824,176 for QSBCS and $1 million for both.

Principal residence exemption

Tax-free Savings Account (TFSA)

Question 4

Tax-Deferral Techniques

Answer 4

Tax deferral is based on the idea that it is better to pay taxes later than it is to pay them today.

Deferral arrangements may involve either the delayed recognition of certain types of income or, alternatively, accelerated recognition of deductions.

Question 5

Examples of Statutory Plans to Defer Tax

Answer 5

Some of the statutory plans used to delay the recognition of income to defer taxes-include:

RRSPs: Contributor receives tax deduction plus tax sheltered growth.

RPPs: Contributors (employers and employees) receive tax deductions and employee receives tax-sheltered growth.

DPSPs: Employers receive tax deduction and employees receive tax-sheltered growth. (employees cannot contribute).

RRIFs: Tax-sheltered payout from RRSPs.

LIFs and LRIFs: Tax-sheltered payout from LIRAs or locked-in RRSPs (available in most provinces).

Question 6

Transfer of Property Before Death

Answer 6

One of the surest ways to ensure that your beneficiaries get what you intended and to decrease the tax load at death is to transfer property before you die. However, you have to be careful not to trigger capital gains or other income (i.e., recapture) on the transfer.

Question 7

Gifts of Capital Assets

Answer 7

Gifts of Capital Assets

If your assets are transferred on a non-arm’s-length basis, they are deemed to be sold at fair market value (FMV), unless they are:

• Transferred to a spouse or spouse trust.

• Qualified farm and fishing property transferred to a child.

• Tax-deferred transfers to a Canadian corporation.

If the gifted asset was income-producing, you benefit because you will reduce your future income. However, since gifts to anyone other than your spouse are transferred at fair market value, you may trigger an accrued capital gain on the transfer. In addition, if the transfers are to a spouse or minors, the attribution rules may apply. Finally, since you will no longer control the asset, you will not benefit from future growth and may have inadequate income in the future.

Question 8

SPOUSAL TRANSFERS 1

Answer 8

Since transfers to spouses, spousal trusts or a former spouse in settlement of divorce occur automatically at tax cost, there is no income to the transferor on the transfer. However, the attribution rules may apply. Spouses include common-law partners including same-sex partners.

Question 9

SPOUSAL TRANSFERS 2

Answer 9

If you give your spouse or common-law partner a capital property, the CRA typically does not require you to report a capital gain or pay taxes on the transfer. Instead, the CRA considers that you have gained the value of the property, but that your spouse or common-law partner has spent that same amount, and as a result, the two figures cancel each other out.

However, if your spouse or common-law partner sells the property during your lifetime, you usually have to report the proceeds of the sale as a capital gain on your income tax. If you are living apart at the time of the sale due to a breakdown in the relationship, you may not have to report the income as a capital gain.

Question 10

ESTATE FREEZE 1

Answer 10

Estate Freeze

An estate freeze is a method to freeze all or part of the value of growing assets at their current fair market value so future growth accrues to the next generation of family members and not to the taxpayer at disposition or death.

Estate freezes typically utilize inter vivos (living) trusts and holding companies as the vehicles to accomplish the freeze. For example, you can transfer “growth” assets to a corporation and receive “non-growth” preferred shares (frozen shares) in exchange. The common shares of the corporation would be issued to the next generation, so that all future growth accrues to them.

Question 11

INTER VIVOS TRUST 1

Answer 11

Inter Vivos Trusts

A trust can be used to retain control over assets even though beneficial ownership has been transferred. A trust established while an individual is alive is called an inter vivos or living trust. (A trust established in a will is known as a testamentary trust.)

An inter vivos trust is an express trust, created by a transfer of property and can be either revocable or irrevocable. It has three parties (although two of these parties may be the same person):

• A settlor, who contributes property to the trust and creates the terms of the trust.

• A trustee who receives the property and carries out the terms of the trust.

• A beneficiary who receives the ultimate benefit from the property.

Assets transferred to an inter vivos trust do not form part of the estate and are not subject to probate fees.

Question 12

What is an Inter-Vivos Trust?

Answer 12

What is an Inter-Vivos Trust?

An inter-vivos trust is a fiduciary relationship used in estate planning created during the lifetime of the trustor.

Also known as a living trust, this trust has a duration that is determined at the time of the trust’s creation and can entail the distribution of assets to the beneficiary during or after the trustor’s lifetime.

The opposite of an inter-vivos trust is a testamentary trust, which goes into effect upon the death of the trustor.

Question 13

BENEFIT OF INTER VIVOS TRUST

Answer 13

Understanding Inter-Vivos Trust

An inter-vivos trust is important because it helps avoid probate, a process of distributing the deceased’s assets in court. This process can be lengthy, costly and also expose a family’s private financial matters by making them a matter of public record. A properly established trust helps ensure assets go to their intended recipients in a timely and private matter.

Question 14

HOW AN INTER VIVOS TRUST WORKS

Answer 14

How an Inter-Vivos Trust Works

An inter-vivos trust is an estate planning vehicle that can own the assets during the trustor’s lifetime. The primary purpose of establishing a living trust is to make assets more easily transferable to the trustor’s beneficiaries without the encumbrance and expense of probate proceedings.

In addition to eliminating the expense and delay of probate, a trust can also ensure the estate is settled without the publicity of probate. The ultimate benefit for the surviving family is the transfer of assets is conducted in a smooth and efficient manner to prevent any disruption in their use.

While living, the trustor, or trustors in the case of a married couple, can be the trustee, managing the assets until they are no longer able, at which time a named backup trustee assumes the duties.

A living trust is revocable, which means any of the provisions and designations can be changed while the trustor is alive. It becomes irrevocable after the death of the trustor.

Question 15

SETTING UP AN INTER VIVOS TRUST

Answer 15

Setting up a Trust

In establishing a trust, the grantor names the trust parties, which include the grantors, typically the husband and wife; the beneficiaries; and the trustee. In most arrangements, the spouses are named as trustees. However, a contingent trustee should be named in the event both spouses die.

Just about any asset can be owned by a trust. Assets such as real estate, investments and business interests can be re-titled in the name of the trust. Some assets, such as life insurance and retirement plans pass to a designated beneficiary so they need not be included.

In addition to assigning assets to specific beneficiaries, a trust can include instructions for the trustee to guide the timing of distribution and management of the assets while they are still held by the trust.

A will is needed to execute the trust. Essentially, the trust becomes the primary beneficiary of a will. In addition, a will acts as a “catch-all” mechanism that determines the disposition of assets that might have been excluded from the trust. It is also the will that establishes guardianship for minor children.

Question 16

Why Set Up an Inter Vivos Trust?

Answer 16

Why set up an inter vivos trust?

To minimize estate taxes or fees

To provide continuity of management of assets in the event of incapacity or after death.

To manage assets for your spouse and/or children (e.g., underage children, spendthrift family members, dependents with special needs)

To provide for a favourite charity

To protect assets from creditors

To reduce income tax through income splitting

Question 17

INCOME SPLITTING & ATTRIBUTION / CHILDREN

Capital gains earned on disposition of property by child.

Answer 17

Capital gains earned on disposition of property by child. The attribution rules for children who are minors (under the age of 18 at year-end) apply only to property income (dividends, rent, interest and royalties) and not to capital gains.

Since capital gains earned on dispositions of property by a minor are taxable to the minor, it may be advantageous to loan or transfer funds to a child to invest in assets that tend to generate more capital gains than income over time. Also, a parent could transfer capital property that would only generate capital gains (i.e., a piece of art) to a child.

Question 18

INCOME SPLITTING

CPP BENEFITS

Answer 18

Splitting CPP benefits. If both spouses are at least 60, CPP benefits can be split using the ratio of time the couple is living together to the period of time that contributions were made.

Question 19

INCOME SPLITTING

SPOUSAL RRSPS

Answer 19

Spousal RRSPs. To prevent misuse of this provision, amounts withdrawn will be included in the taxable income of the contributor, not the annuitant, to the extent that any contributions were made in the year of withdrawal or any or the two previous calendar years.

Question 20

HOW MUCH CAN BE INVESTED IN A SPOUSAL RRSP?

Answer 20

How much can be put into a spousal RRSP?

The amount that you can invest into an RRSP during any given year is called your contribution room or limit. It is indicated on your notice of assessment. Whether you contribute to your own RRSP, a spousal RRSP or both, you cannot put in more than that contribution limit. Your spouse’s contribution limit is not affected by a spousal RRSP.

Question 21

ADVANTAGES OF A SPOUSAL RRSP

Answer 21

Advantages to spousal RRSP contributions?

They allow for income balancing if you make more money than your spouse. In Canada, couples that have equal income basically receive double the tax deductions. Spousal RRSPs are a way for couples to split retirement income. The money you put into an RRSP is allowed to grow tax-deferred. That means you do not pay income tax on it until you take it out of the plan.

If only one spouse has a large amount of money in an RRSP, at retirement that will mean a high income and pay more income tax than if each spouse has the same amount divided between their RRSPs. Both spouses would then be in a lower tax bracket and pay income tax at the same lower marginal tax rate.

It may also be useful to build a nest egg for the first retiree if you will not be retiring at the same time. Current pension income splitting rules have somewhat diminished the need to use spousal RRSPs to achieve a tax benefit but individual circumstances may still maintain some benefit besides the fact that the income splitting effect is established at the time of contribution and not at the time of withdrawal; thus not subject to changes in tax rules.

Answer 22

Income (and losses) from property transferred or loaned to a spouse or minor

If an individual transfers or loans property to:

His or her spouse or common-law partner, or a person who has since become the individual’s spouse or common-law partner; or

A family member who is under 18 years of age.

Any income or loss from the property is deemed to be the income or loss of the individual transferring the property, not of the spouse or minor. This means that the transferor still must declare the income and pay tax on it at his or her marginal tax rate. Legal ownership of assets has no bearing on the attribution rules.

Question 23

INCOME ATTRIBUTION
SECOND GENERATION INCOME

Answer 23

Second Generation Income

• *Where income earned by the transferee is re-invested in income-producing properties, the transferee will earn income on income, also referred to as second generation
  income. **

The attribution rules do not apply to this second generation income. In order to keep track of the second generation income, the most practical approach is to set up
two accounts. The transferred property is invested in the first account.

All interest and dividends earned on the transferred asset can be transferred to the second account.
This exception to the attribution rules on second generation income applies only to income from property, not gains from the disposition of property

Question 24

ATTRIBUTION RULES

FAIR MARKET VALUE TRANSFERS

Answer 24

Fair market value transfers.

If an individual makes a loan to a spouse or child, which the spouse or child uses to invest, and a prescribed or commercial interest rate is charged and paid each year or within 30 days after year-end, the attribution rules do not apply.

Similarly, if an individual transfers property to a spouse or related minor (and reports any resulting gain) and receives back from the spouse or child cash or property of equal fair market value as consideration, attribution rules will not apply.

(Note: For transfers to spouses, an election must be made to transfer or loan property at fair market value; otherwise the transfer will automatically take place at tax cost).

Question 25

ATTRIBUTION RULES

BUSINESS INCOME

Answer 25

Business income. If a loan or transfer is made to earn business income (as opposed to income from property), there is no attribution.

Question 26

ATTRIBUTION RULES

OTHER

Answer 26

- Business income. If a loan or transfer is made to earn business income (as opposed to income from property), there is no attribution.

- Reasonable salaries paid to a spouse or other family members.

- Payment of household expenses and taxes by higher-income earner. The lower-income earners will have more money to invest, thereby increasing their investment income, which will be taxed at lower rates.

- Transfers of assets to children who are > 18. Both income and capital gains are taxed at the tax rate of children who are 18 years and older.

Question 27

PENSION INCOME SPLITTING

Answer 27

Pension Income Splitting — Tax Fairness Plan

The pensioner is someone in receipt of eligible pension income. A pensioner may shift as much as 50% of eligible pension income to their spouse or common law partner. Eligible pension income qualifies for the $2,000 Federal Pension Income Tax Credit. The federal tax credit or savings is 15% of the $2,000 or $300 [$2,000 x 15%].

Question 28

PENSION SPLITTING

Eligible Pension Income for people under age 65

Answer 28

Eligible Pension Income for people under age 65 (at the end of the year):

1. Income from a life annuity from a registered pension plan

2. Income received as a consequence of the death of a spouse arising from:

n an annuity under a matured RRSP

• a payment from a RRIF, LIF, LRIF

• an annuity payment from a DPSP

• the taxable portion of a non-registered annuity (prescribed or non-prescribed).

Question 29

CAPITAL GAINS ON PROPERTY
TRANSFERRED TO A MINOR

Answer 29

One of the most significant opportunities in the attribution rules applies to capital gains and minor children.

Capital gains (and losses) realized on the disposition of property by a minor does not attribute to the transferor. It is therefore advantageous to invest in assets that generate capital gains as opposed to income producing assets.

In-trust for accounts are commonly used for income splitting purposes with minor children.

Question 30

Explain How a Inter Vivos Trust is Set Up

Answer 30

Setting Up a Trust

In establishing a trust, the grantor names the trust parties, which include the grantors, typically the husband and wife; the beneficiaries; and the trustee. In most arrangements, the spouses are named as trustees. However, a contingent trustee should be named in the event both spouses die

Just about any asset can be owned by a trust. Assets such as real estate, investments and business interests can be re-titled in the name of the trust. Some assets, such as life insurance and retirement plans pass to a designated beneficiary so they need not be included

In addition to assigning assets to specific beneficiaries, a trust can include instructions for the trustee to guide the timing of distribution and management of the assets while they are still held by the trust

A will is needed to execute the trust. Essentially, the trust becomes the primary beneficiary of a will. In addition, a will acts as a “catch-all” mechanism that determines the disposition of assets that might have been excluded from the trust. It is also the will that establishes guardianship for minor children

Question 31

ESTATE FREEZE 2

Answer 31

DEFINITION of Estate Freeze
An estate freeze is an asset management strategy whereby an estate owner seeks to transfer assets to his or her beneficiaries, without tax consequences. In some estate freeze scenarios, the estate owner transfers shares of common stock to a company he invests in, in exchange for preferred shares. The company in turn issues new shares of common stock to the beneficiaries, at nominal value.

The main goal of an estate freeze strategy is to avoid capital gains tax, and when owners exchange assets for preferred stock, no capital gains taxes are incurred. Furthermore, Appreciation and inflation can radically increase an individual’s estate tax burden, upon death. Consequently, any estate-reducing program is more effective if it includes techniques capable of shifting appreciation and income to a decedent’s intended beneficiaries.

Question 32

ATTRIBUTION

FAIR MARKET TRANSFERS

Answer 32

Fair market transfers

If an individual transfers property to a spouse, or common-law partner, the attribution rules will not apply where cash or property of equal fair market value is taken
back as consideration.

This exception to the attribution rules can be exploited where the high-income spouse has transferable income-earning assets and the low income spouse has assets that do not produce income. For example jewelry, art, a cottage and an interest in a principal
residence could be used as consideration in a fair market transfer.

Since the transfer of assets will be done at fair market value, the tax liability of the capital gains that are realized will need to be accounted for when determining the benefit of this strategy