The Financial Advisor Guide to Estate Planning
Self Study Course # 9
INTRODUCTION TO ESTATE PLANNING
There is a widespread misconception that "estate planning" is of importance only to
the wealthy. This is due, in part, to the emphasis of the financial service industry on
planning for estate taxes, which only concern larger estate owners. This course,
above all, should help you recognize a number of other significant issues that
deserve everyone's attention. Other courses explore the legal concepts and
procedures, as well as the tools and methods of estate planning, probate, wills, and
trusts.
Although one's "estate" is adequately defined as his or her "property," there is no
precise definition of "estate planning." Your clients’ estate plan can be viewed as a
series of steps to be taken, so that after you die, your property will be handled in a
way that recognizes your values and wishes regarding your survivors and any
charitable interests you might have. When folks start thinking about these things,
some important lifetime concerns often come to mind, too, such as preparing for
possible physical or mental disability. So those issues are frequently addressed as
well when one plans his or her estate.
Where to Start? The prospect of estate planning can be intimidating because there
is usually no single clear answer to that question - there can be so many interrelated human and financial factors to consider. Perhaps your thinking should focus
on these two questions:

First, if you died tomorrow, what would you want to happen?

Secondly, what, most likely, actually would happen?
A good estate plan is designed to bring reality in line with the client’s desires, to the
greatest extent possible, given the practical problems and limitations you face. The
steps in the plan might include candid family discussions, drafting a will and trust,
changing the beneficiary designations on some accounts, buying life insurance, etc.
As for "problems," experience shows that the most common ones are insufficient
money to fund all of one's goals and survivors who do not act as hoped or expected.
Estate Planning - SSC #9
Pro-Seminars International 10/07
2
SO WHAT IS ESTATE PLANNING?
They say there are only two certainties in life, death and taxes. Unfortunately, one
cannot escape income taxes even after death – the taxman persists in collecting
what’s due!
Planning for the estate during one’s lifetime is essential if income taxes and probate
fees are to be minimized on death. Planning will also help ensure that estate assets
are distributed in accordance with the wishes of the deceased. Estate planning
should be an ongoing process, well organized at the beginning and reviewed
periodically to ensure it is correct.
Therefore, if financial planning is the art of creating wealth, estate planning is the
science of how to disperse it. This enables the estate owner to direct assets to
where they should go, while at the same time minimizing the tax implications so as
not to suffer exorbitant estate shrinkage. Unfortunately, it is not an exact science,
and when taxation and human emotions and desires are added into the chemistry, it
may produce results other than the optimum. In addition, nothing frays the family
ties like inherited wealth or future expectations of receiving money. At all times, a
professional team or associate will be working with the Life Underwriter to bring to a
close this particular human saga. It is not uncommon for larger estate settlements
to work with a law firm, accounting firm and a Trust Officer. In small cases, a lawyer
and the Executor (usually the spouse) will complete the picture about the human
potential to want to leave a mark, protect their family and help their favourite
charities.
Every Estate, large and small requires liquidity. Liquidity and asset accumulation
attracts taxation. Life insurance proceeds are not taxable, so large sums of money
can be transferred just when needed most, at the death of the estate owner, and no
tax will be paid. Quite an advantage over all other forms of estate assets, all which
must pay the taxman his due.
3
Estate Planning - SSC #9
Pro-Seminars International 10/07
Life Insurance can be inflation-proofed to deal with death, taxes and bequests long
after the policy was acquired. Life Insurance policies combined with equity products
provide a double-barreled approach to offsetting inflation. Inflation results in
diminished future value, Life Insurance and equity products result in indexed future
gain. All without taxation or in the case of equity products, tax-favoured results.
The Estate Planning process starts well before it is needed, in fact, it is a factor in
Financial Planning, and that part of the plan deals with the estate owner arranging
their affairs, so as to enjoy the benefits while alive as well as accomplish their
desires after death.
Due to substantial taxes at death, conservation is a problem that must be dealt with
before death and disposition has to be planned for to facilitate an orderly passing of
the estate assets.
Estate Planning may not start with a Will, but it always ends with a Will, and so
careful thought and counsel is required to properly set one up. It requires legal
advice from a competent lawyer and sometimes, from an accounting firm. In large
estates, Trust Companies may be utilized to provide administration and to act as a
vehicle of transfer.
Wills lay out an orderly dispersal of the estate assets according to the deceased’s
wishes, keeping in mind certain regulations outlines in law. If the deceased did not
file a Will, the courts will arrange the passing of the assets under the law of intestate
provision.
These laws vary from province to province. Other laws that influence the estate
settlement are the Family Law Act and The Succession Law Reform Act. The
fundamental purpose of a Will then, is the orderly dispersal of the estate. The
purpose of Estate Planning is to give the deceased the full use of their possessions
while alive, at the same time planning for dispersal of assets while alive or following
death.
It is necessary to understand the terminology used to be able to comprehend the
functions of estate planning in general.
Estate Planning - SSC #9
Pro-Seminars International 10/07
4
THE FIVE STEPS TO ESTATE PLANNING
STEP 1. SETTING OBJECTIVES
The first step involves determining those objectives you wish your plan to achieve.

To ensure that your property is used and distributed, both during life and after
death, according to your wishes.

To minimize tax on your income, savings and investment returns both during life
and after death.

To ensure the estate is large enough to provide financial security at retirement
or in the event of disability.

To pay all just debts, including taxes and final expenses.

To ensure that your family’s needs are provided for in the event of your death or
disability.
STEP 2. COLLECTING AND ANALYZING DATA

Identify assets and the form of ownership.

Identify liquid and non-liquid assets.

Determine cash needs at death SUCH AS:

Administrative costs

Funeral Expenses

Outstanding Debts.

Personal Income Taxes

Family Living Expenses.

Cash Bequests
If cash is not available, non-liquid assets may be sacrificed.
5
Estate Planning - SSC #9
Pro-Seminars International 10/07
STEP 3. STRATEGIES FOR TRANSFERRING YOUR ESTATE
This step requires careful planning and needs to be integrated and balanced with
your long-term goals and needs.
TRANSFER OF PROPERTY DURING LIFE (INTER-VIVOS)
By Sale
This is a transfer of ownership for a consideration. A consideration is the exchange
of values, such as deeds, money or property by parties to the contract. The sale of
an item worth $50,000 for $100 is still a sale, not a gift.
The sale is considered by Canada Revenue Agency to be either:
a) At arms-length. This means the parties are independent of each other,
Or:
b) Non-Arms length. This means the parties are operating in collusion.
When Canada Revenue Agency determines a non-arms length transaction, they
may deem the sale to be for Fair Market Value when assessing capital gains to the
seller.
By Gift
This means transferring ownership (or part ownership) to another person for no
consideration. Canada Revenue Agency may deem the gift to have been disposed
of at fair market value in assessing capital gains to the giftor.
Rights or things
This is a special Election so that the value may be taxed as if earned by another
person. The estate has the right to make this decision for up to one year, after
death. If the Right or Things is transferred to a beneficiary (within that year) it will be
taxed at the beneficiary’s rate.
This gives rise to two tax planning techniques:
1) The deceased’s tax credits can be claimed twice.
2) It transfers the income from the deceased’s high tax bracket to a lower tax
bracket.
Estate Planning - SSC #9
Pro-Seminars International 10/07
6
INTER VIVOS TRUST
The taxpayer could set up a trust during his/her lifetime and transfer property to the
trust for the benefit of children, spouse or whomever. At death, the property does
not form part of the estate. The trust document will dictate how the property is to be
distributed, much like if the property was left to be distributed from a will. However,
a taxable disposition will arise when the property is transferred to the trust and the
attribution rules may apply on income earned in the trust if the income is allocated to
a spouse or minor child.
A simple way to explain Inter Vivos Trusts
It is a simple trust created during the life of the grantor. Assets are transferred to
the trust and the trustee provides administration of the assets and income derived
for the benefit of the beneficiaries. The grantor names the beneficiaries when the
trust is established.
Transfer of Property at Death
Most common methods are:

Designation of a specific beneficiary

Tenancy in common

Joint tenancy

Testamentary Trust

Wills

Intestacy (without a will)
Notes to Transfer:
1) Tenancy in common, is a method of property ownership. Two people or more
hold an undivided interest in the property. On the death of
one of the
Tenants in common, their share passes to their heirs or assigns.
2) Joint Tenancy. At death of one tenant, the full title to the property passes to the
surviving tenant (s).
Joint Ownership applies when property is owned with a spouse or child in joint
tenancy with right of survivorship. At death, the deceased’s interest in the property
disappears and is totally owned by the surviving joint owner.
7
Estate Planning - SSC #9
Pro-Seminars International 10/07
No part of the property is included in the deceased’s estate. Care must be taken
when setting up this arrangement. A taxable disposition may occur when
transferring partial ownership to another person. In addition, if the new joint tenant
(spouse or minor child) does not pay for their interest in the property, any income
earned from this person’s portion of the property may be subject to the attribution
rules and taxed in the hands of the original owner.
DESIGNATION OF A SPECIFIC BENEFICIARY
Insurance monies payable to the policyowner or the estate of the insured are not
afforded the same protection as insurance monies payable to a named beneficiary.
For example, in Ontario, beneficiaries named in an insurance policy, or in an RRSP
or RRIF issued by insurance companies, flow directly to the beneficiary, thus
bypassing the estate and probate fees.
With respect to the payment of probate fees, there is a difference of opinion as to
whether RRSP’s etc. issued by non-insurers with a named beneficiary are included
in an individual’s estate and in the calculation for probate fees. RRSP’s issued by
insurance companies afford individuals with one uniformly recognized method of an
insurance policy, RRSP or RRIF, individuals are advised to name beneficiaries and,
if probate fees are a concern, might consider having their RRSP’s with insurers.
Other provinces with the same definition of insurance monies as Ontario will have
similar laws. In addition, naming your spouse as successor annuitant on your RRIF
or having a joint and last survivor annuity will avoid probate fees.
Beneficiary plan may not be so simple
You go to the counter at your local financial institution, hand over a cheque for your
RRSP contribution and fill out a form that has space to name a beneficiary. You
might be told that if you name your spouse when you die the money could be rolled
to his or her RRSP or RRIF without getting taxed.
This statement is true under the Federal Income Tax Act. Nevertheless, that is not
the end of it. Each province has legislation governing which plans can have
beneficiaries designated outside a will.
Estate Planning - SSC #9
Pro-Seminars International 10/07
8
Depending on your will – or lack thereof and where you live, the designation on the
RRSP or RRIF form you fill out at the bank, trust company or credit union may or
may not determine who gets the money when you die.
Alberta’s law does not specifically include RRSPs and RRIFs among the plans for
which beneficiaries can be named outside a will. The Alberta Law Reform Institute
has recently recommended that RRSP and RRIF designations be included and
recognized.
Ontario’s law includes RRSPs but not RRIFs. To make sure your money goes to
the right person, put it in your will. The Ontario attorney general’s office has
indicated this will be looked at the next time the Succession Law Reform Act is
amended.
The other common-law provinces already do recognize the designations. Even
when an over-the-counter designation is recognized, the money still passes through
your estate and could be subject to probate tax and creditors claims. The only
exceptions at the current time are Prince Edward Island and British Columbia.
Quebec allows beneficiary designations outside a will only in life insurance
contracts, and fixed term annuities issued by provincially chartered trust companies.
Across Canada, beneficiary designations for RRSP and RRIF accounts at life
insurers are governed by a uniform set of provincial statutes. Money can pass
outside your estate if a proper beneficiary is named.
Naming a beneficiary through a life insurance plan or an annuity is an effective
estate-planning tool. Upon death of the life insured or annuitant, the proceeds are
paid directly to the named beneficiary rather than passing through the estate.
When a beneficiary designation is made, clients will:

Save time: Claims paid directly to a beneficiary reach your client’s heirs much
more quickly than if flowing through the estate.

Save money: Legal fees are often calculated as a percentage of the value of
the estate. Money paid from a life insurance company to a named beneficiary
does not form part of the estate.
9
Estate Planning - SSC #9
Pro-Seminars International 10/07

Save more money: Probate filling fees, payable to the provincial government,
are assessed against the value of the estate. Proceeds paid by a life insurance
company to a named beneficiary do not form part of the estate, and therefore, is
not subject to these probate filling fees.
TESTAMENTARY TRUSTS
Testamentary Trusts are created in a will and are activated at death of the testator.
This type of trust provides a greater opportunity to split income.
THE WILL
It is surprising the number of people who neglect to complete a will or, if they do
have a will prepared, put off having it reviewed to ensure it is up to date.
Completing a will and having it reviewed periodically makes good sense. Not only
does it give the personal representative the power to make decisions that will
minimize income taxes, but also it gives specific instructions as to how the estate
should be administered. Being an executor is a hard enough job without having to
guess the wishes of the deceased.
A Will is a written declaration of a person’s intent for dispersing property and other
assets after they have died. It outlines the guardianship of children and who is to
administer the estate. The law requires a person to have legal capacity to make the
Will and to follow certain requirements as laid out by the law. The Will can be
changed at any time, since it does not activate until death occurs and it is
instructions only deal with the Estate handling after death.
The executor of your will
Your will should name an executor to settle your estate. This is someone you
appoint with the legal authority to carry out the provisions of your will. If you do not
appoint an executor, the court or your heirs will supervise the distribution of your
property.
Estate Planning - SSC #9
Pro-Seminars International 10/07
10
Some of the responsibilities your executor assumes are

Arranging for probate of the will.

Paying debts and filing a final tax return.

Converting investments and other property to cash as necessary to pay bills and
fulfill the instructions in your will.

Notifying beneficiaries and others of your death.

Keeping a complete accounting record of the administration of your estate.
The appointment of an executor requires careful thought. Some of the
considerations you need to take into account are:

The value and complexity of your assets – what business and financial
experience is required.

The length of time required to administer your estate – for example, is there a
business to wind up or property to sell.

Any circumstances which demand tact and discretion.

Your preferences, for example, if a business is involved do you want the details
handled by your spouse or a relative or a person or persons who have no direct
connection.

Willingness to accept the job – obtain permission before you appoint an
individual or a corporation to be your executor.
NOTE: The more complete and orderly your records are, the easier, and faster, it
will be to settle your estate.
There is no hard and fast rule about choosing your executor. Many people select a
spouse, relative, friend or other person on whose judgement they rely. Your
executor can always obtain additional legal, accounting and investment advice.
You may want to consider having more than one executor if you have a large or
complicated estate. For example, you could appoint a trust company or your legal
advisor to act as a co-executor with your spouse.
An alternative executor or executors is also a good idea. It means there will be
another person with authority to act on your behalf if your ‘first choice” executor
dies, or, for any reason is unable or unwilling to settle your estate.
11
Estate Planning - SSC #9
Pro-Seminars International 10/07
Making a power of attorney
A power of attorney is the written appointment of someone to act as your agent to
perform some act or acts on your behalf.
The authority may be given for a specified purpose. For example, if you are going
to be out of the country for a few months, you may wish to give someone power of
attorney to deal with your investments. A power of attorney may also confer very
broad authority. In British Columbia, Ontario and Saskatchewan, you are able to
make an appointment to ensure that your affairs will be administered if you become
disabled or mentally incapacitated.
The criteria for selecting the person to whom you will give a power of attorney are
essentially the same as those outlined for choosing your executor.
What about a guardian?
It is strongly recommended that anyone with young children indicate someone as a
guardian in the will. Even in two-parent households, it is important to suggest a
guardian – an accident could leave the family orphaned.
A guardian should be also chosen if you have a child or other dependant who would
be unable to function independently because of a mental or physical disability.
Although the appointment of a guardian may have to be confirmed by a court at the
time the guardian wishes to act, the recommendation made in your will is usually
followed.
Before naming a person as a guardian, ensure that this individual is willing to take
on the role. The potential responsibility of a guardian is enormous, involving the
care, support, education and upbringing of your children. It is an appointment,
which you will need to consider carefully because the happiness and wellbeing of
your family is at stake. A guardian may be named in a Will, but must be appointed
by the court. The guardian oversees the interest of minor children as to their person
or property, and is usually the surviving spouse. The appointment, usually approved
by the court as requested, may be contested by an opposing application.
Estate Planning - SSC #9
Pro-Seminars International 10/07
12
Why you must review a will
Many people do not, but should review their will on a regular basis. As a rule of
thumb, it should be looked at whenever they experience a major change.
The Five Key changes that would make a will review necessary are:
1. Relationships change
Remarriage probably invalidates your previous will – do you have a new one? Have
you fallen out (or in) with a relative? Is your favorite charity still favorite?
2. Needs change
Is your 18-year-old daughter a 28-year-old lawyer now? On the other hand, do you
have a new addition to your family? Is a formerly independent family member now
disabled?
3. Situations change
Do you have business partners now? Do you have substantially larger (or even
different) assets?
4. Times change
Is your will still tax-effective? The government does have a tendency to change the
rules every year or so.
5. People die
If you leave part of your estate to someone who pre-decreases you, complications
arise. In addition, what happens if your chosen executor dies before you? (You
could end up with your executor’s executor – any idea who that will be?) Your will
should do what you want it to do, and make things easier for your family. HOW do
you ensure it does?
CODICIL
A Will can be changed without eliminating the old Will, by simply dealing with the
particular change desired by way of a codicil. It is a separate legal document and
must meet the same criteria as the original Will in a stand-alone fashion.
13
Estate Planning - SSC #9
Pro-Seminars International 10/07
TESTATOR (TESTATRIX)

One who makes a Will.

Testamentary Trust is a trust created by the Will or Codicil and governs the
passing of certain property.
CAPACITY
In Canada to make a valid Will, one must have the capacity to do so. In effect, this
means they have reached the legal age of majority (Age 18 or 19, it varies in
different provinces), and that they are of sound mind. This requires that they have
the mental capacity to understand the effect of their actions in terms of making the
Will and the conditions it imposes.
The legal counsel may request a medical examination by one or more doctors who
will then make a statutory declaration as to the soundness of mind.
EXECUTION
In some provinces, namely British Columbia, Nova Scotia and Prince Edward
Island, it is permissible to make a hand written Will. The Holograph Will must be in
the testator’s handwriting, complete with signature and does not require witnesses.
In all other provinces, if the handwriting is not the testators, it requires two
witnesses, and the testator and the witnesses must sign the Will in each other’s
presence.
ESTATE ADMINISTRATION
An Executor /Executrix is the person named in the Will to oversee it’s terms and to
settle the estate. It can be an individual or a Trust Company.
The court assigns an administrator if:

There is no valid Will.

The deceased failed to name an executor in the Will.

The named executor declines to act.
The executor requires broad powers of investment and the right to continue the
business, or to wind it up at their discretion.
Estate Planning - SSC #9
Pro-Seminars International 10/07
14
INTESTATE
Intestate is the condition of dying without a valid Will, if a Will has been drawn, but it
does not cover all the property to be passed, they are said to have died “intestate”
for that portion of their estate.
PROBATE
In Common Law provinces, executors will often get a letter of probate from the
Surrogate Court before the assets are distributed from the estate. The purpose of a
grant of probate is to invest the executor with lawful authority to deal with the estate.
The grant protects the validity of all acts done under the authority of the probate.
The problem with getting a will probated is the fees that are charged by the
provincial governments. The fees are based on the value of the assets in the
estate. Therefore the larger the estate, the larger the fees. To a lesser extent,
probate fees are a form of estate tax or succession duty.
In Quebec, notarial wills do not have to be verified by the Superior Court and no fee
is charged to the estate. English-form wills (in other words, wills made in the
presence of witnesses, other than notarial wills) and wills hand written, dated and
signed, must be verified by Superior Court to have effect, and a small fee is
charged. This verification only attests that the will is accepted, but it is not a
guarantee that the will is authentic; it can be contested. However, probate fees are
not an issue in Quebec.
Probate is the process of the court approving the contents of the Will is valid and
overseeing that the provisions of the Will are carried out by the Executor. The
Executor applies to the court for “letters probate” which gives the court’s approval of
the Will and the appointment of the named Executor. If there is no Will, the courts
name an administrator and the document issued is called “letters of Administration”.
It is possible to decrease the effect of these fees by planning your estate.
15
Estate Planning - SSC #9
Pro-Seminars International 10/07
REVOKING A WILL
A Will can be revoked at any time before death, except if it contains a Life Insurance
Beneficiary Declaration.
This must be changed by naming a new beneficiary.
A Will can be revoked by:

Physical act, such as destroying the Will.

By law; remarriage in some jurisdiction, unless the Will was drawn in
contemplation of said marriage.

A new Will. (Usually the first statement in a Will revokes any previous Will).
Revocation to be valid must be done with soundness of mind and without undue
influence or fraudulent intent.
APPLICABLE PROBATE FILING FEES FOR EACH PROVINCE
Province
Alberta
British Columbia
Manitoba
New Brunswick
Newfoundland
NWT – Including Nunavut
Nova Scotia
Fees
Under $10,000 – $25 fee
$10,000 to $249,999 - Progressive to $300
$250,000 and over - $400 (maximum)
First $10,000 - no fees
$10,001 to $25,000 - $208
$25,001 to $50,000 - $6 / $1000
Over $50,000 - $14 / $1000
First $10,000 - $50
Over $10,000 - $50 + $6 / $1000 thereafter
$5 for each $1000
$85 for the first $1000 and $5 / $1000 thereafter
Plus $50 Administration fee for the order
$10000 or under $25
$10000 - $25000 - $100
$25001 - $125,000 - $200
125,001 - $250,000 - $300
More than $250,000 - $400
Over $1,000 - $15 + .30%
First $10,000 - $70
$10000 - $25,000 - $176
$25001 - $50000 - $293
$50001 - $100,000 - $820
$100,001 thereafter - $820 + $13.85 / $1000
Estate Planning - SSC #9
Pro-Seminars International 10/07
16
Ontario
Prince Edward Island
First $50,000 - $5 / $1000 and $15 / $1000
thereafter
First $10,000 - $50
10,001 - $100,000 – Progressive to $400
Over $100,000 - $400 + $4 / 1000 thereafter
Plus 0.2% closing fee in each case
Quebec
$65 for non-notarial will (nominal fee)
$0 for notarial wills (notarial wills do not need to be
probated)
Saskatchewan
$7 / $1000 from first dollar of estate value
Yukon
First $25,000 – No fee for Letters of Probate
Over $25,000 - $140
In provinces where there are both opening and closing fees, both fees must be paid
(but at different times).
These fees are paid whenever an asset transfers as a consequence of death. If an
individual died and left all assets to a spouse, the assets would face these fees.
When the spouse died, the fees would be paid once again. In Ontario for example,
probate fees could amount to $29,000 on a $1,000,000 estate.
The final reason for striving to avoid probate is that once filed, the statement of
affairs of the deceased, including all assets and liabilities and a copy of the will,
become available to the public. For high-profile and high net worth individuals, a
public record could expose the estate to unwanted publicity.
Tips to Avoiding or Minimizing Probate Costs
There are a number of proven techniques to avoid or minimize probate costs.
Before acting on any of these tips, you should seek the advice of a lawyer or
accountant.
1. Give it away while you are alive
As strange as it sounds, if you die without an estate, there is nothing left to
probate. If a gift to a spouse, child, grandchild or other beneficiary makes sense and
wouldn't jeopardize your well-being, you might consider it as a means of avoiding
probate. However, take care when giving appreciated capital property because in
most cases it will trigger capital gains.
17
Estate Planning - SSC #9
Pro-Seminars International 10/07
If the property gifted produces income and the beneficiary is your spouse, a minor
child or a grandchild, you'll continue to include this income in your taxable income
(attribution rules, Income Tax Act).
2. Register or re-register assets in joint tenancy with rights of survivorship
Assets that are registered in joint tenancy with rights of survivorship become the
property of the joint owner on the death of an owner. Many spouses register their
family home this way, but any non-registered (RSP/RIF) asset can be registered in
joint title. Upon death, the asset does not form part of the estate. When purchasing
assets or re-registering assets, care should be taken with regard to attribution rules.
In addition, if you're re-registering assets, capital gains could be triggered. Consult
your professional advisor before proceeding.
3. Establish an inter-vivos trust
An inter-vivos trust is a trust that you establish during your lifetime. A trust is created
by a donor settling (giving) assets to a trust for the benefit of a beneficiary. The
assets of the trust are managed for the beneficiary by the trustees of the trust. By
settling a trust during your lifetime, you no longer own the assets. You may,
however, be a trustee and exercise a degree of control over the assets. Once
settled, however, the assets are trust assets held for the benefit of the beneficiaries.
Here you have, in fact, given away the assets, but in a different way than in #1.
4. Establish a trust (especially a spousal trust) in your will
While a spousal trust will not help reduce your estate for probate, it may allow a
beneficiary to avoid probate on his or her death.
For example, if John leaves property to a spousal trust for the benefit of his wife
Marie during her lifetime, Marie can enjoy the trust property and spend the income
from the trust. The property is not, however, in her name, it is simply held in trust for
her. When Marie dies, the property passes directly to residual beneficiaries without
being included in Marie's estate. An added advantage to this approach is that during
Marie's lifetime, she and the spousal trust are separate taxpayers and this usually
results in lower overall income taxes compared to all the property and income being
held by one taxpayer.
Estate Planning - SSC #9
Pro-Seminars International 10/07
18
5. Invest in estate-friendly investments
Investment products offered by life insurance companies provide unique estate
advantages. As "life insurance" products (even though they look, act and perform
just like regular investments), the owner of the investment can name a beneficiary.
The investment is registered with the insurance company and upon the individual's
death, assets pass directly to the beneficiary and do not form part of the estate.
Under certain circumstances, these products also offer some creditor protection.
Insurance companies offer a range of highly competitive fixed-rate investments that
act just like Guaranteed Investment Certificates (GICs). They are often referred to
as Guaranteed Interest Annuities (GIAs). They also offer segregated funds that are
similar in many ways to mutual funds. Estate-friendly investments are frequently
underutilized in estate planning.
6. Establish multiple wills
With care and professional drafting by your lawyer, it is possible to separate your
assets into groups: assets that must be probated, assets that don't require probate,
and assets that can or must be probated in another (hopefully lower cost)
jurisdiction. While this approach requires more work, it can substantially reduce the
cost of settling your estate. Some assets, such as the shares of a private company,
normally do not require probate to be dealt with by an executor. If you own a private
company with a significant value, it may be possible for this asset to be dealt with in
a separate will and the executor can avoid probate on this asset. Again, legal advice
is critical in this strategy.
DYING INTESTATE
In Ontario, the Succession Law Reform Act provides the spouse with the first
$200,000 of the estate and divides the remainder with the deceased’s children by
formula.
The spouse however, can elect to ignore the Will, and to take the money due them
under the “Net Family Property Rule”, which includes almost all property acquired
during the marriage (or increase in value of property during that time).
19
Estate Planning - SSC #9
Pro-Seminars International 10/07
There appears to be a definite movement towards “Community of Property” in the
common law provinces that was found previously only in Quebec’s “partnership of
Acquests”
All of this begs the Question ‘Have you Made a Will”?
When the Will’s order of content is examined, the first thing that is evident is the
need for liquidity - CASH.
Debts and taxes come first.
There are FOUR basic ways to provide liquidity (cash) at death:
1) Sale of estate assets

Forced sales usually mean depressed prices, bad timing or both.
2) Borrow the Cash

Even if a loan is available, it has to be paid back.
3) Cash in the Bank

The deceased may believe cash is best, but the best use for cash is
investments, not in bank interest.
4) Life Insurance
Besides being the least expensive of all the alternatives, it has many other
advantages.

The proceeds are available exactly when needed.

The size of the policy can be tailored to the size of the need.

It enables the efficient transfer of assets, without increasing taxation or
administrative costs.

The fact that it is paid for annually or monthly in advance (premiums) of the time
required, is far more advantageous than a large tax bill that has a six-month
payment limit.
Estate Planning - SSC #9
Pro-Seminars International 10/07
20
25 YEAR COST ANALYSIS
$1,000,000 IN ESTATE COSTS
Annual
Funding Option
Cost
Years
Lost
Total
% Of
Asset
Cost
Tax
Due
1. USE CASH
Assuming 8%
simple interest, the
liquidation of
$1,000,000 cash
account.
2. SELL AN
ASSET
Liquidate part of
portfolio assuming it
provides 6% cash
flow & 4%
appreciation
3. BORROW
FROM BANK
Borrow $1,000,000
@10% amortized
over 25 years
4. BORROW
FROM
GOVERNMENT
Borrow $1,000,000
@ prescribed rate
(10%) over 10
years.
$80,000
Forever
$1,000,000
$3,0000,000
300
$100,000
Forever
$1,000,000
$3,500,000
350
$110,168
25
$0.00
$2,754,200
275
$162,745
10
$0.00
$1,627,450
162
There is also a fifth option – a form of life insurance that offers a prepayment
privilege for the premiums to be paid. This will definitely be the cheapest method of
conserving an estate.
21
Estate Planning - SSC #9
Pro-Seminars International 10/07
WHICH METHOD DO YOU THINK MAKES THE MOST SENSE FOR AN
ESTATE?
DEBTS
Just Debts and Taxes must be paid, in cash before any other estate requirements
are met. The “Just Debts” are outlined in Total Needs Planning and are selfexplanatory.
However to name a few:
A. Terminal illness
Often leave unpaid balances. Even with Government Health Care Plans and Group
Insurance, often-costly requirements demand cash, to say nothing of the loss of
income or no income. The longer the illness, the bigger the balance.
B. Funerals and Cemetery Costs:
Many people do not plan for these costs and so the family and/or executor have 1-½
days to make these arrangements that took the deceased a lifetime to make. Even
with plans arranged, both require cash. Memorial societies and prepayment plans,
which are pre-arranged, will certainly make this task much easier.
As you probably know, funeral expenses and final estate expenses are inevitable
costs that will have to be met sometime in the future. To meet these costs, money
can come from one of two places – your estate or a life insurance policy. Funeral
expenses currently run from $5,000 to $15,000 and estate management costs, while
varying by individual, can easily exceed $5,000.
Which is Best?
Here are some things to consider when deciding whether to pay funeral and final
expenses from the estate or using life insurance.
Your Estate

May not be adequate if you outlive your assets.

Funds may be tied up while estate is probated.

Will reduce assets available for distribution to beneficiaries.
Estate Planning - SSC #9
Pro-Seminars International 10/07
22
A Life Insurance Policy

The life insurance payout is guaranteed.

Two weeks is the average payout time.

Proceeds paid to the estate are tax-free.
A USEFUL THIRD PARTY DOCUMENT TO SHARE WITH YOUR CLIENTS IN
ORDER TO SHOW THEM THE TRUE COSTS OF THEIR FINAL JOURNEY
“The below costs were taken from a Southern Ontario Funeral Home general price
list from1999. The goods and services shown are those that we can provide to the
families that we serve. You may choose only those items you desire, the cost of the
casket, the applicable taxes, and other disbursements such as clergy, cemetery
and/or crematorium costs, and newspaper notices are not listed.”
FEES FOR FUNERAL SERVICES AND AUTOMOBILES …………………$3,148.00
This includes the Funeral Director’s professional services, embalmer’s professional
services, other preparation, staff services, documentation and registration, use of
the funeral home for 2 days visitation, use of the facilities for the day of the funeral
service, use of the preparation room, all automobiles such as lead car, funeral
coach, family car, vehicle for local transportation of the deceased from the place of
death, vehicle for the local disbursement of flowers and car for registrations.
PROFESSIONAL AND STAFF SERVICES
1.
Funeral Director’s Professional Services
$1035.00
This charge includes, but is not limited to, consultation and assistance with the
planning of the funeral service, co-ordination of external services and supplies and
supervision and direction of all arrangements pertain to the funeral services and
final disposition. These services are available on a 24-hour basis. Includes staff
assistance in local removal from place of death, care and arrangement of flowers,
receptionists, secretarial and maintenance of facilities.
23
Estate Planning - SSC #9
Pro-Seminars International 10/07
2.
Documentation and Registration
$75.00
Preparation and filing of the necessary documents, certificates and permits.
Embalmer’s Professional Services
3.
$ 260.00
Except in certain special cases, embalming is not required by law. However, the
funeral home’s policy is that embalming is necessary if arrangements include
visitation or if we are asked to hold the remains of the deceased for more than 24
hours.
4.
Other Preparation
$ 140.00
These services may include, when necessary, cosmetology, placing the body in the
casket or container, special care of autopsied remains, sanitation and exterior
disinfecting of the body when no embalming is authorized.
TOTAL FOR THIS SECTION $1510.00
FACILITIES
5. (A) Use of the Funeral Home
Use of the Funeral Home for Visitation Period – 1st day
- Additional days (each day)
$ 495.00
$ 183.00
(This includes the visitation room and all facilities available, such as coffee
lounge, coatroom, washrooms, and parking. Charges calculated per day
on portion thereof.)
(b)
Use of Funeral Home – Day of Service (only)
In lieu of Funeral Home facilities, all necessary equipment and additional
staff for services off premises.
$ 295.00
(c) Use of the Family Center
6.
$ 190.00
Use of the Preparation Room
$ 240.00
TOTAL FOR THIS SECTION
Estate Planning - SSC #9
Pro-Seminars International 10/07
$ 913.00
24
AUTOMOBILES
7.
Transfer of the Deceased
$ 100.00
8.
Funeral Coach
$ 180.00
9.
Lead Car
$ 50.00
10.
Limousine for family
$ 150.00
11.
Other Automobile Services
$ 90.00
TOTAL FOR THIS SECTION
$ 570.00
12.
Limousine for Pall Bearers*
$ 150.00
13.
Extra Limousine for Family*
$ 150.00
(For any of the above vehicles, these charges apply to a 25-kilometer radius.
Distances over this will be charged at $1.00 per kilometer)
*These two automobiles are optional and are not listed in the total above.
SUNDRY ITEMS
Register Book
$40.00
Acknowledgement Cards
$35.00
In Memoriam Cards
$40.00
Proof of Death Certificates
$35.00
TOTAL FOR THIS SECTION
$150.00
TOTAL COST = $3148.00
The costs of the casket, vaults etc. have to be added to the above totals. There are
many different styles in a variety of price ranges for the families to choose from.
As you can see, there are many different decisions that have to be made when
someone dies. They should not be taken lightly. With proper advanced planning,
the process is much easier.
25
Estate Planning - SSC #9
Pro-Seminars International 10/07
C. Unpaid Taxes
Property taxes not paid on the installment plan will be required to be paid until time
of death.
Please note “Annual Income” for comments on unpaid income tax.
D. Probate Fees
Probate fees are administration fees levied by the courts to grant the letters probate
or letters of administration. The tariff is related to the amount of asset.
E. Legal Fees
A lawyer generally is required to settle an estate. Their charge can run to 7 or 8% of
the estate value.
F. Cash Bequests
Everyone wants to get a legacy in cash from Uncle Charlie’s estate. Uncle Charlie’s
estate will require cash to pay this bequest. If the amounts to be dispersed are
large, a Life Insurance Policy makes ultimately more sense than requiring the
executor to cash in stocks, bonds or certificates to fund it.
G. Executors/Executrix Fees
Most individuals and all Trust Companies will request that these fees be paid. Here
is an illustration of such fees based on the Fair Market Value of the estate assets as
of the date of distribution. Example of some Executor fees are:
1. Up to $250,000- 5%
On the excess over $750,000-4%
Over $1 million- 3%
2. All income received and disbursements- 6%
3. Annual Management based on average market value of assets under
management. 3/5 of 1% up to $250,000/yr.
4. Any additional special service fees approved by a Judge of the surrogate court.
One area that can be a major debt and drain on the estate is CAPITAL GAINS.
Proper planning helps minimize the capital gains tax at death and ensures sufficient
estate liquidity to pay income taxes and other estate costs.
Estate Planning - SSC #9
Pro-Seminars International 10/07
26
Capital gains have been taxable in Canada since 1972. Many Canadians have
become complacent about the capital gains tax since the introduction of the capital
gains exemption in 1985. They believe that most, if not all, capital gains arising on
death will be offset by the exemption, so income taxes will not represent a
significant problem for the estate.
The taxation of capital gains may not be a problem in relatively small estate
situations, but they certainly must be considered in larger estates. Unless proper
planning is done well in advance of death, including a pre-arranged funding
mechanism, the capital gains tax can seriously erode estate values.
The capital gains rules are complex. Clients with a potential capital gains problem
are encouraged to review their estate plans with their tax and legal advisors.
Capital gains arise on the disposition of ‘capital property.’ A disposition includes an
actual sale of the property and deemed sales that occur in the event of death and
certain non-arm’s length transfers.
Capital property includes real estate (principal residence, cottage or other
vacation property, rental property, business property), portfolio investments (shares
of corporations, bonds, mortgages), shares in small business corporations, farm
property and personal property such as vehicles, art and jewelry.
A capital gain results when the proceeds of disposition (actual or deemed)
EXCEED the ‘tax cost’ of the property. For example, land purchased 15 years ago
for $40,000 and sold today for $60,000 results in a $20,000 capital gain.
A capital loss
Results when the tax cost of the property exceeds the proceeds of disposition.
The tax cost of capital property is usually equal to the original cost of the property,
including acquisition costs. However, it may be increased or decreased due to
certain factors.
27
Estate Planning - SSC #9
Pro-Seminars International 10/07
For example, the tax cost of real estate may be increased by out-of-pocket capital
costs to improve the property, such as a building addition or the paving of a
driveway.
Capital gains at death
The general rule is that, at the time of death, an individual is deemed to have
disposed of all capital property immediately before death for proceeds equal to the
fair market value of the property. As a result, accrued capital gains (net of capital
losses) are taxable to the deceased in the year of death.
While there are special rules for principal residences and farm property, the only
exception to the general rule noted above involves property transferred to a spouse
or spouse trust.
Property, which is, transferred to a spouse or spouse trust automatically transfers on
a tax-deferred basis. For income tax purposes, the proceeds of disposition are
deemed equal to the tax cost of the property. As a result, the capital gain is
deferred until a subsequent disposition occurs or upon the death of the spouse.
While transfers between spouses can be tax-deferred, the executor can elect to
have the transfer occur at fair market value. This would create some capital gains
on the deceased’s final tax return, which may be beneficial if there are unutilized
capital losses or the capital gain qualifies for the deceased’s capital gains
exemption.
Under present tax law, the spousal transfer rules only apply to legally married
couples. However, proposed new legislation will change the definition of “spouse’ to
include a common-law spouse, effective 1993.
Capital gains exemption
As of March 19, 2007, the capital gains exemption has been increased to $750,000
from its previous $500,000 limit. This means that if you haven’t already taken
advantage of the tax preferred treatment of capital gains on qualified small business
shares, you should do so while the getting’s good. If you have already maxed out
your $500,000, you have an additional quarter million to play with.
Estate Planning - SSC #9
Pro-Seminars International 10/07
28
Some more information on the Lifetime Capital Gains Exemption

Under certain circumstances, small business owners, farmers, and fishers may
be eligible for a lifetime capital gains exemption on the first $500,000 of capital
gain realized on the disposition of qualifying capital property.

The 2007 Budget proposes that the LCGE be increased to $750,000. However,
because the inclusion rate for capital gains and capital losses is 50%, the
lifetime capital gains deduction limit would be increased from $250,000 (1/2 of
$500,000) to $375,000 (1/2 of $750,000).

The 2007 Budget proposes that the LCGE apply to dispositions of property
made after March 18, 2007.
The 2007 Budget proposes that an individual's capital gains deduction in
respect to net taxable capital gains be determined using a three-step process:
1. Determine the individual's capital gains deduction for 2007 as if the capital gains
deduction limit for 2007 remained at $250,000.
2. Determine an additional amount, not exceeding $125,000 that is the increase in
the cumulative gains limit at the end of 2007 that is attributable to net taxable
capital gains from dispositions made after March 18, 2007, to the extent that it
exceeds the amount in step 1.
3. Add the amounts determined in steps 1 and 2.
Note: As of the 2008 tax year, the lifetime capital gains deduction limit will be
determined according to the usual determination process.
Capital gains tax
Taxable capital gains are included in taxable income and taxed at the individual’s
marginal tax rate. Taxable capital gains equal 50 per cent of net capital gains (i.e.
total capital gains, net of capital losses and the capital gains exemption). Any
resulting tax liability is due at the time the tax return is required to be filed.
Principal residence
The capital gain on a principal residence is exempt from taxation to the extent that
the ‘principal residence exemption’ is claimed on the property for each year of
ownership.
29
Estate Planning - SSC #9
Pro-Seminars International 10/07
Before 1982, it was possible for each spouse to claim one residence as a principal
residence. For example, if one spouse owns the home in the city and the other
spouse the cottage, both residences could be claimed as a principal residence, and
the capital gains on both residences would be exempt.
Since 1981, only one residence may be claimed in a given year as a principal
residence. As a result, the gain on one of the residences accruing since 1981 will
be eventually taxable.
Cottages and other real estate property
Most Canadians have memories of happy childhood experiences associated with
cottage life in the summer. Many of us who now are fortunate enough to own our
cottages are anxious to leave the vacation property to our succeeding generations,
for the continued enjoyment of children and grandchildren.
The following explores some of the issues of cottage succession planning, some
pitfalls to avoid and some strategies for keeping the taxman at bay
There are many things to consider in any succession plan; however the most
serious financial obstacle to passing the cottage on to your children is the Capital
Gains Tax liability.
At one time there was no such thing as Capital Gains Tax in Canada. It was
imposed in 1972 and the basic exemptions, through changes to the Income Tax Act,
were first reduced in 1992 and eliminated in 1995. Today, despite a decrease in the
inclusion rate, Capital Gains represents the single most onerous financial burden of
most succession planning strategies.
To see how capital gains works with a cottage, consider the following:
1. The fair market value of the property.
That’s what it is worth in today’s terms on the current market. A realtor will usually
provide an estimate of the value of your property at no charge.
2. The adjusted cost base of the property
This is the price paid for the property + the cost of any capital improvements - a
shed, a well, a new dock - made since the property was acquired.
Estate Planning - SSC #9
Pro-Seminars International 10/07
30
If the property was purchased before Dec. 31st 1971, then the value (i.e. FMV) of
the property at that date applies (a professional appraiser can research past sales to
determine this). If the capital gains tax exemption was taken advantage of in 1994,
then the ACB indicated on the tax receipt of that year may be used.
Total Capital Gain equals the Fair Market value (FMV) minus the adjusted cost base
(ACB). The inclusion rate for capital gains is 50%. That means you will pay tax on
half of the total capital gain.
The following example illustrates:
A cottage was purchased in 1969 at a price of $10,000. The value of the property on
Dec. 1971 was appraised at $12,500. The owner estimates that in the intervening
years he spent $20,000 on various improvements and additions. At today’s market,
the value is appraised at $175,000. If the cottage were disposed of today (through
sale or the death of the owner) the capital gain would be $142,500 ($175,000 ($10,000 + $12,500)). Tax would be payable on half of that - given current law equal to $71,250 and at a 50% marginal rate that would result in approx. $36,000
additional taxes owing.
Dealing with capital gains taxes
There are legitimate ways to reduce the tax bite so that the cottage can be passed
to your heirs without bankrupting your estate.
If you transfer the property as a gift it is deemed to be a disposition at FMV and the
taxes due will be so calculated. Even though your intention is to gift the property,
capital gains taxes on the full market value is still payable. One technique to
consider is to transfer it in stages, rather than all at once. If you transfer only a
certain percentage each year the taxes that apply to that portion of the capital gain
will be much less. If you are collecting the Old Age Security however, keep an eye
on the income maximums.
The OAS claw back will be triggered by income reported in excess of $52,800 (year
2000) so plan your annual transfers accordingly. (Note that even if you affect
transfer of the property through a sale at less than market value, capital gains taxes
will nonetheless be calculated on the full FMV).
31
Estate Planning - SSC #9
Pro-Seminars International 10/07
If you leave the cottage in your Will the law considers it sold simply by the event of
your death and capital gains taxes apply. Then the actual amount paid may be
greater because the cottage fair market value may have increased, but the tax can
be paid from sources other than your estate. Insurance on the owner’s life to cover
taxes at death is a very common strategy, sometimes with the estate beneficiaries
paying for the insurance premiums.
The principal residence exemption should not be neglected when planning for
cottage succession. Under this exemption our principal residence is not subject to
capital gains tax regardless of how much it appreciates in value, and it allows for
some opportunities for reducing the tax impact on the cottage as well.
Before Dec. 31, 1981 it was possible for each family member - including minor
children - to designate a separate principal residence for capital gains purposes.
Thus the husband could exempt the house from taxes while the wife could use her
exemption for the cottage. This loophole was closed after 1981 but the benefit
remains; if the cottage and house were in separate names before 1982, capital
gains relief for that period is available on the disposition of either dwelling.
To offset capital gains after 1981 it might be advantageous to choose the cottage as
your principal residence, rather than the city house. The strategy is to apply the
residence exemption against that property that has enjoyed the greater capital gain
(regardless of which property you actually spent more time living in).
As an example
Suppose you inherited a cottage in 1983 the FMV of which was appraised at
$95,000. In the same year you purchased a house for $200,000. Today, 20 years
later, the cottage is valued at $200,000 and the house is worth $280,000. There is
$25,000 more in capital gain on the cottage than the house and a potential savings
of several thousand dollars in taxes to be realized by declaring the cottage as
principal residence. Since cottage and residential properties appreciate at different
rates at different periods of time, you can move the exemption around; declare the
cottage as principal residence when values of those properties are soaring, then
move the designation back to your city house when waterfront values languish and
urban property appreciates.
Estate Planning - SSC #9
Pro-Seminars International 10/07
32
You will need independent appraisals on both properties to facilitate this maneuver
but it could be well worth the effort in tax savings.
Regardless of what declaration regarding your principal residence you choose, keep
in mind that you need make the decision only at the time you dispose of either
property, through a sale, gift or in passing to your dependants through your Will. The
rules for the principal residence designation for tax purposes are complex so you
are well advised to run these scenarios past your legal advisor to verify the tax
advantages.
Probate taxes and the cottage
If you gift the property while still alive probate can be avoided, although as noted
before, the gifting will trigger capital gains at the FMV of the property if transferred to
anyone other than a spouse. Also consider that land transfer taxes and other legal
expenses that come with transferring title to property might be more than the
savings in probate taxes.
Entering into a JTWROS (Joint Tenancy with Rights of Survivorship) agreement will
avoid probate but likewise trigger capital gains taxes on the portion of the ownership
that is being transferred. Moreover there are certain aspects of a JTWROS to
consider. Assets set aside in these trusts are subject to the creditors of the parties in
trust and are not protected from bankruptcy proceedings against any of the trust
partners. JTWROS agreements are not allowed in Quebec.
Probate can also be avoided by placing the cottage property in a trust. Owners aged
65 or older can set up Alter Ego or Joint Partner trusts that keep the cottage out of
the estate but retain continued access and control for the owner. Capital gains
would not be paid until the death of the party that established the trust. Family Living
Trusts result in a disposition at market value at the time of the trust creation and
thereafter taxes on accrued capital gains must be paid every 21 years.
Setting up a testamentary trust as part of a Will can leave a cottage property to
sibling beneficiaries jointly. Probate would be avoided; capital gains tax would still
be paid but possibly at a lower marginal rate because the gain is attributable to the
trust and not the estate income.
33
Estate Planning - SSC #9
Pro-Seminars International 10/07
In addition to the cottage the trust could include a sum of capital set aside to provide
for the upkeep and operating cost of the property. This provision of a testamentary
trust makes it a popular tool for cottage succession planning since it avoids the
conflicts that can sometimes arise over the shared expenses of jointly inherited
property.
Farm property
While the general rules apply to all capital property, there is an exception made for
farm property, including farmland, buildings and equipment. Generally, where the
farm property was used in the business of farming immediately before death, it can
be transferred on a tax-deferred basis to a spouse, child or parent of the deceased
farmer. In this way, capital gains may be deferred indefinitely as long as the
property continues to be used in the business of farming and is retained in the
family.
COTTAGE SUCCESSION – Main Options
COTTAGE DECISION
Take Action Now
Leave Cottage
as Part of Your Estate
Options
-
Gift it to children/grandchildren
- Have estate sell cottage, giving
children first right of refusal.
-
Sell it to children/grandchildren
- Leave directly to children as part of
your estate.
-
Establish an Inter Vivos (Lifetime) Trust - Establish a trust under your will which
holds the cottage for the benefit of
your children/grandchildren
TAX IMPACT - Capital gains tax
TAX IMPACT
Capital gain tax triggered immediately
Triggered in the future upon
upon transfer of ownership. Since 1994
death of the surviving spouse.
no capital gains exemption is available.
Since 1994 no capital gains
exemption is available.
Estate Planning - SSC #9
Pro-Seminars International 10/07
34
Family Issues to Consider

Discuss plans for the cottage with your family.

Decide how you wish the ownership to be transferred.

Parents wanting continued use of the cottage.

Let the kids work it out for themselves.

Look at sibling rivalry.

Affordability issues.

Creditors and ex-spouses.

Skipping a generation.

Do you want to keep the cottage in the family?

Family Law issues.

What if you or your children have creditor problems?

Probate fees?
INCOME TAX AT DEATH
Income Tax at death is somewhat more complicated. Income taxes arising on death
can be a significant drain on estate assets. Estate planning will help to conserve the
estate and ensure that estate assets are distributed in an orderly manner.
Income tax rules
The personal representative of the deceased (i.e. the executor, trustee or
administrator) is responsible for administration of the estate, including the filing of
income tax returns.
One or more personal income tax returns for the deceased (called terminal returns)
must be completed for the period from January 1 to the date of death. The number
of terminal returns required to be filed will depend on the nature and timing of the
income, which had been earned by the deceased before death.
Income earned and deductible expenses incurred are reported on the terminal
return(s). Income tax is calculated, and any resulting liability for tax is due at the
time the return is required to be filed. Income taxes are paid from the estate.
35
Estate Planning - SSC #9
Pro-Seminars International 10/07
Filing of tax returns
The terminal return(s) must be filed by the later of April 30 following the year of
death, or six months following death. For example, if the taxpayer died on March 5,
the return is due by April 30 of the following year. However, if death occurs Dec. 5,
the return would not be due for six months after the date of death, i.e. June 5 of the
following year.
Clearance certificates
Before a final distribution of estate assets, the personal representative should obtain
a clearance certificate from Canada Revenue Agency. If assets are distributed and
the clearance certificate is not obtained, the personal representative is responsible
for payment of any outstanding income taxes.
Getting professional advice
Income tax legislation as it relates to deceased persons and their estates can be
very complex. Accrual basis reporting of income in the year of death, deemed
dispositions of capital property immediately before death, filing of special elections
and multiple income tax returns are just a few of the many rules that can apply.
There are many opportunities for tax planning after death occurs, but there are also
serious traps for the unwary!
In virtually all estate situations, the representative of the deceased should seek
professional advice. Certainly, a lawyer should be involved in the settling of the
estate. A tax accountant will generally be involved in the preparation of the required
income tax returns for the deceased and the estate in all but the simplest of estates.
Estate planning
Planning for the estate during one’s lifetime is essential if income taxes are to be
minimized on death. Planning will also help to ensure that estate assets are
distributed in accordance with the wishes of the deceased. Preparation of a will is a
primary planning tool, even in the simplest of estate situations.
Estate planning should be an ongoing process, well organized at the beginning and
reviewed periodically to ensure it is current.
Estate Planning - SSC #9
Pro-Seminars International 10/07
36
Where there is a will…
It is surprising the number of people who neglect to complete a will or, if they do
have a will prepared, put off having it reviewed to ensure it is up-to-date.
Completing a will and having it reviewed it reviewed periodically makes good sense.
Not only does it give the personal representative the power to make decisions that
will minimize income taxes, but also it gives specific instructions as to how the
estate should be administered. As previously stated, being an executor is a tough
enough job without having to guess the wishes of the deceased.
INCOME SOURCES FOR FINAL TAX RETURN
Income relating to the period before the date of death is generally taxed to the
deceased in the year of death. Income earned following the date of death is usually
taxed to the estate or the beneficiaries of the estate.
Completing the final personal income tax return for the deceased can be simple.
Income reported on the tax return will often include, for example, employment
income earned in the year up to the date of death, pension income received during
the year prior to the date of death, and / or interest income received or accrued from
the last reporting date to the date of death. These amounts are usually determined
without difficulty.
While most estate situations are straightforward, others can be complicated if the
deceased owned RRSPs (matured or unmatured) or capital property at the time of
death. Capital property includes, for example, farm property, rental property,
vacation property or shares in a small business. The estate can be further
complicated if the deceased have been self-employed through a proprietorship or
partnership.
The tax treatment at death of various types of income is summarized below. The list
is not exhaustive and should not be considered a substitute for obtaining competent
professional advice on estate matters.
37
Estate Planning - SSC #9
Pro-Seminars International 10/07
EMPLOYMENT INCOME

Includes salary and wages, commission income, and benefits.

Income earned from January 1 to date of death is taxable to the deceased.

Usually tax is deducted at source.
INVESTMENT INCOME

Includes interest on bank accounts, GICs, term deposits, CSBs and bonds, and
taxable dividends from corporations.

Interest income accrued / received from last reporting date-to-date of death is
taxable to the deceased.

Taxable dividends declared / received from corporations from Jan. 1 to the date
of death are taxable to the deceased.
PENSION INCOME

Includes income from company pension plans, OAS and CPP / QPP

Income received from Jan. 1 to the date of death is taxable to the deceased.

Lump-sum death benefits are normally taxable to the recipient (usually the
surviving spouse, children or estate of the deceased) in the year received.

Survivor’s benefits are taxable to the recipient in the year received.

Taxpayer can deduct from earned income all contributions to pension plans in
the year of death.
SELF-EMPLOYMENT BUSINESS INCOME

Includes sole proprietorship or partnership arrangements.

If fiscal year-end occurs before date of death, income for that fiscal year and the
stub period income form the fiscal year end to date of death are taxable to the
deceased.

If death occurs before normal fiscal year-end, income accrued from last fiscal
year-end to date of death is taxable to the deceased.

Income includes capital gain / loss recaptured depreciation and other income
resulting from deemed disposition of business property at fair market value
immediately before death.

Tax is generally paid on a quarterly basis or in arrears by April of the year
following.
Estate Planning - SSC #9
Pro-Seminars International 10/07
38
Accrual Basis
Besides cash, income may include accrual income that is taxable, but the money
has not been received.
This may include:

Net increases in inventory of raw materials, goods in progress and inventory
ready for sale.

Net decreases in accounts payable.

Net increases in work completed but not billed and “deemed” net increases in
accounts receivable (work billed, goods sold but not paid for).
Serious liquidity problems can result if cash has to be raised.
EARNED INCOME NOT RECEIVED
The Act specifies that all income would have been taxed if received before death,
but not received, be added in to the terminal return.
This may include:

Unpaid Salary

Deferred income like bonuses and commissions

Increased value of inventory

Unpaid royalties etc.
CAPITAL GAINS AND RECAPTURED DEPRECIATION

Includes principal residence, cottage, vacation property, farm property, stocks,
bonds, investment funds, real estate, and buildings and equipment used in an
unincorporated business.

All the property owned, other than the principle residence is deemed to have
been sold immediately before death and 50% of the Capital Gain (effective
October 2000) realized will be added to the total income. In addition, if
depreciation had been claimed on capital property such as buildings and
equipment etc. in past tax years and where the deemed value of the property
exceed the Capital Cost Allowance, the difference will be recaptured and added
back in to be taxed.
39
Estate Planning - SSC #9
Pro-Seminars International 10/07
RRSPs, RRIFs and ANNUITIES
Canadians are encouraged to save for retirement through pension plans offered by
their employers and through government benefit programs. However, many
Canadians supplement these sources of retirement income by contributing to
registered retirement savings plans (RRSPs).
Contributing to an RRSP offers many advantages, namely a tax deduction against
current earnings, tax-sheltered growth on funds remaining in the RRSP, and
potential income splitting in future years. Once the plan has matured, the funds can
be withdrawn in a tax-effective manner through the purchase of a registered
retirement income fund (RRIF) or annually.
While many Canadians look to RRSPs as a significant source of retirement income
and source of estate capital to pass onto their beneficiaries, few people are familiar
with the tax rules related to RRSPs, RRIFs and annuities in the event of death.
Income taxes relating to registered funds held at death can create a significant
liability that the estate must settle before assets can be distributed to the intended
beneficiaries.
General rule – RRSPs
If the RRSP has not matured, meaning that a retirement income had not
commenced prior to death, the fair market value of the RRSP fund at the time of
death is included on the deceased’s final income tax return and taxed accordingly.
For example, if the deceased had $100,000 of RRSP funds saved at the time of
death and the general rule applies, the $100,000 would be included on the
deceased’s final return, resulting in a tax liability of up to $50,000.
Any balance of tax owing on the deceased’s final income tax return is due at the
time the return is required to be filed. The due date for filing the final income tax
return is April 30 of the year following death or six months following the date of
death, whichever is the later. Income taxes are generally paid from the estate
before estate assets are distributed.
Estate Planning - SSC #9
Pro-Seminars International 10/07
40
Exceptions to general rule – RRSPs
First, if a surviving spouse is the named beneficiary under the contract, the RRSP
funds are taxed in the hands of the surviving spouse and not the deceased
annuitant.
The surviving spouse has several options available to defer taxation on funds
received from the deceased annuitant’s plan, namely, transfer the funds into his /
her own RRSP (only possible if the surviving spouse is under age 71 throughout the
year), use the funds to purchase an annuity or RRIF, or transfer the funds into an
existing RRIF.
As a result, when a spouse is the named beneficiary, the funds are essentially
transferred to the spouse on a tax-deferred basis.
If the spouse is not the named beneficiary under the contract, but is a beneficiary of
the deceased’s estate, the executor and the surviving spouse may jointly elect to
have the funds transferred on a tax-deferred basis, in the manner described above.
This is generally available only if the spouse is the sole beneficiary of the estate or
the RRSP funds are specifically left to the spouse under the terms of the will.
For the purpose of these rules, the term “spouse’ includes a common-law spouse,
as defined in the Income Tax Act.
Second, if there is no surviving spouse, the beneficiary may be a child or grandchild
of the deceased who was financially dependent at the time of death. If the child had
earned more than $5,000 in the taxation year preceding the year of death, or
someone other than the deceased had claimed the child as a dependant on their tax
return for that preceding year.
There are limited tax deferral opportunities available to a dependent child who
receives RRSP funds in this manner. First, the recipient is allowed to transfer the
funds into an annuity for a term not exceeding 18 years minus the child’s present
age. In this case, the child is taxed on annuity payments as they are received
Effectively, this deferral opportunity is not available if the child is 18 years of age or
older. Second, if the child was dependent on the deceased by reason of physical or
mental infirmity, the funds may be transferred into the child’s own RRSP, annuity or
RRIF.
41
Estate Planning - SSC #9
Pro-Seminars International 10/07
These are the only two exceptions to the general rule. If neither exception applies,
the RRSP funds are taxed on the deceased’s final income tax return.
General rule – RRIFs and annuities
If the RRSP has matured, meaning that a retirement income had commenced prior
to death, the present value of the remaining guaranteed annuity payments or the fair
market value of the RRIF balance at the time of death is included on the deceased’s
final income tax return and taxed accordingly.
Exceptions to general rule – RRIFs and annuities
The same exceptions apply for RRIFs and annuities as for RRSP funds in an
unmatured plan.
With respect to the surviving spouse, two options are generally available,

Receive the funds in a lump sum, in which case they are taxable to the surviving
spouse and not the deceased annuitant. The surviving spouse may transfer the
funds to an RRSP (if under age 71 throughout the year), RRIF or annuity in
order to defer taxation.

Continue the installments from the existing RRIF or annuity, in which case the
income is taxed as received and no amount is included on the deceased’s final
tax return.
With respect to a dependent child or grandchild who was financially dependent on
the deceased at the time of death, the lump-sum payment is taxable to the child or
grandchild and not the deceased annuitant. As in the case of a payment from an
unmatured plan, there can be no spouse at the time of death for these rules to
apply.
Yet another twist…
In the event the general rule applies and the registered funds are taxed on the
deceased annuitant final tax return, the tax liability must be paid by the estate even
though the funds may be paid directly to a named beneficiary.
Estate Planning - SSC #9
Pro-Seminars International 10/07
42
For example, if the deceased named a brother as beneficiary, the fair market value
of RRSP funds held at death would be included on the deceased’s final income tax
return and the estate would be responsible for paying the related income taxes.
However, the brother would receive the funds tax-free directly from the carrier – the
payment does not flow through the estate and withholding taxes are not deducted
before the payment is made. This may lead to an unintended result in that other
estate assets would have to be used to pay the related income tax.
There is a special rule, which allows Canada Revenue Agency to claim against the
proceeds paid directly to a named beneficiary, but this would only be used if the
estate has insufficient funds to pay the related income taxes.
Planning considerations
Where the estate is significant and / or income taxes represent a major concern,
clients are encouraged to review their estate plans with their professional advisors,
including their tax accountant and lawyer. In any event, life insurance will help
ensure that financial security plans are realized. Life insurance provides the
necessary liquidity at the time of death to meet immediate cash needs (such as
income taxes and other estate costs) and a continuing income for a surviving
spouse.
STEP 4 IMPLEMENTING YOUR PLAN
To carry out the plan, requires the naming of those people who will act on your
behalf.
Executors
Carry out the terms of your Will and settle outstanding debts and distribution of
assets.
An Executor Needs:

To have experience administering estate

To understand your financial affairs.

To have no conflict of interest.

To have sensitivity to the needs of your beneficiaries.

To keep costs to a minimum.
43
Estate Planning - SSC #9
Pro-Seminars International 10/07
Guardians
A guardian is a person named by the testator to be responsible for the testator’s
minor children. It is important to separate the guardian function from the trustee’s
function.
Power of Attorney
This is a written legal document in which you appoint another person to manage
your financial affairs under certain specific circumstances, such as incapacitation.
The statutes that apply vary from Province to Province. The Power of Attorney
avoids the need for the court to appoint a Conservator (guardian) who must abide
by onerous legislation.
Living Will
Some Provinces allow a Living Will, which is a type of Power of Attorney. In this
document, the individual makes certain decisions pertaining to their personal care in
the event that they become incapacitated.
STEP 5. MONITORING YOUR PLAN
Estate planning to be effective when it IS needed most at the moment of death
requires reviews on a regular basis.
Some of the changes that may require adjustments are:

Changes in marital status due to marriage, death or divorce

Significant changes in the value of estate assets.

Birth or death of family or near family members.

Changes in health.

Changes of specific bequests

Changes in business conditions, including execution of a buy-sell agreement

Changes of Life Insurance coverage or beneficiaries.

Necessity to change executor or trustee or guardian.

Change in the form of ownership.
Estate Planning - SSC #9
Pro-Seminars International 10/07
44
Conclusion:
Estates by their very nature are asset based, not cash based and so liquidity will be
the first and largest problem the executor/executrix has to deal with.
To sacrifice a business, force the sale of property or forego solid investments are
not wise choices when much easier and suitable answers are available.
Estate Planning Techniques
We have covered extensively the advisability of having a Will. However, it is more
than a legal document, it is the very essence of what the deceased wanted for his or
her heirs. It is their voice in the final affairs of their estate that they laboured so long
to achieve.
Wills provides for the transfer of assets to one or more people. If it is the spouse, it
will probably transfer all the assets and may include a common disaster clause. If it
is to a minor child, a trustee will need to be named.
If it is to two or more people, care needs to be exercised that exact wording is used
to pass the assets as desired. If the Will includes Trust, trustees must be appointed
with clearly defined powers. If these powers are not clearly delineated then the
trustee will be restricted under the Act that oversees trustee investments. Likewise,
business ownership and the right to continue the business HAS to be specified in
the Will. The testator has the right to convey powers not only to the trustees, but
also to the executor.
Sufficient leeway (power) should be given to allow them to get the job done and to
relieve them of responsibilities for losses that occurred from decisions made with the
best of intentions.
CAREFUL PLANNING A MUST
An Estate Owner may use many documents to accomplish their purpose. Wills, Buy
and Sell Agreements and a Life Insurance Beneficiary declaration to name a few.
Life Insurance provides for the easiest, most direct method of passing assets at
death. Most parents want to be fair and equal in their bequests to their children.
45
Estate Planning - SSC #9
Pro-Seminars International 10/07
If Life Insurance is not available, care should be given so that other assets of equal
value are passed on to the beneficiaries.
A Buy and Sell Agreement may only deal with one child, so it would be advisable to
provide assets of equal value, and here Life Insurance provides an excellent
vehicle, to other children. It may prevent years of family disharmony and bickering.
Since a beneficiary declaration in a Life Insurance Policy bypasses the estate, care
and co-ordination with the Will and it is instructions is vital to a balanced outcome.
A Will besides outlining the plan of dispersal must deal with taxes as stated earlier.
Many tax-oriented clauses can be included in a Will to help minimize the tax liability.
One of them deals with “Rights or Things”.
There are two alternatives. One is to have them taxed as a separate entity all
together. The other is to have the “right or thing” passed to the beneficiary and
taxed only as it is received by them, rather than the Estate. In both cases, the
election must be made within 3 months of the mailing of the Notice of Assessment,
which ever is later. Income spread over years instead of lump sum or months will
greatly affect the tax payable.
Rollovers
As referred to in Retirement planning, if the deceased’s RRSP has a spousal
beneficiary, the spouse has the right to take the proceeds into taxable income in the
year of death or have it rolled over to their own RRSP. The same provisions apply
to RPPs and DPSPs. Another rollover applies to Capital Gains and Capital Cost
allowances. The Act allows the tax liability to be deferred until the spouse’s death if
these are rolled over.
They transfer and are received at Fair Market Value as if the spouse had always
owned them. For property that has growth potential, this can result in a tremendous
tax bill on the second death due to the years of accumulation from both the
deceased and spouse’s ownership.
Estate Planning - SSC #9
Pro-Seminars International 10/07
46
Trusts
One of the more popular devices has been the use of Trusts. A Trust is an
arrangement whereby one or more persons (trustees) hold legal title to property for
the other persons (the beneficiaries). The person who creates the trust and puts
(settles) property is called the settlor. A Trust can be either inter vivos (Latin for
“among the living”) or a testamentary trust created by the Will.
A Trust is taxed as a separate entity and so sometimes it is better to have income
earned taxed inside the trust than paid out to beneficiaries, especially if the
beneficiary is a minor. Personal and Trust Income Tax rates are identical, but the
trust does not have recourse to the personal tax credits. This restriction can be
avoided by making “a Preferred Beneficiary” election.
The result of this election, provided the beneficiary agrees, is that the income will be
taxed in their hands.
Trusts, other than spousal trusts, are subject to the “Twenty One Year Deemed
Realization Rule”. This rule states that every 21 years the assets are deemed to
have been sold and the capital gains and /or capital cost allowance taxed as
prescribed.
Certain trusts can apply to qualify for postponement or it may be advantageous to
distribute the capital assets to the beneficiaries before the 21st years.
The beneficiaries receive it in a tax-free rollover, which effectively defers taxation
until they die, unless they roll it over to their spouses.
All of the demands adequate liquidity. The best-laid plans will not succeed if cash is
not available to meet all obligations created by the death.
Estate Freeze
Estate Freeze is the term used to describe steps taken to fix the value of your estate
(or some particular asset) at its present value, so that future growth will go to your
children and not be taxed on your death. Estate freezing is most often used when
your own property or a business has a great potential for growth.
47
Estate Planning - SSC #9
Pro-Seminars International 10/07
There are several different types of Estate Freezes:
a) Sale of the parents shares to their children. This method triggers immediate
Capital Gains and loss of use. The children (demands a trust if they are a
minor) can pay with a Promissory Note.
b) The children or trust can incorporate a holding company and subscribe for its
entire common shares, which would initially have only a nominal value. The
holding company then either purchases the operating assets of the original
company or the parent’s shares in that company. In return, the parent would
receive voting preferred shares in the holding company.
c) Lastly, the operating company could be reorganized with the children receiving
new common shares at nominal value, and the parent exchanging their common
shares for new voting preferred shares. All growth will then occur in the
children’s hands. As Robbie Burns was known to say “The best laid plans of
mice and men go oft astray”, and so do estate-planning devices. In the event
that tax laws change or plans do not work out as intended, an estate freeze is
difficult and expensive to unfreeze. Before setting one in motion, all the
alternatives need to be examined and professional advice sought from
accountant and lawyers.
Planned or charitable giving
About 22 million Canadians, or 85 per cent of the population over the age of 15,
made a financial contribution to a charity or other non-profit group in 2004,
according to Statistics Canada.
The total amount contributed came to $8.9 billion, with individuals averaging $400 in
donations during the year. Almost half of the money — $4 billion — was contributed
to religious organizations. Another $1.2 billion made its way to health organizations.
While more money was contributed to religious groups, other organizations attracted
broader support. Only 38 per cent of adult Canadians sent money to religious
organizations, while 57 per cent made donations to health groups and 43 per cent
donated to social services organizations.
Estate Planning - SSC #9
Pro-Seminars International 10/07
48
Albertans were the most generous donors — averaging $500 each in the year. The
province with the lowest average donation was Quebec, where citizens, on average,
donated $167.
The provinces with the greatest percentage of donors were Prince Edward Island
and Newfoundland and Labrador, where 93 per cent of adults gave money. "All four
Atlantic provinces had a higher percentage of donors than the national rate,"
Statistics Canada said.
The information comes from the agency's latest survey of giving and
volunteering. The survey shows that while Canadians are relatively generous with
their time and money, it's a small group of big donors who come up with the bulk of
the total value of all donations.
Statistics Canada says the top quarter of all donors were responsible for 82 per cent
of the money donated in 2004.
Following is the percentage of population that donates to charity by province:

Newfoundland and Labrador: 93%.

Prince Edward Island: 93%.

Nova Scotia: 90%.

New Brunswick: 88%.

Quebec: 83%.

Ontario: 90%.

Manitoba: 84%.

Saskatchewan: 82%.

Alberta: 79%.

British Columbia: 77%.

Canada: 85%.
49
Estate Planning - SSC #9
Pro-Seminars International 10/07
BASIC TAX RULES
General charitable income tax rules

Canada Revenue Agency provides incentive to bridge charity’s need for money
and donor’s desire to give.

Gifts to a registered charity or to the Crown qualify for a tax credit for individual
(s.118.1) or a deduction for corporations (s.110.1).
Canada Revenue Agency says that a gift is a voluntary transfer of property without
valuable consideration.
Tax consequences are important in structuring charitable gifts, since proper
planning can increase the benefits to the donor. The tax benefits are often a major
incentive to charitable giving and should be carefully considered from the outset.
A gift to a registered charity by an individual (including a trust) entitles the donor to a
non-refundable tax credit, i.e. a deduction in computing tax otherwise payable,
whereas a gift by a corporation entitles it to a deduction in computing taxable
income, as opposed to a tax credit. These rules are found in section 118.1 of the
Income Tax Act (the "ITA") for gifts by individuals and section 110.1 of the ITA for
gifts by corporations.
The March 19, 2007 federal budget contains a number of proposals aimed at
registered charities and donors. These include relief from tax on capital gains where
marketable securities (including shares acquired from qualifying stock options) are
donated to private foundations, extension of the 'loan back rules' to arm's length
situations and an incentive for donations of medicine out of inventory by
corporations to registered charities that have received assistance from CIDA and
use the medicine in foreign activities.
The proposals include new rules for private foundations to regulate 'self-dealing' in
certain corporations.
There will also be new 'excess holdings' rules for private foundations that own
shares of listed or unlisted corporations.
Estate Planning - SSC #9
Pro-Seminars International 10/07
50
Individuals
An individual who makes a gift to a charity is entitled to a credit against tax
otherwise payable. For purposes of this summary, the references to a "charity"
include generally charities which are registered by Canada Revenue Agency
("CRA"), registered Canadian amateur athletic associations, certain housing
corporations, Canadian municipalities, the crown, the United Nations and certain
foreign charities (including certain foreign universities).
Where the gift is less than $200, the federal tax credit is calculated at the lowest
personal tax rate on the amount of the gift (15.25% for 2006 and 15.5% for 2007
and later years, under the changes in the May 2, 2006 federal budget). Where the
gift exceeds $200, the credit is 29% of the amount of the gift. A comparable tax
credit is also available in calculating provincial taxes, with special rules applicable in
Quebec.
An individual can claim a tax credit for a charitable gift of up to 75% of net income
for the year. Any unused credit can be carried forward for 5 years and used to offset
taxes in those years, subject to the 75% limit in each year. The limit does not apply
in the year of death or the previous year. Unused credits not applied in the year of
death can be used in the prior year, without any limit based on income.
The 75% limit is increased by an additional 25% of any taxable capital gain realized
by the donor as a result of making a gift of appreciated capital property, plus 25% of
the amount of any recapture of capital cost allowance realized on a gift of
depreciable property (to a maximum of 25% of the lesser of the capital cost or the
fair market value of the depreciable property).
CRA's administrative position on gifts and receipts is set out in IT-110R3 entitled
"Gifts and Official Donation Receipts". In addition, useful comments are set out in a
number of CRA newsletters, policy statements and consultation drafts. These
newsletters, interpretation bulletins, policy statements and other information from
CRA can be viewed on the CRA web site at www.cra-arc.gc.ca. In particular, in late
2006 CRA added a separate section on its web site aimed at donors, called 'Giving
to Charity: Information for Donors'.
51
Estate Planning - SSC #9
Pro-Seminars International 10/07
Corporations
A corporation that makes a gift to a charity is entitled to a deduction in computing
taxable income. However, the corporation is also subject to the income limits noted
above for individuals. The corporation can claim a deduction of up to 75% of its net
income for the year. If the corporation makes a gift of appreciated capital property,
the limit is increased by 25% of the taxable capital gain and 25% of any recapture of
capital cost allowance realized on a gift of depreciable property (to a maximum of
25% of the lesser of the capital cost or the fair market value of the depreciable
property).
DIFFERENT TYPES OF CHARITABLE GIFTS
The following are some basic features and tax consequences of certain types of
gifts.
1. Gifts by Will
Gifts are often made by will, as "testamentary" gifts. The donor ("testator") states in
a will that on death, property is to be given as a bequest or legacy to a specified
charity or a charity to be chosen by the executors. The gift can be cash or property,
such as a work of art or shares. If the testator leaves too much discretion to the
executors in choosing a charity or the amount of the gift, CRA may allege the gift is
made by the estate and not deemed to be made in the year of death.
Otherwise, the testator is deemed to have made the gift immediately before the date
of death. Therefore, in the terminal return for the year of death, a tax credit is
available in computing tax otherwise payable. Any unused tax credits in the year of
death can be carried back and used to reduce taxes payable in the prior year. The
credit is available to offset 100% of net income for the year of death and the prior
year.
This credit is of particular benefit in calculating tax otherwise payable in the year of
death, since the deceased is deemed to have disposed of all capital assets
immediately before death (subject to certain exceptions, such as for spousal
rollovers) at fair market value, thereby realizing capital gains in the year of death.
Estate Planning - SSC #9
Pro-Seminars International 10/07
52
2. Annuities
Prior to December 20, 2002 a donor could transfer cash to a charity which
undertook to pay an annuity for life to the donor, or perhaps to the donor and a
spouse, as long as one of them was alive. The annuity payment received by the
donor would be a blend of interest and capital, and only the interest portion would
normally be taxable. If the donor transferred cash to the charity in excess of the
amount expected to be received over the term of the annuity, the excess was
considered under CRA's administrative policy to be a gift and the charity could issue
a tax receipt for the excess. CRA's policy as stated in IT-111R2 entitled "Annuities
Purchased from Charitable Organizations" was not to tax any portion of an annuity
payment received by a donor in such circumstances.
If the donor died earlier than expected, the charity would keep the remaining funds.
If the donor lived beyond the life expectancy, the charity had to meet its
commitments and might need to use other funds to do so.
Only charitable organizations can issue annuities, since foundations can be
deregistered if they incur ineligible debt obligations. Furthermore, a charity must
ensure that it has authority to issue annuities pursuant to provincial laws dealing
with insurance or other relevant laws. In many cases, the charity will purchase an
annuity from a financial institution rather than issuing it itself, to reduce its risk of
loss.
The Department of Finance announced a number of proposed changes on
December 20, 2002. These proposals were modified on December 5, 2003, in
response to so-called 'art flip' transactions, and eventually introduced in Bill C-33 in
November, 2006, which has not been enacted as at April, 2007. Nevertheless, CRA
is administering the law as if these changes were in place. One major change deals
with the measurement of a gift where the donor receives some advantage in
exchange, to deal with 'split-receipting'. CRA has changed its administrative policy
dealing with annuities and no longer applies the administrative policy set out in IT111R2 for annuities issued after December 20, 2002. CRA has acknowledged that
its earlier administrative position has no basis in law and cannot be continued in the
face of the proposed changes in the ITA.
53
Estate Planning - SSC #9
Pro-Seminars International 10/07
Under the proposed changes, the value of property received from a charity in
exchange for a gift must be determined and that value will become the cost of that
property. As a result, where an amount is transferred to a charity by a donor and the
advantage received by the donor is a stream of annuity payments, the amount of the
gift will be equal to the excess of the amount transferred by the donor to the charity
over the amount that would be required to purchase an annuity that would provide
the same payments. CRA has stated that despite the withdrawal of its administrative
position, it expects charitable annuities to continue as a means of fundraising which
could be more advantageous to the donor than in the past.
In an example mentioned by CRA, for a donor with a life expectancy of eight years,
who actually lives for eight years and makes a cash payment of $100,000, in
exchange for annuity payments of $10,000 for each of those eight years, the cost of
the annuity that will pay $80,000 over eight years is $50,000. Under the former
administrative practice, the donor would be entitled to a tax receipt for $20,000 in
the year of the payment and would receive a total of $80,000 as annuity payments
tax-free. Under the proposed changes, the donor will receive a tax receipt for
$50,000 in the year of the gift, and will receive $80,000 in annuity payments, of
which $30,000 will be included in income over the eight years, as blended
payments.
3. Life Insurance
A charity can benefit from gifts of insurance policies in several ways. From the
donor's point of view, a gift of an insurance policy allows a large donation, at a
relatively small cost to the donor. CRA's administrative position on donations of life
insurance policies is set out in IT-244R3 entitled "Gifts by Individuals of Insurance
Policies as Charitable Donations".
A charity can purchase a life insurance policy on the donor's life on the
understanding that the donor will pay the premiums directly to the insurance
company. This is often supported by a pledge to pay the premiums. The charity can
issue a tax receipt to the donor for the premiums paid. On the death of the donor,
the charity will receive the death benefit, but it will not be a gift by the donor.
Estate Planning - SSC #9
Pro-Seminars International 10/07
54
The major drawback from the charity's point of view is that there is no way to ensure
that the donor will pay the premiums. However, if the donor fails to pay, the charity
can surrender the policy or pay the premiums out of its own funds.
Alternatively, the donor can transfer an existing policy to the charity and undertake
to pay future premiums. The charity can issue a receipt for the fair market value of
the gift, which is usually the cash surrender value of the policy (normally only whole
life or universal life policies will have a value). The charity can issue a tax receipt for
the premiums paid. There may be an inclusion in income of the donor on a gift of a
policy if the fair market value of the policy exceeds its tax cost.
As a further alternative, the donor whose life is insured can continue to own the
policy, and name the charity as the beneficiary of the policy. The donor will receive
no tax relief for the premiums paid or the value of the policy, since nothing currently
is being given to the charity. Under insurance law, the donor can change the
beneficiary from the charity to another person. If the charity is the named
beneficiary, it will receive the death benefit on the donor's death. For deaths prior to
1999, neither the donor nor the estate received a tax credit when the death benefit
was paid to the charity. For deaths after 1998, the donor is deemed to have made a
gift to the charity immediately before death, if the charity receives the death benefit
under the policy within 36 months after death. The fair market value of the gift is
deemed to be the fair market value, at the time of the individual's death, of the right
to that transfer.
A donor can also use life insurance proceeds to pay a bequest in a will to a charity.
The donor who owns an insurance policy can fund the bequest, naming the estate
as beneficiary of the policy. The will would include a bequest equal to the death
benefit from the insurance policy. On the donor's death, the estate would pay the
bequest to the charity and receive the life insurance proceeds free of tax. The
charity would issue a receipt for the amount of the bequest. The gift could then be
used to reduce tax in the terminal return or in the return for the prior year, if there
are excess credits. In some provinces, probate tax on the value of the proceeds
passing through the estate may be a factor. A direct designation of a charity as a
beneficiary will be treated as a donation in the year of death of the insured.
55
Estate Planning - SSC #9
Pro-Seminars International 10/07
4. Gifts of Residual Interests
A donor can give property to a charity, but maintain the right to use the property for
his or her lifetime. Alternatively, the donor can establish a charitable remainder trust
by transferring cash assets to a trust, reserving a right to receive payments for life
and transferring the balance on death to a charity. CRA's administrative position on
this type of gift is set out in IT-226R, entitled "Gifts to a Charity of a Residual Interest
in Real Property or an Equitable Interest in a Trust". If certain conditions are met,
CRA considers the donor has made a gift which will qualify for a tax receipt. This
type of gift could be made during a person's lifetime or by a will. It is necessary to
value the residual interest. This value will be the fair market value of the transferred
property (usually cash) less the present value of the reserved interest, taking into
account an appropriate discount rate, the life expectancy of the donor, current
interest rates and any other relevant circumstances. This type of gift is analogous to
a charity annuity. If there is a right to encroach on the capital of the property, CRA
takes the view that the value of the residual interest will be nil. A trust will generally
be required for gifts of property other than real estate, so that a residual interest in
the trust is donated to the charity.
By way of example, an individual donor may wish to donate a work of art to a
charity, but retain possession of the art until her death. In these circumstances, if the
donor transfers title in the art to a trust of which the charity is the residual beneficiary
at the time of the gift, the donor has made a gift of a residual interest in the trust, the
value of which is based on the factors mentioned above.
A gift of a residual interest may result in a capital gain to the donor if the value of the
property exceeds its adjusted cost base, determined in accordance with a formula
applied by CRA.
Using a charitable remainder trust or a gift of a residual interest often involves
reliance on administrative policies of CRA and raises a number of technical issues.
The Department of Finance is considering changes in the ITA dealing with
charitable remainder trusts, but no amendments have been introduced. Specific
advice should be sought before this type of planning is utilized.
Estate Planning - SSC #9
Pro-Seminars International 10/07
56
5. Gifts of Capital Property
A person who makes a gift of capital property is deemed to have received proceeds
of disposition equal to the fair market value of the property. If the fair market value
exceeds the cost, a capital gain will be realized. The capital gains inclusion rate is
50%. In addition, if the property is depreciable property, there may be recapture of
capital cost allowance previously claimed, which is fully included in income.
A donor can reduce capital gains tax on a gift of appreciated capital property to a
charity, by designating in the tax return in the year in which the gift is made, the
transfer price as an amount not greater than the fair market value of the property
and not less than its adjusted cost base. The qualifying donor will then be deemed
to have disposed of the property for this designated amount and will also be
considered to have made a gift equal to the designated amount when calculating the
tax credit or deduction. This permits the donor to avoid a capital gain altogether, or
create the desired amount of capital gain (for example to offset capital losses).
Certain restrictions apply in the case of a non-resident individual disposing of
Canadian real estate to a charity.
For gifts to public qualified donees of securities traded on a prescribed stock
exchange (such as shares, bonds, warrants, debentures and mutual fund units), the
amount to be included as a taxable capital gain is reduced by one-half. The amount
of the taxable capital gain is reduced from 50% to 25%. This, combined with the
increased income limits, has resulted in a greater portion of the gift of a qualifying
marketable security being available to shelter other income. The entire gain realized
on a qualifying gift of marketable securities made to a public qualified donee after
May 1, 2006 is exempt from tax. The March 19, 2007 budget will extend this
incentive to gifts to private foundations after that day. It is more tax-efficient for the
donor to give such securities directly to a charity, rather than sell them and give the
proceeds to the charity.
Ordinarily, an employee who exercises a stock option is taxed on a benefit equal to
the difference between the fair market value of the shares at the time of exercise
and the sum of the exercise price plus the amount paid for the option. In certain
circumstances, the employee can claim a deduction against the stock option benefit
so the taxable portion of the benefit is equal to the taxable portion of a capital gain
(50% currently).
57
Estate Planning - SSC #9
Pro-Seminars International 10/07
Where an employee stock option is exercised for marketable securities which are
given to a charity (other than a private foundation) within 30 days of the option being
exercised and certain other conditions are met, the taxable benefit is reduced to
one-quarter of the benefit. Individuals who make qualifying donations after May 1,
2006 to public qualified donees of marketable securities acquired through such
stock options are not required to include any amount of the benefit. The March 19,
2007 budget will extend this to gifts of such securities to private foundation after that
day.
A gift of a "non-qualifying security" to a charity will be ignored in determining the tax
deduction or credit in most cases. A non-qualifying security generally includes an
obligation of the donor or a non-arm's length person, a share issued by a
corporation with which the donor does not deal at arm's length or any other security
issued by the individual or a non-arm's length person. Specifically excepted are
obligations, shares or securities listed on prescribed stock exchanges and deposits
with financial institutions. If the gift is disposed of within five years of receipt of the
gift, or the property ceases to be a "non-qualifying security" within the five-year
period, the individual will be treated as having made a gift at that time. This rule
does not apply to an "excepted gift", which is generally a gift of a share made to an
arm's length qualified donee that is not a private foundation, and where the donee is
a charitable organization or a public foundation, the donor deals at arm's length with
all of the donee's directors and officers. CRA considers the relevant time when the
donor must deal at arm's length with the donee is immediately after the gift.
The objective of these rules is to deny a tax credit for certain types of gifts, including
shares of privately held companies, subject to some relief if the donee disposes of
the security within five years. The March 19, 2007 budget will extend these rules
where the non-qualifying security is donated to a trust of which the registered charity
is a beneficiary.
There are provisions dealing with certain "loan-back" arrangements under which a
person donates property to a charity which is not dealing at arm's length with the
person and receives back a loan, or is allowed to use the property donated to the
charity. In these cases, the fair market value of the gift will be reduced for purposes
of calculating the tax credit.
Estate Planning - SSC #9
Pro-Seminars International 10/07
58
The March 19, 2007 budget will extend these rules to certain arm's length
arrangements. CRA's administrative position on gifts of capital property is set out in
IT-288R2 entitled "Gifts of Capital Properties to a Charity and Others" and IT-297R2
entitled "Gifts in Kind to Charity and Others."
As discussed more fully below, the proposed amendments in Bill C-33 will
significantly change the rules for determining the value of gifts of property in many
situations.
6. Gifts of Art, Cultural and Ecological Property
A.
Art
Certain gifts of inventory by an artist receive special treatment. In those
circumstances, where an appropriate designation is made, an artist is entitled to a
credit based on the fair market value of the property but no income is triggered on
the disposition.
Artwork is generally considered to be personal-use property unless it is inventory.
Personal-use property is property that is used primarily for the personal use or
enjoyment and includes jewellery, clothing, furniture, and certain works of art. For
purposes of calculating the capital gain or loss, the adjusted cost base and
proceeds of disposition of personal-use property are deemed to be at least $1,000.
This rule eases the compliance and administrative burden associated with the
reporting of dispositions of personal-use property.
The $1,000 deemed adjusted cost base and deemed proceeds of disposition for
personal-use property will not apply if the property is acquired after February 27,
2000, as part of an arrangement in which the property is given to a charity.
Therefore, where this type of property with a value of less than $1,000 is donated to
a charity in those circumstances, it will no longer be treated as personal-use
property, and any resulting capital gain will be taxable.
B.
Cultural Property
A gift of certified cultural property to a designated institution will not trigger a capital
gain. The donor will be allowed a credit (if an individual) or a deduction (if a
corporation) for the fair market value of the property and will not be limited to 75% of
income.
59
Estate Planning - SSC #9
Pro-Seminars International 10/07
There are special rules for determining the fair market value of cultural property. In
addition, any capital gain on an object that is donated is exempt from tax. The
determination is made by the Canadian Cultural Property Export Review Board and
there are extensive rules for the procedures to be followed and appeals if the
amount determined is not acceptable to the donor. The Board must certify the
property and designate the institution.
Any unused credits or deductions can be carried forward for five years, or back one
year in the event of death. Charities receiving gifts of cultural property are subject to
a penalty tax in certain circumstances if they dispose of the gifted property within ten
years of its receipt. CRA's administrative position on gifts by artists is set out in IT504R2 entitled "Visual Artists and Writers", and its position on gifts of cultural
property set out in IT-407R4 entitled "Dispositions of Cultural Property to
Designated Canadian institutions".
C.
Ecological Property
There are similar rules for gifts of ecologically sensitive property to the crown, a
municipality or a charity that is approved for the conservation and protection of the
environment. There are incentives for owners of ecologically sensitive land to
protect that land while at the same time qualifying for a tax benefit. The precise
nature of the conveyance of property will depend on legal issues and in some cases
there may be split ownership.
There are special valuation rules for gifts of ecological property. These include gifts
of the land itself and gifts of easements over the land. The use of easements
provides some flexibility, permitting the owner to retain legal title while fettering its
future use and preventing development, but this can raise difficult valuation issues in
some cases. The fair market value will be determined by the Minister of the
Environment and there are extensive rules for the procedures to be followed and
appeals if the amount determined is not acceptable to the donor. As in the case of
gifts of cultural property, a charity accepting a gift is subject to a penalty if it
disposes of the property within ten years or changes its use without the consent of
the Minister of the Environment. Under the Ecological Gifts Program, Environment
Canada certifies that land is ecologically sensitive and an expert panel certifies the
value.
Estate Planning - SSC #9
Pro-Seminars International 10/07
60
Gains realized on gifts made after May 1, 2006 are exempt. Where gifts were made
prior to that date, 50% of the gain is taxable.
7. Gifts of Inventory
Unlike gifts of capital property, gifts of inventory do not permit the donor to choose
an amount between the cost of the property and its fair market value. As a result, a
gift of property that is part of the inventory of a business will result in an income
inclusion. While there will be a corresponding eligible amount for the gift (the eligible
amount will depend on whether any advantage is received by the donor), it is
frequently less advantageous to donate inventory rather than capital property. This
is one of the reasons why special rules were enacted for gifts of inventory made by
artists, as discussed above.
The March 19, 2007 budget will permit corporations to claim a deduction for a gift of
medicine held in inventory to a registered charity, if the charity has received financial
assistance from CIDA and uses the medicine in carrying out its foreign activities.
8. Gifts to the Crown
A gift to Her Majesty in right of Canada or Her Majesty in right of a Province (a
"crown gift") is subject to the same income limitation as other gifts, i.e. 75% of the
donor's income for the year plus 25% of any taxable capital gain, plus an amount
equal to 25% of recapture of previously claimed capital cost allowance.
Consequently, crown gifts provide the same tax relief as gifts to other charities.
There are separate rules for gifts made prior to 1997 to the federal or provincial
crown.
9. Charitable Donations of RRSPs and RRIFs
Donations made as a consequence of a direct designation of proceeds of RRSPs or
RRIFs to a charity on the death of an individual qualify as gifts eligible for the
individual donation tax credit, if the transfer of funds from RRSPs or RRIFs to the
charity occurs within 36 months of death. The transfer is deemed to be a gift made
immediately before death by the individual to the charity. The fair market value of
the gift is deemed to be the fair market value, at the time of the individual's death, of
the right to the transfer.
61
Estate Planning - SSC #9
Pro-Seminars International 10/07
Since the balance in an RRSP or RRSP is treated as income in the year of death, in
the absence of a rollover to a spouse, the credit for a gift to charity in the year of
death will effectively eliminate the tax otherwise payable on the balance, if there is a
direct designation. This is the same result as if there were a bequest by will of the
amount included in income under the RRSP or RRIF, without having to determine
the amount in advance. A direct designation of a charity will be treated as a
donation.
ANTI-TERRORISM RULES
Very broad rules in the ITA and other legislation give sweeping powers to the
federal government to try to address abuses through which terrorism is funded
through Canadian registered charities. Donors should be aware of these rules and
carry out appropriate due diligence before making donations to organizations that
may be subject to these rules. Similarly, charities should carefully consider the
identity of donors, and the way in which donors have obtained funds and other
donated property. Charities should review their lists of donors for organizations that
may be identified as terrorist groups or affiliated with such groups or that might
(even unknowingly) be assisting that type of activity. This can be of particular
concern for organizations that are members of affiliated groups of charities, since
one organization can be exposed for activities of another in certain circumstances.
Both charities and donors would be well advised to consider these issues where
there is any possibility of a terrorist connection.
RECENT AND PROPOSED CHANGES
As a result of the May 2, 2006 budget, personal tax rates changed (this affects the
credit or deduction for gifts up to $200) and incentive for donations of marketable
securities and ecologically sensitive land for gifts made after May 1, 2006 was
extended by exempting the realized capital gain.
A number of other changes are proposed for charities and charitable donations in
Bill C-33. One significant change deals with 'split receipting', under which the value
of a gift will be the excess of the value of the property given over the value of any
benefit or advantage received by the donor or a person not dealing at arm's length
with the donor. As noted above, this is the basis for the new administrative position
dealing with charitable annuities.
Estate Planning - SSC #9
Pro-Seminars International 10/07
62
CRA has indicated that this policy will also apply to situations in which a payment is
made, for which some consideration is received from the charity, such as
recognition, a small gift, membership, a meal, etc. The previous administrative
practice of CRA was not supported by the law and CRA and the Department of
Finance are attempting to rectify this. Under the proposals, a charity will be required
to place a value on any benefit received by the donor in exchange for the payment,
and issue a receipt only for the net amount. There will be some limits on the scope
of this change, which will apply to gifts made after December 20, 2002.
The definition of 'tax shelter' includes certain arrangements under which property is
given by an individual to a charity if the tax credit claimed by an individual donor will
exceed the cost of the property to the donor, or if non-recourse debt is involved.
This permits CRA to identify various tax planning techniques that have not been
treated as tax shelters because the definition has not included situations in which
there is a reduction in taxes payable through a tax credit, rather than a reduction in
income or a reduction in taxable income.
The proposed amendments in Bill C-33 include significant changes in the rules for
determining the value of a gift in kind. As a result of perceived abuses arising out of
arrangements under which property was acquired at a low cost and valued at a
much higher cost when donated, an arbitrary rule is proposed under which the value
of the property will not exceed its cost, if the gift occurs within three years of
acquisition of the property. This rule will apply regardless of the actual value of the
property. In addition, if property is acquired with any expectation that it may be given
during the lifetime of the owner, its value cannot exceed its cost. These rules will not
apply to gifts of inventory, marketable securities, Canadian real estate, certified
cultural property or approved ecological property or to gifts on death. As a result, all
other gifts of capital property will be subject to these new valuation rules.
In determining the fair market value of the donated property, the intention of the
donor at the time of acquisition will now be relevant. If one of the main reasons for
acquiring the property was to make a gift (other than by will), in most cases the
donor will have to use the acquisition cost as the fair market value at the time of the
gift. For both gifts that are subject to the three year rule and gifts that are subject to
the ten year rule, there will be extensive 'tracing' rules to deal with transfers of
property prior to the time of the gift.
63
Estate Planning - SSC #9
Pro-Seminars International 10/07
These new rules will also apply to property that was acquired under what is called a
'gifting arrangement' for tax shelter reporting purposes, or involving debt that the
donor may not have to pay. There will be an anti-avoidance rule which will address
situations in which a cash gift is made and the charity uses the cash to buy property
from the donor at more than its cost. These new rules are very far reaching and
unless they are changed before they are implemented, will have a very serious
effect on a number of situations in which donors expect to receive credit for the
value of the gift rather than its cost.
The proposals in Bill C-33 will reduce the value of the gift by any advantage that is
in any way related to the gift. The scope of the wording is uncertain and it will be
difficult to apply in many cases. CRA has indicated that it expects charities to
undertake due diligence in establishing the fair market value based on the "cost"
approach, and in determining the value of any advantage that would reduce the
eligible amount of a gift
If a donor fails to inform the registered charity of circumstances that reduce the
eligible amount, despite the amount shown on the official receipts, under the
proposals the eligible amount will be nil. This is a serious penalty for a donor who is
prepared to gamble that an advantage will not reduce the eligible amount of the gift.
Registered charities are advised to review carefully the circumstances in which gifts
of property are received, when determining the eligible amount of the gift. In many
cases, this will require consultations with the donor.
The proposals in Bill C-33 also deal with the rules for designation of the registered
charity as a charitable organization, public foundation or private foundation and a
new "control" test, based on commercial law concepts, such as arm's length and de
facto control. These changes are intended to apply after 1999. CRA has recently
taken the position that the proposed rules will apply currently, without yet being
enacted, because they will be retroactive.
CRA has taken the position that starting in 2005, registered charities should include
the web site address of CRA on official receipts, despite the fact that new rules are
not yet enacted.
Estate Planning - SSC #9
Pro-Seminars International 10/07
64
Although, CRA indicated that registered charities would not be penalized for not
including this information in 2005 receipts, it requires all receipts to include it as of
January 2006.
Intermediate sanctions can now be assessed against registered charities. This gives
CRA the option of assessing tax or penalties rather than revoking registration, for
various types of non-compliance, such as issuing improper receipts, carrying on an
unrelated business (in the case of a charitable foundation or charitable organization)
or carrying on any business (in the case of a private foundation), acquiring control of
a corporation, conferring an undue benefit and other defaults. There is a new regime
for objections and appeals by charities and greater transparency. The new rules for
creating endowments, transfers between charities and the disbursement quota will
require charities to plan more carefully than in the past.
Anti-avoidance rules prevent "trafficking" in unused charitable donations made by
corporations. In some cases, unused deductions for previous donations have been
available to a subsequent purchaser of the shares of a corporation.
CRA is working on a new form T3010A and is consulting with the charities sector.
This form has evolved over time and it is not readily apparent whether it is intended
to provide public information or to assist CRA in ensuring that charities comply with
the requirements in the ITA, or perhaps a bit of both. With the introduction of
intermediate sanctions, the revised form may require additional information that will
assist CRA in determining whether penalties should be assessed.
The March 19, 2007 budget will introduce new rules dealing with "excess" business
holdings by private foundations, consisting of shares of private corporations or listed
corporations. For taxation years beginning after March 19, 2007, a private
foundation that owns more than 2% of any class of shares of a corporation will be
required to report its holdings together with those of persons not dealing at arm's
length with it, when filing its T3010 return for the year. Where the holdings of a
foundation exceed 2% and the combined holdings of the foundation and all nonarm's length persons exceed 20%, either the foundation or the other persons will be
required to divest to below the 20% level.
65
Estate Planning - SSC #9
Pro-Seminars International 10/07
If the divestiture does not occur within stipulated periods of time, the foundation will
be subject to penalties. CRA can treat non-arm's length persons as dealing at arm's
length, if sufficient reasons are given.
There will be transitional rules for private foundations that held shares on March 19,
2007. The period for compliance will vary depending on the size of the holdings and
will range from 5 to 20 years. The rules are designed to encourage private
foundations to complete this transition in a timely manner by denying donors relief
from capital gains on donations of marketable securities for taxation years of the
private foundation beginning after March 19, 2012, if it is not then in compliance with
the new rules.
These rules are apparently intended to address concerns about potential "selfdealing". Extending the concept to shares of private corporations goes further than
had originally been expected and seems to be unrelated to the incentive for gifts of
marketable securities.
LET’S LOOK AT STRATEGIES USING LIFE INSURANCE

Charitable giving results in a sacrifice.

Donor must be philanthropically inclined.

Good insurance program will be flexible and respect the donor’s wishes and
circumstances.

Using life insurance allows a person of modest means to provide a large gift to a
charity for a relatively small annual premium (which will generate a tax credit),
without reducing the estate to be left to dependents / beneficiaries.

Donor may receive recognition (donor can benefit from the goodwill associated
with the gift while still alive).
Estate Planning - SSC #9
Pro-Seminars International 10/07
66
FUNDING METHODS
Three methods

Funding a bequest through a will.

Charity-owned insurance policy.

Donor-owned insurance policy.
Funding a bequest through a will

Donor owns an insurance policy and names his/her estate as beneficiary.

Donor makes bequest in will in favour of the charity.
Pros

Provide lump sum on death to charity by payment of premiums.

Bequest is not subject to disbursement rules.

Allows flexibility; donor can change mind and designate a different beneficiary.

Tax credit in year of death, with one-year carry back
Cons

No current tax credit available.

Tax credit on death may not be totally utilized.

Subject to creditor claims, probate fees and estate litigation, since insurance
passes through estate.
Funding a bequest with a charity owned policy

Charity owns insurance policy and is the beneficiary.

Donor pays premiums.
Pros

Premium paid will generate current tax credits due to ease of arrangement.

Lump sum on death to charity provided by paying of premiums.

Charity has certainty of receipt of death benefits - no creditor claims, probate or
estate litigation fees.

Premiums receipted will not be subject to disbursement rules if subject to 10year direction or trust.
67
Estate Planning - SSC #9
Pro-Seminars International 10/07
Cons

Donor has no rights under policy.

If donor defaults, charity may have to pay premiums or allow lapse and take
cash surrender value.

Donor can apply for policy and then absolutely assign or gift policy to charity.

Charity can apply for policy on life of donor with understanding that donor will
pay premiums.

Donor can absolutely assign or gift an existing policy to charity.

Disposition at fair market value may result in income inclusion AND the donor
will get the tax credit.
Funding a bequest with a donor owned policy

Donor owns policy and names charity as beneficiary.

From a tax point of view, this is not recommended, however, there may be other
reasons for structuring this way.
Pros

Lump sum on death to charity provided by paying of premiums.

Death benefit is not subject to disbursement rules.

Gift not subject to creditor claims or probate fees.

Donor has flexibility to change beneficiary.

Premium notices will encourage continuation of donations / premiums.

Tax credit of 100 per cent can be realized on death.
Cons

No tax credit available either during life or at death.
CANADIANS AND U.S. ESTATE TAXES
In 1988, the United States changed estate tax rules substantially increasing taxes to
Canadians owning property in the U.S. So far, the Canadian government has been
able to work out an agreement with the U.S. to lessen this increased tax burden.
Estate Planning - SSC #9
Pro-Seminars International 10/07
68
History
Estate taxes or succession duties are taxes paid on the value of property owned by
an individual at death. Canada does not have estate taxes. However, at death,
capital assets are deemed to be disposed of at fair market value (FMV), which may
result in capital gains tax being paid. In the U.S., there is no deemed disposition of
capital property on death but there are federal and state estate taxes.
Who is taxable?
U.S. citizens and/or residents (Americans) and non-resident aliens (Canadians) are
taxed differently. A resident is defined as a person who acquires domicile in a place
by living there with no definite present intention of leaving.
Since intention may be difficult to substantiate, other criteria such as social and
economic ties to the community or immigration status may be used. Canadians
vacationing in the U.S. are usually considered non-residents of the U.S. because
they intend to leave to Canada in the near future.
How the estate tax applies
U.S. estate tax applies to the fair market value of the world-wide property of a U.S.
citizen, a Green Card holder, and an individual resident in the U.S. at the time of
their death. As well, U.S. estate tax generally applies to property situated in the U.S.
that is owned by non-residents of the U.S. In calculating an individual’s taxable
estate, deductions for debts and certain expenses are permitted. However, for
Canadian residents, the permitted deductions are prorated based on the value of
their U.S. gross assets over their world-wide assets.
Unlike the U.S., Canada does not have an estate tax. But, when Canadian residents
die, they are deemed to dispose of all of their capital property at fair market value,
unless the property transfers to a spouse or a spousal trust. As a result, in the year
of death, if you are a Canadian resident and you own U.S. real property, for
Canadian purposes you may have a large “deemed” capital gain with respect to
such property, in addition to a possible U.S. estate tax liability. In some cases, the
combination of the Canadian tax and U.S. estate tax liability could end up being a
substantial percentage of the value of the property.
69
Estate Planning - SSC #9
Pro-Seminars International 10/07
U.S. estate tax changes
In June 2001, the U.S. passed a law that phases out the estate tax over the next
decade. Under the legislation, the estate tax rate is gradually being reduced and the
exemption amounts are being increased. Based on the changes made, the estate
tax will be repealed for the 2010 year. However, this change may not be permanent.
Unlike Canadian tax law, the 2001 changes were contained in legislation referred to
as a reconciliation act, and consequently, it was necessary to include a “sunset
clause” to comply with U.S. law. Ignoring the legalities, what this really means is that
the changes enacted will not apply after December 31, 2010. So, unless further
steps are taken, the repeal of the estate tax will only actually last for one year 2010. In 2011, the system will revert back to the rules that applied just before the
2001 reconciliation bill was enacted. Unfortunately, it is difficult to predict whether
further steps will be taken to make this repeal permanent, or to perhaps continue the
rules as they apply for 2009.
U.S. estate tax rates and exemptions
For U.S. estate tax purposes, a “unified credit” is available which effectively exempts
a portion of the estate from estate tax. For U.S. citizens and residents, the unified
credit is based on an effective exemption amount of $1.5 million U.S. for 2005. This
effective exemption for U.S. persons will increase until it reaches $3.5 million U.S. in
2009, as shown in the table on page 3. In addition, the top estate tax rate is being
reduced as shown on page 3 (other graduated rates remain unchanged).
Year
Effective Exemption
Top Estate Tax Rate
(U.S. $)
2004
1,500,000
48%
2005
1,500,000
47%
2006
2,000,000
46%
2007
2,000,000
45%
2008
2,000,000
45%
2009
3,500,000
45%
2010
Repealed
Repealed
2011 and after
1,000,000
55%
Estate Planning - SSC #9
Pro-Seminars International 10/07
70
For 2005, the graduated estate tax rates and the unified credit are as follows:
Taxable Estate
Estate Tax
From
To
Tax on bottom of
(U.S. $)
(U.S. $)
range
Rate on excess
(U.S. $)
0
10,000
0
18%
10,000
20,000
1,800
20%
20,000
40,000
3,800
22%
40,000
60,000
8,200
24%
60,000
80,000
13,000
26%
80,000
100,000
18,200
28%
100,000
150,000
23,800
30%
150,000
250,000
38,800
32%
250,000
500,000
70,800
34%
500,000
750,000
155,800
37%
750,000
1,000,000
248,300
39%
1,000,000
1,250,000
345,800
41%
1,250,000
1,500,000
448,300
43%
1,500,000
2,000,000
555,800
45%
2,000,000
And over
780,800
47%
Unified Credit for 2005
$555,800
Estates of non-residents
For U.S. estate tax purposes, non-residents are taxed on the fair market value of
their U.S. “situs” property. U.S. situs property is basically property situated in the
U.S. and includes, for example:

Real property and tangible personal property situated in the U.S. at death,

U.S. securities, certain U.S. debt obligations,

U.S. mutual funds including money market funds,

Interests in certain trusts if the assets held by that trust have a U.S. situs, and

Any business-related assets owned by a sole proprietor and used in a U.S.
business activity that are included in the sole proprietor’s gross estate. For
example, these assets might include land, machinery and equipment, patents,
accounts receivable and goodwill.
71
Estate Planning - SSC #9
Pro-Seminars International 10/07
There are several types of property which are exceptions to the U.S. situs rules for
estate tax purposes. Some of these exceptions include U.S. bank deposits (not
effectively connected with a trade or business in the U.S.), the proceeds of life
insurance on the life of the decedent, and certain portfolio debt obligations. Under
U.S. domestic tax law, U.S. estate tax is applicable on U.S. situs property owned by
non-residents; however non-residents are entitled to a much more limited unified
credit of $13,000 U.S., which basically exempts assets worth $60,000 U.S. This
exemption did not increase as a result of the 2001 estate tax changes.
Treaty relief
Fortunately, the Canada-U.S. tax treaty provides Canadians some relief from U.S.
estate tax. As discussed below, the treaty provides for a basic unified credit
exemption similar to that available to U.S. citizens, Green Card holders, and U.S.
residents.
Unified credit exemption
The treaty allows Canadians to benefit from the same exemption amount that U.S.
persons can claim. In 2005, the effective exemption amount is $1.5 million U.S. As
with the effective exemption for U.S. residents, U.S. citizens, and Green Card
holders, the exemption available under the treaty will increase to $3.5 million U.S.
by 2009. However, Canadians must remember that the exemption is prorated based
on the ratio of the value of U.S. situs assets compared with the value of the estate
as a whole. Where the prorated exemption is less than $60,000 U.S., the deceased
can make use of the flat $60,000 U.S. exemption allowed to non-residents under
U.S. domestic law.
Canadians must also keep in mind that the value of Canadian assets and the value
of the entire estate is based on the U.S. rules. For example, where an individual
holds life insurance, the value of that insurance is included in the value of the estate
for U.S. purposes, even if the estate is not named as the beneficiary.
Estate Planning - SSC #9
Pro-Seminars International 10/07
72
To better understand the application of this unified credit exemption, let’s look at an
example…A Canadian who dies in 2005 owns a Florida condominium worth
$400,000 U.S. and non-U.S. situs assets worth $1.6 million U.S.
In this case, the net U.S. estate tax will be calculated as
follows:
Estate Tax on $400,000 U.S.
Tax on the first $250,000 U.S.
$70,800
Tax on balance at 34%
51,000
Total Tax
121,800
Less:
Prorated unified credit
$400,000/$2,000,000 x
$555,800
Net U.S. Estate Tax in 2005
111,160
$10,640
As you can see from this example, the Canada-U.S. tax treaty only provides partial
relief where the value of a Canadian’s U.S. property is low in relation to the total
value of their estate.
Small estate relief
There is another exemption provided under the treaty, although it will not be needed
now that the unified credit exemption has reached $1.5 million U.S. The small estate
rule applies where a Canadian has a world-wide gross estate that does not exceed
$1.2 million U.S. at the time of death. In this case, the U.S. estate tax will apply only
to U.S. real property held directly or indirectly by the decedent (this would include
interests in U.S. partnerships or corporations holding real property located in the
U.S.) and personal property forming part of a permanent establishment or fixed
base. So, for example, where this rule applies, shares of a U.S. corporation held by
a Canadian will not be subject to U.S. estate tax. This rule was relevant for 2003
and prior years, as the unified credit exemption was less than the $1.2 million U.S.
threshold for the small estate rule.
73
Estate Planning - SSC #9
Pro-Seminars International 10/07
Additional treaty relief
Another relieving provision under the treaty includes a non-refundable spousal credit
exemption. Lastly, the treaty provides further relief as the U.S. estate tax that has to
be paid on death may be eligible as a credit against Canadian income tax in the
year of death on U.S. source income.
New U.S. income tax rules after 2009
Under current U.S. tax rules, where an asset is subject to estate tax, the heirs of the
deceased generally inherit the asset with a cost base for U.S. income tax purposes
equal to fair market value on the date of death. This means that someone who
inherits property will only be liable for tax on any appreciation in value that accrues
while they own the property – they will not be taxed on any appreciation in value that
occurred while the property was owned during the lifetime of the deceased.
However, when the estate tax is fully repealed in 2010, this rule will no longer apply.
Though the rules are complicated, for U.S. estate tax purposes after 2009, two
general rules will apply regarding the cost base of property inherited on death:
Where U.S. property of a U.S. resident or citizen is transferred to another U.S.
resident or citizen on death, the new owner will assume the property at its original
cost for U.S. tax purposes. This rule will also apply to transfers of taxable U.S.
property on death between two non-residents of the U.S. So, if a Canadian owns
U.S. property and on death (in 2010) that property is transferred to another
Canadian, the new owner will assume the property at its original cost for U.S. tax
purposes. In recognition that there was an effective exemption for U.S. estate tax
purposes, a basic increase is available whereby the tax cost of the deceased’s
assets can be increased by up to $1.3 million U.S. where the parties are U.S.
persons and by $60,000 U.S. where the parties are non-residents.
Where a U.S. person transfers property on death to a non-resident, the property will
be considered disposed of by the deceased at fair market value. So, if a U.S. person
dies in 2010 and leaves U.S. property to a Canadian resident (who is not also a U.S.
citizen), the Canadian will not end up paying tax on any appreciation in value that
occurred during the lifetime of the deceased.
Estate Planning - SSC #9
Pro-Seminars International 10/07
74
For transfers on death between Canadians, a logical conclusion is that the first rule
above would apply on the same basis as the current estate rules. That is,
Canadians would also be allowed to increase that basis of U.S. assets by $1.3
million U.S., except that this basis increase would again be subject to a prorating
depending on how much of the deceased’s estate is made up of U.S. assets.
However, it would appear that the current treaty with the U.S. would not allow for
this result. Consequently, if these rules become permanent, it is hoped that the
treaty will be updated prior to 2010.
Planning in uncertain times
Despite the changes to the treaty and the increased exemption amounts, some
individuals will still have a U.S. estate tax liability. In addition, with the uncertainty
associated with the future of the estate tax rules, planning becomes more
complicated as the estate tax plan may not be necessary after 2009. So, one will
want to use a plan which will not cause other tax problems on an ongoing basis and
that can be easily changed in the future.
Some potential estate planning tools that can be used include:
Use a Canadian corporation to hold U.S. investment properties
If a Canadian corporation holds the U.S. property, there should not be a disposition
of the property for estate tax purposes on death. However, it should be noted that
you may pay more combined Canadian and U.S. income tax on investment income
and on the eventual capital gain by using a corporation.
Use a non-recourse mortgage to finance U.S. real estate
In general, liabilities of an individual will be applied on a pro-rata basis to reduce the
value of U.S. situs and non-situs assets. However, if you use a non-recourse
mortgage to finance U.S. real property, that liability will be allocated directly against
the value of U.S. real property for estate tax purposes. Under a non-recourse
mortgage, the lender has recourse only to the mortgaged property and not to the
mortgagor personally, in the event of default.
Reduce the value of your Canadian estate
For some people, an estate liability can arise because the value of the individual’s
world-wide estate is much higher than their U.S. estate.
75
Estate Planning - SSC #9
Pro-Seminars International 10/07
This is due to the prorating of the treaty exemption and the prorating of general
liabilities discussed earlier. So, if you can take steps to reduce the value of your total
estate, a higher unified credit will be available after the prorating. Also, a higher
proportion of your general liabilities will be applied against your U.S. situs property if
the value of your estate is reduced. Reducing the value of your estate below $1.5
million U.S. (in 2005) would eliminate U.S. estate taxes completely.
Other more sophisticated plans are available such as the use of a trust or
partnership to hold U.S. situs property and U.S. Qualified Domestic Trusts (QDTs).
In addition to these tax planning ideas, another solution is to simply purchase life
insurance to cover the expected estate tax liability. When using life insurance, one
must keep the prorating rule for the unified credit in mind, and professional advice
on structuring life insurance is recommended.
For a trust to qualify as a QDT:

At least one of the trustees must be a U.S. citizen or U.S. Corporation.

The trust must meet certain requirements to ensure that any future estate tax is
collectable and

The executor must elect on the estate tax return to treat the trust as QDT.
Any income paid from the QDT is not taxable; however principal distributions are
subject to U.S. estate tax. The principal remaining in the QDT at the time of death
of the surviving spouse is subject to U.S. estate tax at the time.
Some other deductions from the US Estate Tax
Once the gross estate has been determined, there are deductions available which
reduce the gross estate. Among these deductions are funeral and administrative
expenses, claims and obligations of the decedent (like unpaid property and income
taxes arising before death), and losses incurred during the settlement of the estate
arising from fires, storms, etc. which are not compensated for in any manner (such
as by insurance).
These deductions are allowable to the extent the U.S. situs gross estate is of the
decedent’s entire gross estate (including non-U.S. situs property).
Estate Planning - SSC #9
Pro-Seminars International 10/07
76
Some other deductions available are donations to charities situated in the U.S., a
marital deduction for the value of property passing to the decedent’s surviving U.S.
citizen spouse and property passing to a qualified domestic trust (QDT).
A QDT enables a decedent to claim a deduction for the value of property transferred
to it for the benefit of a surviving spouse who is not a U.S. citizen.
Gifts
The U.S. applies a gift tax on all gifts made by an individual during the year on
amounts greater than $10,000 / year / donee. The rate of tax on gifts is the same as
the estate tax rate. Americans can give unlimited amount to a spouse tax-free,
while Canadians are allowed a $100,000 annual tax-free exemption on gifts to a
spouse. This tax does not apply to gifts made to an U.S. charity.
All gifts that were subject to gift tax during the decedent’s lifetime must be added to
the decedent’s taxable estate. This ensures the estate will be taxed at higher
marginal estate tax rates. Otherwise, individuals would take advantage of lower
marginal tax rates more than once when gifts are made during the decedent’s
lifetime.
Remember, for Canadian tax purposes, when a resident of Canada makes a gift of
anything to anybody (or corporation) the proceeds of disposition are deemed the fair
market value of the gift. Thus, if the gift is capital property, a capital gain could
occur.
U.S. gift tax
Gift taxes previously paid are allowed as a credit because the value of gifts is
included in the gross estate.
The 2001 changes and their uncertainty make planning for the estate tax more
difficult. We know the U.S. estate tax will be with us for the rest of this decade, but
then the uncertainty begins. Despite this, if you own U.S. assets, you should be
concerned about the possible application of U.S. estate tax.
77
Estate Planning - SSC #9
Pro-Seminars International 10/07
Miscellaneous tax issues for Canadians in the U.S.
Life Insurance
Proceeds of a life insurance policy are considered part of the decedent’s estate,
when either of these two conditions is met:

The death benefit is payable to the decedent’s estate.

The decedent owns (fully or partially) the life insurance policy at death.
The full death benefit is included in the estate if condition number one applies, while
the cash surrender value of the policy is included in the estate if condition two
applies. If the decedent transferred the ownership of a policy to anyone, either
directly or through a trust, for an amount less than the value of the policy during the
three-year period before the decedent’s death, the value of the policy is included in
the decedent’s estate. The above rules for life insurance only apply to Americans.
Any policies owned by Canadians, or death proceeds received in a Canadian
decedent’s estate, are not subject to U.S. estate tax.
This includes policies purchased from U.S. insurers. However, if a Canadian
subsequently becomes an U.S. resident, life insurance policies purchased while a
Canadian would be subject to U.S. estate tax.
Estate tax on prior transfers from other decedents
The decedent’s estate can claim a full or partial credit for federal estate tax paid by
the person who preciously transferred the property to the decedent. The amount of
the credit is reduced 20 per cent for each two-year period that the date of dea5th of
the transferor preceded the date of death of the decedent. As a result, after 10
years, there is no credit for estate tax or prior transfers and the transferred property
is subject to full estate tax once again. However, for surviving spouses who are not
U.S. citizens, the above 20 per cent reduction every two years does not apply, thus
allowing them to claim the full credit for estate tax on prior transfers.
State death taxes
Estate taxes owing to states are allowed as a credit against federal estate taxes.
Estate Planning - SSC #9
Pro-Seminars International 10/07
78
Double tax for Canadians
In Canada, Canadian residents are deemed to dispose of their capital property at
death for an amount equal to the fair market value of the property. This will result in
a tax liability if the property has unrealized gains. If this capital property were
situated in the U.S., it would also be subject to U.S. estate taxes.
Because Canadian tax is an income tax and the U.S. tax is an estate tax, the foreign
tax credit system between the two countries does not work, resulting in full tax being
paid in both countries. In addition, the tax treaty between Canada and the U.S., one
purpose of which is to eliminate double tax, does not provide relief. Therefore,
Canadians who own property in the U.S. are subject to double tax on that property.
Solution
Obviously, life insurance is an ideal solution to the problem of U.S. estate taxes and
double taxation. However, you may come across other possible solutions brought
forth by clients or their tax advisors.
Canadian corporations
U.S. situs property can be owned in a Canadian corporation. Shares of a Canadian
corporation are not U.S. situs property, so at death these shares would not be
included in the gross U.S. estate. It is best if the Canadian Corporation owns this
property from the outset in order to avoid possible Canadian and U.S. income tax on
accrued gains when the property is transferred into the Canadian Corporation. In
addition, if the U.S. property is vacation property, a taxable benefit will be conferred
on the shareholder, unless FMV rent is paid to the company for personal use.
It may be possible to set up a Canadian corporation whose “single purpose” is to
hold the vacation property. In this case, a shareholder benefit can be avoided,
provided a number of very restrictive conditions can be met. However, the
possibility exists that the U.S., may “look through” and ignore the corporation, and
assess the property as being personally owned because they determined that the
only reason for the corporate structure is to avoid U.S. estate taxes.
79
Estate Planning - SSC #9
Pro-Seminars International 10/07
Canadian mutual funds
Consider making investments in U.S. securities through Canadian mutual or
segregated funds, because these funds are not U.S. situs property.
Debt
If financing is required on either a Canadian or U.S. property, consider placing the
debt on the U.S. property. If it is non-recourse debt, it will provide a 100 per cent
deduction against the gross estate.
Joint ownership of property
If possible, both spouses could contribute financially toward the purchase of U.S.
situs property. This would avoid having the surviving spouse’s portion of the
property included in the deceased’s U.S. estate. However, this only defers the tax
until the surviving spouse dies.
Some other possible solutions or band-aids, which may not be feasible, realistic or
fit within the taxpayer’s plans, are:

Marrying an U.S. spouse, thus allowing ease of transfer of assets to the spouse
at death, and deferring the tax until the death of the surviving spouse.

Becoming an U.S. resident in order to take advantage of the larger credit.

Renting vacation property instead of buying.

Selling the property before death.
Opportunity
Plenty of possible solutions exist, most of which fail to eliminate the problem. They
only temporarily decrease or defer it. Furthermore, many of the strategies are risky,
expensive and cumbersome. Most people will wish to keep the property and would
want to solve the problem with a simple, inexpensive, effective, risk-free method.
Many advisors and commentators share the view that life insurance is that method.
However, one thing must be kept in mind. Life insurance cash values or death
benefits can increase the U.S. estate tax liability for U.S. citizens and /or residents,
as was explained earlier.
Estate Planning - SSC #9
Pro-Seminars International 10/07
80
One common way of avoiding this problem is using an irrevocable life insurance
trust. This trust would apply for the insurance on the life of the taxpayer and
premiums would be funded from income earned in the trust or contributions made
by the taxpayer. The beneficiary of the policy would be the trust. It is important that
the taxpayer not have any incidents of ownership in the policy. Therefore, the
taxpayer should not be a trustee, or at the very most a co-trustee with no powers
whatsoever when it comes to dealing with the insurance. The beneficiaries of the
trust will be the taxpayer’s children. At the insured’s death, the proceeds are paid to
the trustee, who can then lend money to the insured’s estate, for adequate security,
in order to pay the estate taxes, or the trustee may purchase assets from the
deceased’s estate.
This accomplishes two things:

The deceased’s assets are retained in the family and not sold in order to pay the
tax bill.

The insurance itself is not included in the deceased’s estate for estate tax
purposes.
This type of arrangement is only needed by taxpayers, which are U.S. citizens
and/or with large estates. Former Canadian residents who now live in the U.S. may
want to look into this type of arrangement if the size of their estate warrants it. It is
not necessary for your, as an Agent or Broker to know all these detailed rules.
However, it is important for you to recognize that a potential problem exists and to
direct your client to seek professional tax advice. Remember that the U.S. situs
property could involve a larger tax bill than anticipated, and that life insurance is a
viable solution to this problem.
IN CONCLUSION
Estate Planning is a rigorous and exacting process. It requires frequent reviews to
keep the plan current with the changes of law and the estate owner’s wishes.
Careful planning, subsequent reviews and competent advisors are mandatory.
The experienced Agent or Broker should not overlook any tax saving possibilities
when dealing with their client’s estate planning needs.
REMEMBER - Money is always the problem…Money is
always the solution
81
Estate Planning - SSC #9
Pro-Seminars International 10/07
TAX PLANNING CHECKLIST
Individual Planning
At Present
Advisable
Yes
Yes
No
1) Are all personal and dependency exemptions being taken (children,
parents, foster children, etc)?
2) Are maximum deductions for all expenses related to the production
of income being taken?
3) Are maximum investments, childcare, and other credits being taken?
4) Is maximum utilization being made of RRSP, RESP plan for tax
advantage? Has the appropriate type (s) of plan been chosen?
5) Are contributions to charitable and other tax-exempt organizations
being used as fully as the client is disposed to use them?
6) Are the client’s real property investments being fully used for tax
advantage?
7) Is client making maximum arrangements to repay non-deductible
mortgage loans?
8) Are investment losses effectively used as deductions from ordinary
income?
9) Are the client’s income fluctuations suitable for forward averaging?
10) Are income and deductions being directed to specific years to avoid
drastic fluctuation by:
a) Accelerating income?
b) Postponing deductions?
c) Postponing income?
d) Accelerating deductions?
e) Avoiding constructive receipt?
11) Has the effect of receiving dividend income versus interest income
(or salary) been examined?
Estate Planning - SSC #9
Pro-Seminars International 10/07
82
No
TAX PLANNING CHECKLIST
Individual Planning Continued
12) Have installment sales of investments or other property been
arranged to minimize tax?
13) Is investment in tax-sheltered instruments being used?
14) Is the client taking maximum advantage of the lifetime capital gains
exemption?
15) Has client planned for family members to maximize their capital
gains exemption?
16) Are gift/sale leasebacks being used?
17) Have alternative distribution methods for registered plans been
analyzed for tax consequences?
18) Is maximum advantage, between spouses being taken (or planned)
for: the investment income deduction?
The pension income deduction?
19) Is ordinary income from depreciation recapture being eliminated,
reduced, or deferred through timing or other planning mechanisms?
20) Have appropriate techniques for income splitting with children been
utilized?
21) Are plan distribution rollovers to another registered plan (e.g. RRSP)
advisable to defer taxable income?
83
Estate Planning - SSC #9
Pro-Seminars International 10/07
At Present
Advisable
Yes
Yes
No
No
TAX PLANNING CHECKLIST
Business Planning
At Present
Advisable
Yes
Yes
No
1. Are maximum allowable deductions for all expenses being taken?
2. Are expiring carryovers of credits, net operating losses and
charitable contributions being effectively used through timing of
income and deductions?
3. Is maximum use being made of a pension or profit sharing plan for
tax advantage?
- Has the appropriate type(s) of plan been chosen?
4.
Are contributions to charitable or other tax-exempt organizations
being used as fully as the client is disposed to use them?
5. Is the form of client’s business or investment being fully utilized to
maximize personal deductions and credits (e.g. corporation,
partnership, and trust)?
6. Are income and deductions being directed to specific years to avoid
drastic fluctuation by:
a. Accelerating income?
b. Postponing deductions?
c. Postponing Income?
d. Accelerating deductions?
e. Avoiding constructive receipts?
f. Changing accounting methods?
7. Is the full range of deductible employment fringe benefits being
explored and used within the clients limits?
8. Are interest-free loans to shareholders or key employees being used
to permit funding of personal objectives?
Tax Planning Checklist
Estate Planning - SSC #9
Pro-Seminars International 10/07
84
No
Business Planning, Continued
9.
Is gift/sale leaseback's being utilized?
10. Is ordinary income from depreciation recapture being eliminated,
reduced or deferred through timing or other planning mechanisms?
11. Have non-registered retirement plans been considered?
12. Are phantom stock plans being used for deferring compensation?
13. Are stock options possible and advantageous?
14. Are registered plans designed to maximize employee advantage
during employment as well as at retirement? (for example, do they
permit rollovers from other plans, etc?).
15. Have business contribution plans been developed and formalized by
legal agreements?
16. Are employment contracts being used effectively to support the
reasonableness of compensation (e.g. Management company
employees)?
17. Indicate any situation unique to this client that does not appear
above.
85
Estate Planning - SSC #9
Pro-Seminars International 10/07
At Present
Advisable
Yes
Yes
No
No
Tax Planning Checklist
Estate Planning
At Present
Advisable
Yes
Yes
No
1. Have the client and spouse considered electing not to fully use the
spousal rollover if such an election is tax advantageous to their
cumulative estates?
2. Have life insurance policies been properly positioned?
3. Does the estate appear to have sufficient liquidity to fund
postmortem expenses and tax liabilities?
4. Has consideration been given to generation-skipping transfers?
5. Have testamentary charitable dispositions and their advantages
been explored?
6. Is lifetime gifting programs being used to shift ownership of assets
from the clients’ estate?
7. Have the client’s estate planning wishes been embodied in
appropriate legal documents that have been reviewed recently?
8. Has the value of each estate asset been explored in order to obtain
an estimate of potential tax liability?
9. Have the client’s most personal objectives, feelings, and thoughts
been given equal weight with tax planning?
10. A. Is there any reversionary interest or power of appointment not on
the client’s balance sheet?
B. If so, has it been examined for its potential tax impact?
11. Have estate-freezing devices such as recapitalizations, personal
holding companies been used?
Estate Planning - SSC #9
Pro-Seminars International 10/07
86
No
Tax Planning Checklist
At Present
Advisable
Yes
Yes
Estate Planning, Continued
12. Indicate any situation unique to this client that does not appear
above.
13. Does the client’s Will provide for income sprinkling among
beneficiaries?
14. Have the client and spouse considered electing not to fully use the
spousal rollover if such an election is tax advantageous to their
cumulative estates?
15. Have life insurance policies been properly positioned?
16. Does the estate appear to have sufficient liquidity to fund
postmortem expenses and tax liabilities?
17. Has consideration been given to succession planning?
18. Has testamentary charitable dispositions and their advantages been
explored?
19. Is lifetime gifting programs being used to shift ownership of assets
from the client’ s estate
20. Have the client’s estate planning wishes been embodied in
appropriate legal documents that have been reviewed recently?
21. Has the value of each estate asset been explored in order to obtain
an estimate of potential tax liability?
22. Have the clients’ most personal objectives, feelings, and thoughts
been given equal weight with tax planning?
87
Estate Planning - SSC #9
Pro-Seminars International 10/07
No
No
Tax Planning Checklist
Estate Planning, Continued
At Present
Advisable
Yes
Yes
No
No
23. Does the client’s Will provide for income splitting among
beneficiaries?
24. Indicate any situation that is unique to the client that does not appear
above.
Document Checklist
An adequate analysis of financial planning needs depends on complete and accurate
information. Consequently, a study of actual instruments and documents may be necessary.
The information is treated as highly confidential. Please request copies where possible.
Wills of clients and their spouses.
Trust agreements and detailed lists of trust assets.
Existing business insurance policies: life, disability and annuity.
Group insurance and pension contracts or trust agreements.
Financial statements of business (3 yr. if possible)
Income tax returns
Partnership agreement
Company by-laws (sales of shareholdings)
Buy-sell Agreements
Other agreements (royalty, franchise, profit sharing, deferred compensation, etc.)
It is good business practice to leave a receipt for documents received and to obtain a receipt
from the client upon return of the documents.
Estate Planning - SSC #9
Pro-Seminars International 10/07
88
YOUR PERSONAL FINANCIAL PLAN
The following form provides a convenient way of reviewing and recording the
essential details of your personal financial plans.
REVIEW YOUR WILL AND/OR TRUST INSTRUMENTS FOR:

Changes in beneficiaries - births, deaths, marriages etc.

Changes resulting from maturity of children, illness, significant changes in
assets etc.

Revisions to federal and provincial taxes, estate and property laws which may
affect your will

Changes that may be desirable in executors, trustees and guardians
REVIEW YOUR PERSONAL INSURANCE PROGRAM
Ensure that it meets your present needs and beneficiary designations are up to
date.
Advisers
Telephone Number
Financial Consultant Lawyer Accountant Banker Trust Officer Investment Counselor May we have your permission to consult your professional advisers and to request information
from the companies which issued your present insurance contracts? Yes ___ No ___
Date: ________________ Signature of Client __________________________
89
Estate Planning - SSC #9
Pro-Seminars International 10/07