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Taxation of Trusts
Jennifer Dundas, Spring 2002
CHAPTER “A” -- Introduction
Overview of estate planning. Make sure property goes where you want it to.
Purpose: to minimize taxes as log as it fits with where the testator wants the property to
go. In the meantime, can also help testator save money on taxes before death.
Relevant legislation
Intestate Succession Act: where property goes if you don’t have a will.
Executors: collect and ensure distribution of property.
Homestead Act: takes preference over the will. Surviving spouse always entitled to live
in home as a life estate. Complications: who pays expenses and utilities? There is a
small body of law on this topic.
Marital Property Act: Part IV. Provides that the surviving spouse has a right to apply for
equalization. This can override the will.
Dependents Relief Act: Those who can demonstrate a dependence on the deceased can
seek an order for maintenance.
CHAPTER “B” – Distinguishing the Estate from a Testamentary Trust
Difficult to come to grips with what an estate is, at common law. With intestacy, the
court appoints executors (personal representatives). In Mb, all property is to be dealt
with by representatives. At common law, only personalty devolves to the
representative. Realty devolves directly to the beneficiary. S. 17.3 (3) allowed realty to
devolve to the representative as well. This is an example of how the lines between an
estate and a trust are blurred. The language is common to both.
Personal representatives have to determine what the deceased owns, then pay off the
debts of the deceased. What’s left is distributed to beneficiaries. At C/L,
representatives have a year to administer the estate, plus such extra time as is reasonable.
In Mb, under s. 33(1), personal reps can take such reasonable time as is necessary.
Personal reps must act unanimously (at C/L). However, will can override by
stipulating that majority decisions will prevail. (R. Haasz (1959) OWN 395 OCA).
Trustees must act unanimously (Gibb v. McMahon (1905) 9 OLR 522 OCA). Trust
document can provide majority rule: Consolidate Holding Co (SCC).
“Legacy” is used to describe a gift of money.
“Bequest”: personalty. The beneficiary is known as the “legatee”.
“Devise”: a gift of real property. The “devisee” is the recipient of real property.
“Residue”: the property that is left over after payments of debts.
“Residuary beneficiaries”: the beneficiaries who take the residue.
Creditors have preferential rights over beneficiaries.
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If estate is insolvent (debts more than assets) beneficiaries are irrelevant. Secured
creditors take first.
Solvent estate? Have to ask out-of-what are the creditors paid. A will can provide a
recipe. A general clause is almost invariably used: debts are to be paid out of residue.
See p. D25 in materials. Clause “E” p.3.
Debts are paid first out of residue, then personalty, then out of realty, at C/L.
When debts are greater than the residue, C/L provides that you can dip into
legacies and bequests. Devises follow next. (Re Kotowski (1987) 6 WWR 685
MbCA) (overruled in other respects in Canada Permanent Trustco v. Kerry (1997)
4WWR 555.)
One exception to creditors getting priority: s. 36 Wills Act. Beneficiary of
realty that has a mortgage on it takes subject to the mortgage, unless the will says
the mortgage is to be paid out first. Beneficiary then has to deal with mortgage,
and terms within it (e.g. has to be paid out on death of mortgagee). If mortgage
more than value of property, beneficiary can disclaim the gift.
Debt on personal property? At C/L the debt is paid out of residue, unless there
is not enough residue, in which case the legatee will bear the charge (Re Simpson
(1927) OLR 310 OAC).
Until estate finished being administered, beneficiaries don’t know what they’ll get.
Personal representatives have a fiduciary duty to beneficiaries to administer according to
will and legislation. Beneficiaries have legal rights against personal representatives. Can
go to court to get personal reps removed, or forced to do their job. Their rights are “in
personam” against the representative. But there is no absolute right to the property of the
deceased. Until the will is administered, in theory it is not known what is or will be
theirs. (Commissioner of Stamp Duties – in casebook – upheld in Canada in MNR v.
Fitzgerald (1949) 1 CTC SCC).
Beneficiary cannot sell their rights. If having insolvency problems, estate cannot be
seized. That is different from the beneficiary of a true trust. Corpus of trust in true trust
is defined. Beneficiaries know what is theirs. Creditors can seize their interest. The fact
that a beneficiary has rights in rem will affect the taxation of an estate vs. taxation of
a trust.
Rights of a legatee do constitute rights in rem, not only in personam. (Williams v.
Holland, 1965) 1 WLR 739.) But prof says the better view is that all beneficiaries’ rights
are in personam. (Re Hayes (1971) 1 WLR 758 at 764).
Corollary: no one can demand assets or income from assets, as long as estate is
administered in a timely fashion (Re Neeld (1962) 2 LERS 335 Eng CA).
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1994 Canadian Tax Journal, 1454-59 has a good summary of the above. (not in
materials)
A will often names same people as executors, and trustees of a testamentary trust.
When estate comes to an end, the trust starts. Executors become trustees. You can name
different people, however.
Re: McLean (1982) 135 DLR 3d 667 Ont High Court, at 669-670.
Same person person named trustee and executor. After 25 years or so wanted to resign as
trustee only – had completed the administration of the estate. Held: he could resign by
“deed”, but he also had to be removed as executor, since even though the duties had come
to an end, the position had not. Executors can only be removed by the court.
 An executor settles and winds up the estate, and can only resign or be removed
from the office by a court.
 A Trustee is an ongoing position, for the duration of the trust, and can resign
from the position.
 The two positions are distinct, and in theory one may resign as trustee while
remaining an executor.
Lecture on Trust Law for Tax Practitioners, J.M. Fuke
A trustee is not an agent of either the beneficiaries or the settlor. A Trustee has full legal
ownership of the property, and can deal with it without anyone’s consent. If he is sued,
the person suing him is not limited to recovering only the trust property.
A contract involving trust property is still valid and enforceable, even if it contravenes
the instrument creating the trust, and trust law generally. The beneficiaries only recourse
is a personal action against the trustee. The settlor has no basis of action.
If a will instructs that money be set aside for a trust, the trust does not take form until the
fund has been created. If the trust is to be created from the residue, the trust arises only
when the residue has been ascertained.
Distinctions: trust, testamentary trust, estate. S. 108(1)
Estate is different from a testamentary trust. Broader.
A testamentary trust can refer to trust separate from the estate, or the estate itself.
S. 108(1) defines trust as including a testamentary trust.
ITA: estate considered a separate taxpayer.
Some provisions only apply to estates, some to testamentary trusts, but the word “trust”
generally is understood as referring to either testamentary trust or estate. E.g. s.
104(2) the basic provision: a trust is deemed to be an individual. It includes an estate. S.
104(1) reference to trust or estate refers to executors. Obligations of a trust fall on
executors or trustees.
[108(1)]  def’n of trust – includes a testamentary trust
 def’n of testamentary trust – includes an estate
[104(2)]  trusts (and thus estates) are deemed to be individuals
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CHAPTER “C” – Distinguishing the Four Taxpayers and the
Income Tax Returns of Each (an overview)
Filing requirements of estate and testamentary trust.
Note references in materials to terminal year, deemed income, and the deemed
provisions in s. 70.
In TP’s terminal year (Jan 1-death), have to include deemed income.
Three deeming provisions: 70(1) period amounts (2) rights and things, (5) K property.
Year end: S. 104(23) (a) An estate or testamentary trust can use any year-end it wants.
Tax return to be filed w-in 90 days.
Filing Requirements of Deceased
 returns filed by their pers rep. Use form T1.
 Taxation year = Terminal year = Jan 1 to date of death.
 If die between Jan 1 and Oct 31 – file by April 30th of next year [150(1)(d)]
a. If deceased or cohabiting spouse operated a business – file by June 15th of
next year [150(1)(d)]
 If die in Nov or Dec – file w/in 6 mths of death date or April 30th (if later)
or June 15th (if spouse or deceased operated a business) [150(1)(b)]
 Must include special things in return
a. [70(5)]  deemed K gains
b. [70(1)]  amts owing on periodic basis that had accrued or been earned but
had not been paid and were not due  e.g. SALARY.
i. amts owing at death date goes to deceased’s return, rest goes to
estate’s return
c. [70(2)]  value of rights and things = things that were owing AND were
due, but had not been paid at the death date (dividends declared, but unpaid;
salary owing; debts, crops in the bins, etc.) – declare value
i. executors allowed to file a separate return for these things as if they
were earned by a separate taxpayer  gives you access to lower rates
1) get an extra married status credit [118(1)], dependents credits
[118(1)] and age credits [118(2)]
2) BUT pension credits [118(3)], charitable donation credits
[118.1] and medical expenses [118.2] must be split amongst
the 2 returns
3) AND must do so w/in 1 year of death or w/in 90 days of
receiving assessment
4) BUT [70(3), 69(1.1)] say that if these rts and things are
transferred to a benef w/in the terminal year – they are included
in benefs income when paid and no need for deceased to report
them – good if not sure if these debts will ever be paid.
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Filing Requirements of the Estate
 does not come into existence or earn income until death date
 is an individual [def’ns of trusts and testamentary trusts - 108(1), 104(2), 104(1)]
 taxation year = death date and on
 249(1)(b) says that the taxation year of an individual = calendar year.
BUT 104(23)(a) says that a testamentary trust (which includes an estate) can
select a year end that it sees fit as long as it is not longer than 12 mths
 150(1)(c) says that return must be filed w/in 90 days of year end
 104(23)(e) says that estate does not have to make quarterly pmts – but must
pay all taxes owing w/in 90 days of year end
Filing Requirements of the Testamentary Trust
 created by a Will
 comes into being when estate administered and executor transfers assets to the trustee
 are individuals under [108(1), 104(1, 2)]
 249(1)(b) says that the taxation year of an individual = calendar year, BUT
104(23)(a) says a testamentary trust can select a year end that it sees fit (see above)
o this discretion DOES NOT APPLY TO INTER VIVOS TRUSTS!
 150(1)(c) says that return must be filed w/in 90 days of year end.
 104(23)(e) says that testamentary trust does not have to make quarterly pmts – but
must pay all taxes owing w/in 90 days of year end
o DOES NOT APPLY TO INTER VIVOS TRUSTS!
Filing Requirements of Beneficiaries
- same as everybody else. File T1.
CHAPTER “D” – Taxation for the Terminal Year of the Deceased
“Periodic payments and the terminal year.”
S. 70(1): amounts payable on a period basis, where death occurs during a period. E.g.,
where interest, royalties, salaries, etc., are paid or earned on a periodic basis. TP must
include pro rata portion of the amount relative to the time during the period when death
occurred. The balance becomes payment due to or from the estate. E.g. deceased dies 21
days into a 30-day period. He reports 21/30 of the rent, salaries, etc., the estate claims
9/30. See Cullity, Chapter 2. Also, CCRA bulletin IT 410R para 7.
CCRA Bulletin IT 410R para 7: Deceased Taxpayers
7. Regardless of the method followed in computing income, subsection 70(1) brings into the income, for
the year of death of a taxpayer, the value of all amounts of interest ... that accrued but were not payable on
or before the date of death (see IT-210R). Where the provisions of subsection 70(1) apply with respect to
interest on a debt obligation, which is transferred to the estate or a beneficiary of the deceased, the
Department considers that, for the purpose of subsection 20(14), the deceased taxpayer is to be regarded as
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the transferor and the estate or the beneficiary, as the case might be, is to be regarded as the transferee.
Accordingly, in these circumstances the estate or beneficiary will be entitled to the deduction under the
rules of subsection 20(14) applicable to a transferee, as described in 6 above.
S. 70(2): The rights and things section. Deals with amounts due at point of death, and
not paid. E.g. rent in default, salary not collected. Executor can file a separate tax return
for these rights and things  lower marginal tax rate. Unconnected to tax return of the
deceased.
These rights and things generally refer to things like dividends declared but not yet paid,
uncashed matured bond coupons, and eligible deductions from income such as “cash
basis” inventory. IF the deceased had included them, they would have been subject to the
highest marginal tax rate of his/her return.
s. 70(3) If rights and things are transferred to a beneficiary within the prescribed time,
neither the estate nor the deceased declares the income. The beneficiary declares income
at the point at which he/she receives the benefit. (If not done within the prescribed time,
then the net value of the rights or things are included in the deceased’s income.)
Deemed Disposition of Depreciable Property at Death (S. 70(5))
s. 70(5)(a) Deceased deemed to have disposed of capital property immediately before
death at FMV (which can lead to a capital gain or loss). In the case of depreciable
property, there can be a recapture of the capital cost allowance, or a terminal loss.
o FMV = willing buyer and seller w/ full knowledge of the
circumstances
s. 70(5)(b) Person acquiring property b/c of death acquires it at that same FMV. Can
apply to estate to take the deemed disposition, instead of the beneficiary.
The Queen v. Mastrinardi: M owned shares in M Ltd., which owned term life
insurance on M worth $500,000. (Remember that insurance goes into a capital
dividend account, and can be paid out as a capital dividend.) Without life
insurance, each share was worth $323. After he died of a heart attack while
walking down the street, the life insurance raised the value of each share to $778.
CCRA sd the capital gain to the beneficiary should be calculated using $778.
M’s estate says $323, because no one would have paid any extra for the shares
before M’s death because of the insurance. CCRA says “immediately before
death” means the moment before death. CCRA lost. Since then, s. 70(5)(iii) was
passed, stating that any life insurance in a company is to be valued at the cash
surrender value. Since term life insurance has no cash surrender value, it cannot
be used to calculate the value of the company before death.
S. 70(5)(c)  Depreciable Property Exception – NO K Loss Possible
If deceased had depreciable property which cost > FMV the ben getting the property is
assigned an ACB = original cost and then deemed to have taken CCA down to FMV
Example: (Grower version)
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Cost = 100, UCC = 75 and FMV = 90 would normally deem disposition at 90 
15 recapture for deceased.BUT recipient gets an ACB = 100 and CCA = 10, UCC
= 90
Why: if the ACB = 90 and the property went up in value they would only pay tax
on ½ b/c a capital gain, yet the original owner was deducting full CCA  so, now
if goes back up in price  full recapture
S. 70(5)(c) (my version)
Example:
ACB of $100, FMV of $90.  $90 is the deemed disposition. The ACB
to the beneficiary would normally be $90. But CCRA under s. 70(5)(c) will give
the beneficiary a capital cost allowance of $10, and an ACB of $100,  UCC of
$90 so if the value goes back up, it will be taxed as recapture.
You could also use a K gain exemption of the deceased and sell it to the spouse using
70(5), eat up the exemption and then spouse’s cost base . (Farm property)
Joint tenancy problem with 70(5): Person owns property in JT that has a FMV of
1,000,000 and an ACB = 1. Person dies and is deemed to have disposed of their ½
immediately before death and is nailed w/ a 500,000 K gain, half of which is taxable as
income. BUT the JT property is NOT part of the estate – deceased and estate have no
power over that property. The deceased and her estate, however, must allocate the
deemed disposition.
Capital Cost Allowance
If you have depreciable property, you cannot claim CCA in terminal year, b/c to claim
CCA, you need assets at the end of the year. Part XI Regulation: Deduct CCA against
UCC at year end. S. 70(5) deemed disposition. Therefore, CCA all gone.
s. 248 (8) “occurrences as a consequence of death” [applies to transfers under s. 70,
and for the definition of testamentary trust in 108(1)(i)]. If the terms of a testamentary
condition or instrument provide that a beneficiary can purchase the property, the ben can
do so and still claim a tax deferral under 70(6) (spousal rollover) or 70(9) (farm rollover),
as long as the person is a true beneficiary of the will. (This would appear to apply to
Schippman (below), although it appears not to have been argued.)
s. 248(8)(b) anyone who takes b/c of disclaimer of surrender, takes on same basis as if
taking as a consequence of death.
s. 248(23.1) A person who takes b/c of the Marital Property Act takes on same basis as if
taking as a consequence of death.
S.248(9) imposes a 35-month limit for renunciation or disclaimer. “Disclaimer, release
or surrender”: known as “renunciation” in Canada. “I don’t want it; take it back.”
Rollover to Spousal Trust under 70(6)
S. 70(6) Allows a rollover for property transferred to a spouse or spousal trust. If
testator was res. in Cda just prior to death, and the trust is resident in Canada, the transfer
can be dealt with as a rollover (thereby deferring taxable capital gain), within a 3-year
window (or as long as is reasonable).
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S. 70(6)(b)(i) spouse is entitled to receive all of the income of the trust, i.e. is the only
person with the legal right to enforce payment of the income.
S. 70(6)(b)(ii) No other person may obtain the use of any income or capital of the trust.
The mere possibility that someone can obtain such benefit will defeat the trust for the
purposes of s. 70(6).
 Therefore, the mere existence of a power to encroach on the capital or income of the
trust for someone other than the spouse, whether exercised or not, defeats the 70(6)
rollover benefit.
S. 70(6)(d)(ii) non-depreciable property. E.g. FMV = $100,000. ACB = $10,000. Trust
gets a cost of $10,000. When sells, realizes gain of $90,000.
S. 70(6)(d)(i) depreciable property. The proceeds are the lesser of the cost or cost
amount (Cost amount defined in s. 248 as undepreciated capital cost (UCC)). E.g.
$100,000 paid for building, depreciated to $10,000, FMV = $40,000. If the trust sells the
building, it is liable for re capture and capital gain. According to 70(6)(e) the difference
between $10,000 and $30,000 remains recapture for beneficiary or trust.
Absolute ownership of assets required for a 70(6) rollover to spouse or spousal trust.
Parkes v. MNR (TCC)
Deceased left shares in a co to his wife. But, he had a S/H agreement with his brother,
which required that if he died, his shares would be sold to the other S/H for $400,000,
with the proceeds going to his estate. The wife was executor. She transferred title of
shares into her name in order to get the benefits of a 70(6) rollover, and then sold them to
the S/H. This was an attempt to avoid the taxes otherwise payable under 70(5). Court sd
shares did not vest indefeasibly in her, b/c she was under an obligation to sell them. The
other S/H was a creditor of the estate, and creditors take before beneficiaries.
 A surviving spouse cannot use the preferential treatment under 70(6), and effect a
rollover, thereby avoiding the harsher treatment under 70(5), if the property in
question is legally required to be transferred to another person upon the owner’s
death.
 To take advantage of the preferential treatment of a spouse in 70(6), the property
must “vest indefeasibly” in the surviving spouse.
 Creditors take before beneficiaries.
 IT 449R bulletin: “vested indefeasibly” means unassailable right to ownership of
property. A right to ownership that cannot be defeated by another person.
Greenwood Estate v. The Queen (FCA)
Shares left to spousal trust. Deceased had agreement with sons that they would buy the
shares. Estate sold to sons. Estate dealt with transaction as a 70(6) rollover. FCA
wouldn’t allow this for the same reasons as in Parkes.
1. A spousal trust is dealt with in the same way as a spouse, for the purposes of the
distinction between s. 70(5) and 70(6), where there is a claim on property of
deceased that supersedes that of the spouse or spousal trust.
Two preconditions for a valid spousal trust, to allow a 70(6) rollover
2. Must be resident in Canada . Deceased res. in Canada prior to trust. The
residence of the trustees determines the residence of the trust (Thibodeau).
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3. The spouse must be entitled to all income from the trust for as long as he/she is
alive. But pay attention to what the definition of income is.
Under s. 108(3), the meaning of income for purposes of 70(6) is not income as
defined by the ITA S. 3, but as defined by the C/L for purposes of trusts. (This
definition predates taxes.)
o At C/L, no part of a capital gain constitutes income.
o Stock dividends are included as income by ITA, but at C/L, they are
deemed to be capital. (Waters v. Toronto General Trusts (1959) SCC)
o Depreciable assets also handled differently. ITA can provide higher or
lower rate of depreciation than C/L, which looks only at lifespan.
Property source? Cannot take depreciation of asset into account for benefit
of capital beneficiary. K-ben is only entitled to take the depreciated asset
at its value as of transfer. Gets no consideration for the decrease in value
during the life of the trust. Re: Katz (1980)
 The ITA has many other deeming provisions. If a company winds
up, s. 84(3) and (2) deem a dividend to be the amount that
proceeds exceed PUC. This is treated as income. But at C/L, such
proceeds are treated as capital.
NB: Watch for 2 aspects of a spousal trust that may defeat 70(6)
1. A spouse must be entitled to benefit from the depreciation of property, even
though it would mean, in effect, encroaching on the entitlement of the capital
beneficiary. So, a spousal trust must not be structured to protect for the K-ben the
value of the capital asset at the time the trust is created. This would in effect
deprive the spouse of income at C/L, and defeat the spousal trust for the purposes
of 70(6). The rollover would be disallowed.
2. If a trust is set up to hold for the capital beneficiary the amount of any deemed
dividend on a windup, it will defeat the 70(6) rollover in a spousal trust.
The Guarantee Trust Co. of Canada and Johnson v. MNR (1982) Tax Review Board
Spousal trust failed b/c it provided the wife with $600/month, rather than all of the
income. Capital to be used for kids’ education.
 A valid spousal trust must not place a ceiling on the income the spouse to which
the spouse is entitled.
 A power of encroachment for anyone except the spouse will defeat the trust.
 It doesn’t matter if trustees actually encroach on the spouse’s entitlements. The
mere existence of the power to do so defeats the trust.
Peardon v. MNR (1985) TCC
Spousal trust failed b/c income to be paid at discretion of trustees. Secondly, granaries of
farm could be used by sons without rent. This breached the requirement that no one be
able to obtain use of the capital (70(6)(b)). Grandson was to be able to use farmland, but
was to keep it in good repair. That was okay, b/c it was akin to paying rent. But the
power of the executors to allow sons to use the granaries without paying rent tainted the
trust.
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

A trust that says the trustees may use any part of the estate for the benefit of the
surviving spouse will defeat the spousal trust, b/c it does not require all of the
estate to be used for the benefit of the surviving spouse.
If a third party is to benefit from use of capital, then there must be quid pro quo,
i.e. a benefit returned to the estate.
o This case implies that the return benefit does not have to be substantial.
Keeping a house in good repair is considered fair rent for the house.
Interest-free loans
CCRA # 9627345 (1996): If trustees are empowered to give out interest-free loans to
third parties, that disqualifies the trust.
Discretion over designation of income or capital
2001-0076845 (2001): If trustees have discretion to determine what receipts go into the
capital account, and what go into the income account, a spousal trust is defeated, b/c what
is arguably income could be placed beyond the reach of the spouse. (This is not an
uncommon clause in wills.)
Entire life
If spousal trust ends at re-marriage, then spousal trust defeated. Spouse must benefit for
entire life. (Me: why not argue that the condition should fail (as being contrary to public
policy), rather than the trust?)
Marital Property Act
Under the MPA, at least ½ of one’s assets must be left to one’s spouse. If the will states
that these assets are to be placed into a spousal trust, then the spouse can elect to take
outright, and defeat the will.
Other ways to defeat a spousal trust IT-305R4
“A trust for the benefit of a spouse is tainted in a manner that cannot be remedied by the
method provided in subsection 70(7) if certain types of obligations are to be met out of its
property before the death of the spouse. Examples of such obligations include:
1. a contingent liability to make good any deficiency that may arise in another trust
created under the same will,
2. a liability for the payment of trustee fees applicable to other trusts under the will,
3. an obligation to pay a bequest to another beneficiary out of the property of the
estate that is held by the spouse trust, and
4. a remarriage clause which, if the spouse remarries, would result in someone other
than the spouse being entitled to income or capital of the trust before the spouse's
death.
The trust is not tainted in this manner, however, if the debt or obligation to be met is:
1. a testamentary debt [defined in 70(8)(c): a debt or obligation of the TP for which
payment was outstanding immediately before his or her death, or any amount
payable in consequence of the TP’s death other than any amount payable to any
person as a beneficiary of the estate.]
2. a debt or obligation to the spouse,
3. a debt or obligation incurred for the benefit of the spouse, or
4. an obligation to pay fees to the trustee for the administration of the spouse trust.”
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At death of surviving spouse
When the surviving spouse dies, the trust is deemed to dispose of all assets for FMV wtax consequences. Deferral of taxes will not last longer than the life of the surviving
spouse. S. 70(5) applies to the surviving spouse. The assets, however, may remain in the
trust to be dealt with according to the testator’s terms.
S. 110.6(12) Trusts don’t have a capital gains exemption
If second spouse had unused k-gains exemption, the trust can use it when the second
spouse dies. (Equates assets going outright to spouse, despite trust.)
When to avoid 70(6) rollover: Consider whether the assets would generate capital
losses, or if there are other K-losses in the terminal year to counter the K-gains.
s. 70(6.2) Executors can elect out of the rollover. Do this if assets would generate K
losses via 70(5) or if there are other losses in terminal year that could eat those K gains
(Note that in the terminal year  K losses go against all income.) Asset is then
transferred to spousal trust at higher tax base.
Proviso: Cannot split up gains/losses (if deceased has $100,000 loss and a $200,000 gain
on land – cannot rollover ½ of the gain), but if building and land or shares – then allocate.
See p. F-53,54 of case materials.
Re: Schippmann Estate (2001) BCCA
“Appeal by the testator's son and daughter from a decision that they were responsible for
their proportionate share of the estate's deferred capital gains tax and recapture. The son
and daughter each received 25 per cent of the residue of the estate, with the widow
receiving 50 per cent. The will provided an option to the widow to purchase a
commercial property at its appraised value. The property was transferred to the widow
on a tax-free basis under 70(6). Upon an application to pass accounts, the judge
determined that the widow was able to defer taxes of $391,000, which would have been
payable immediately if the property had been sold to a third party. The son and daughter
were responsible for one-half of the face amount of the liability. HELD: Appeal
allowed in part. It was possible that the widow would never have to pay the taxes, and
likely that they would not have to be paid until some considerable time in the future. The
widow was unduly favoured by requiring the children to pay presently at full value onehalf of the potential tax liability. As a matter of fairness, liability for payment of taxes
was assessed for present purposes at two-thirds of face value, with half that amount
allocated to the children.”
 A curious decision, in that the children were in no way harmed by the widow
exercising her option. The taxes would have been payable even if she had not
bought the property.
 This case seems to be on conflict with Penner v. MNR (1984) below.
 Where the surviving spouse exercises rollover rights under 70(6), and triggers a
tax payable by the other beneficiaries of the estate, the other beneficiaries may
argue that the executor is favour one beneficiary over another, and can apply to
the court to have the assessed value of the real estate lowered, thereby lowering
taxes payable.
12
S. 70(9) Farming Rollovers





s. 70(9) allows rollover of land and depreciable property from parent to child
(instead of spouse, and not via a trust) if certain conditions are met:
1. both resident in Cda immediately before death
2. assets must be used at time of death in business of farming in which the deceased,
spouse or child was actively engaged in a regular and continuous basis
(a) hence can roll to any kid – need not be working on the farm
(b) actively engaged means actively engaged in mgmt and day-to-day
activities
- Wilde v. MNR {started doing too much as a lawyer, not as a farmer}.
Required: daily activity over a ‘substantial period of time’ up to point
of disposition of land.
- “custom farming” – someone else farms, but you make all the
decisions (what plant, when seed, spray, etc.) and remain owner then
rollover allowed. [IT 268R4, para 24, IT349R3, para 13]
- renting out the land? (even if paid in crops via sharecropping) =
property source income and not engaged in a farming business
(c) child includes grandkids [70(10)] and [252] = kid-in-laws
property vests indefeasibly in child w/in 36 mths of death (unless MNR Ok’s longer)
land rolled at ACB
depreciable property rolled at lesser of capital cost or cost amount
can also elect a partial rollover – eat up K losses of parent
Note: the rules still apply whether the spouse or child is running the farm. Or, if the
assets are rented to a family farm corporation [s. 70(10), 70(9.8)].
But: if deceased rented to third party, then don’t get the rollover. Also prevented with
share-cropping (getting a share of crop produced.)
s. 70(10) “child” includes grandchildren.
s. 252 (applies to whole act) “child” includes daughter-in-law or son-in-law.
70(9.1)  Roll farm assets into spousal trust via 70(6), then to kids
This section addressed problem is that when spouse dies S.104 (4) and (5) make the trust
dispose of the property, resulting in shorter tax deferral than if had rolled to the kids.
[70(9.1)] allows a roll from the spousal trust to the child of the taxpayer.
- BUT no requirement of active engagement when spouse dies
- Therefore  roll to spouse who can rent farm out and then roll to the kids
Boger Estate 91 DTC FCTD, FCA
Title of the farm property was transferred to the estate and then was sold w/o ever
transferring it into the names of the benefs. Will said farm was to go to the kids – but
estate sold it since they would be hit w/ a land transfer tax and then when they sold it the
3rd party would pay also. MNR says land not transferred to kids indefeasibly  tax
estate. BUT since estate was all wound up and all debts had been paid, the executor was
only a bare trustee and the kids now had beneficial ownership. Kids wanted to be hit
with the K gain since more of them then just one estate. Held: The making of the will
13
was a sufficient transfer. Executor acting on behalf of the kids NOT the estate when she
sold the land since they owned it. It did vest since it was ascertainable that the kids
would get the property and they could dmd possession at any moment and was
indefeasibly b/c there were no conditions subsequent tied to the land. FCA agreed:
Don’t need a formal conveyance for the land to be transferred
 A formal conveyance of farm land to the beneficiaries is not necessary, in order for
them to be considered has having been “transferred or distributed” to with in the
meaning of 70(9), as long as the property is not sold until the estate is wound up.
o If must be the case that the executor is acting on behalf of the beneficiaries,
not the TP or estate, in selling property.
 NB: If estate sells assets before estate wound up, then 70(9) rollover is defeated.
 If sale of property to a third party is required, then 70(9) defeated. (as w- Parkes)
Cy says know this next section to get a sense of what the legislation means, but there will
not be an extensive fact scenario on this:
S. 70(9.2) Rollover of shares of an incorporated family farm from parent to child.
Child (extended def’n) must be a resident of Cda. Property must vest indefeasibly w/in
36 mths. Child assumes parent’s ACB.
[70(10)] defines “share of the capital stock of a family farm corporation”
 shares must be in a corp were “substantially all” (90% or more) of all the
FMV of the property was “attributable to” (allows farmers to rent out
farm/sharecrop) or “has been used in a farming business” where one or more
of the family members farm
o “substantially all”: It is a question of fact to be determined on an
individual basis whether, for purposes of the definitions of
"interest in a family farm partnership" and "share of the capital
stock of a family farm corporation" in subsection 70(10), "all or
substantially all" of the property of a corporation or partnership is
attributable to qualifying use. However, if 90% in terms of fair
market value of the property of a family farm corporation or family
farm partnership is used principally in qualifying use, then the "all
or substantially all" requirement will be considered to have been
met. IT-268R4
o McDonald (1998 CTC) “substantially all” is an elastic def’n.
Allowed 85%
o “has been used” means it could subsequently be rented out. E.g.
old farmer rents out land late in life.
 or if Holdco has 90% of its assets in corp that have 90% of their assets in the
farming business. So, can interpose a HoldCo without jeopardizing rollover.
 NOT net assets – just assets
 96-17525  CCRA says that it is not OK if family farm corp sells the farm
assets for cash  not attributable to property used in farming. Cy says cd
litigate this, b/c arguably the income is attributable to the farm’s assets.
14

CCRA says can rent b/c property still farming. So, if farmer wants to rent out,
better create a family farm corporation, b/c same deal doesn’t apply to an
individual under 70(9).
“Child”: The definition of "child" in subsection 70(10) (which also applies to section 73
by virtue of subsection 73(6)) and the description in subsection 252(1) expand the usual
meaning of child to include:
1. a child of the taxpayer whether born within or outside marriage;
2. a spouse of a child;
3. a step-child;
4. an adopted child;
5. a grandchild;
6. a great-grandchild; and
7. a person adopted-in-fact.
To be adopted-in-fact for the purposes of (g) above, paragraph 252(1)(b) provides that an
unrelated person will be deemed to be a taxpayer's child if that person is wholly
dependent on the taxpayer for support and if the taxpayer has, in law or in fact, custody
and control of the person (or had such custody and control immediately before that
person turned 19 years old).
If a scenario on a qualified small business corporation comes up, see D-40 in the
course materials.
Disposition of Land Inventory
S. 70(5.2)(c) provides that the deemed disposition of land inventory will be at FMV.
Applies only to land, not buildings. Includes land that is held for Adventure in the Nature
of Trade.  FULL GAIN to deceased.
o Unlike with s. 70(5) for capital property, there is no provision that the
acquiring party is getting ACB of the deceased.
o S. 69(1)(c) however states that where a taxpayer acquires property by way of
bequest or inheritance, the TP is deemed to acquire the property at its FMV.
S. 70(5.2)(d): rollover to spouse in a spousal trust for land inventory. Same as a s.70(6).
No rollover provisions apply?
CCRA in an IT (IT 0044165) says that where there are no rollover provisions applicable,
paragraph 69(1)(c) applies to determine the cost of a property acquired by way of gift,
bequest or inheritance, whether the transferor of the inherited property is a “taxpayer” as
defined in 248(1) or not. (However, the requirement in 69(1)(c) that the TP acquire by
way of “gift, bequest or inheritance” are not met where property of a deceased is
transferred to his estate, b/c no bequest or inheritance is provided, and thus there can be
no deemed cost to the estate under this section.)
 S. 107(2) applies to the beneficiary. FMV is the basis, b/c the beneficiary is
acquiring land at no cost under s.70(5)(c).
15
Disposition of Good Will
Other deemed disposition: e.g. suppose deceased TP ran business that had good will.
Sole proprietorship? (Goodwill: value of business over and above hard assets. Property
source has no good will. Income is generated solely from assets. Good will in an
intangible, the technical term for which is “eligible capital property”)
Good will: Value over and above assets value of business (somewhat equivalent to
advertising and waiting period until business catches on.)
If business comes to an end on death (estate or beneficiary will not continue business), s.
24(1) permits deceased to take a deduction from CEC account. Can take the entire CEC
account. But if spouse continues the business (e.g. via spousal trust), then there can be a
s. 24(2) rollover to spouse. CEC rolls to spouse.
s. 70(5.1) covers a rollover of CEC to anyone, including spouse.
As a result of the above, no income arises from a recognition of goodwill. It is a
write-off or roll-over.
Lifetime $500,000 capital gains exemption
A deduction against taxable capital gain, up to $250,000 of the taxable portion of the
capital gain. It applies to 2 kinds of assets:
1. Qualified farm property (s. 110.6(2)), includes real property and shares in a
family farm corporation.
2. Qualified small business corporation shares.(Def’ns for both corp in 110.6(1))
Exemption is different from rollover. E.g. shares of $500,000 with a cost base of $1
going to spouse: With exemption, husband would report gain, and get offsetting
deduction. Wife would have, then, a cost base of $500,000 under s. 70(5).
An exemption saves tax on an absolute basis, instead of deferring tax, so is thus more
favourable. In addition, exemption is a function of the type of property, whereas a
rollover is a function of the type of recipient.
1. “Qualified Farm Property” has two broad categories (s.110.6(1))
(a) Real Property – land and buildings
(a) if property was owned before June 18, 1987. It qualifies if it was used by
a member of the deceased family in the business of farming, in the year of
disposition OR in any 5 years of ownership.
(b) regardless of from when owned, if in any two years it was used by a
family member in the business of farming, and gross revenues from
farming of the family members in each of the two years exceeded
16
other income. (Gross revenue of farming measured against gross income
from other sources.)
(Note: this is a different definition from the farm property rollover in s. 70(9)).
(b) Share of the capital stock in a family farm corporation: Same term used to
describe two concepts. (Also in s. 70(10)). The following criteria must be met:
(a) There must have been an uninterrupted 2-year period in which 50% of the
assets were used in farming. AND
(b) 90% test (“substantially all” of the value of the assets were attributable to
farming).
Information Circular IC70-6R4 (Definition: Share Family Farm Corporation) (Nov. 20,
2001). CCRA was of the opinion that a person who rented out his farmland for most of
his lifetime, and only farmed it for a brief (although greater than two-year) period, did not
own shares of the capital stock of a family farm corporation. CCRA sd that the
requirements (in “b”) had not been met, because the land was not used principally in the
course of carrying on the business of farming (i.e. Canco did not use all of the land more
than 50% of the 35 years that it owned it, it in the course of carrying on the business of
farming.)
2. Qualified Small Business Corporation shares.
Exemption for QSBC is in s. 110.6(2.1). Under definition in 110.6(1) a QSBC share is a
share of a "small business corporation". Two criteria must be met:
(a) A share is in a small business corporation (a CCPC, as per s. 248(1)) in
which most (90% or more) of the of the assets are used principally in an
active business carried on primarily in Canada,
AND,
(b) throughout a two-year term immediately preceding the corporation's
disposition, the corporation must either:
i. have more than 50% of its assets by FMV used in active business.
(Note: shares and debt it owns in connected subsidiaries only
qualify as active business assets if subsidiaries meet the 90% active
business test by FMV throughout the 24 months.) OR
ii. have more than 90% of assets by FMV used in active business, but
shares and debt owned in connected subsidiaries must only meet
the >50% by FMV test.
>90% ABI
>50%
>50%
or
(subs)
>50% ABI
>90%
>90%
17
See sample problems and answers at D-42.
Clean up points re: Terminal Year.
1) S. 111(1)(b), 111(8): Allowable capital losses offset taxable capital gains. Capital
losses can be carried back 3 years, and forward indefinitely.
In year of death, special treatment of allowable capital losses in s. 111(1)(b) and s.
111(2). Allowable capital losses can be used to offset any other income from any
source in year of death, or previous year.
If you claim this, can only do it if the allowable capital losses in the terminal year or
previous year exceed the lifetime taxable capital gains exemption. (See p. 757 in
“Materials on Canadian Income Tax.)
If you have depreciable property, you cannot claim CCA in terminal year, b/c to claim
CCA, you need assets at the end of the year. Part XI Regulation: Deduct CCA against
UCC at year end. S. 70(5) deemed disposition. Therefore, CCA all gone.
2) S. 159(5) and 159(7): provide relief re: a source. i.e. TP can elect to pay tax on
“special items” in the terminal year in 10 annual instalments, provided security
arrangement is made with the minister. Letter of credit from bank or Canada Savings
Bonds will do. This is not a great relief, b/c TP is charged interest at “prime plus 4”.
Special items are
 s. 70(2) (Rights, things)
 s. 70(5) capital gains and recapture,
 s. 70(5.2)(c) land, inventory disposition.
Cy says calculate tax for deceased in final year without these items, and make 10-year
election on the balance.
CHAPTER “E” Taxation of the Estate
Duties of Executor/Administrator:
(a) Inventory assets
(b) Payment of debts
(c) Distribution of assets to beneficiaries.
At common-law, E/A given a minimum of one year to do this. S. 33 of the Trustee Act
codifies the C/L, and may give a longer period (obscure).
S. 41 Trustee Act: E/A must advertise for creditors of deceased. Recipe given.
Provided E/A advertises and pays off claims, she can then distribute property. If a
18
creditor later steps forward, no liability. S. 41(2) says that while creditor cannot sue
trustee, he can still chase beneficiaries for assets. The C/L rules for tracing will apply
(complicated).
Re: Berry (1982) 34 OR (2d) 56 Ontario HC of Justice: If executors get notice of
claim which has no merit, and they distribute the assets, but creditors end up winning the
claim, executors are liable.
 Executor should set up reserve in case rejected creditor’s claim is good (“prudent
reserve”).
BUT, If acting for creditor, Trustee Act S. 51(2) says if someone makes a claim against
the estate, and executor rejects the claim, claimant must comment action within six
months, regardless of normal limitation of action period.
Under s. 29(1) of the Marital Property Act, a spouse has six months following probate to
make a claim for equalization. If estate distributed before six months, E/A can be
personally liable under s. 32.
The Dependents Relief Act, ss. 6 and 7, also gives a 6-month period.
ITA s. 159(1) and (2): overrides s. 41 of the Trustee Act. E/A must get clearance
certificate from minister that all taxes are paid. If they don’t, then personally liable for
taxes under 159(3).
Executor liability
Bougie v. The Queen 90 DTC 6387 FCTD:
Minister has been known to change mind and re-assess. Issuance of certificate doesn’t
preclude reassessment, only the fact that the executors are not personally liable. The
minister must then trace via C/L against beneficiaries. (It often takes a long time to get a
certificate, holding up the estate.)
 Executors are not released from their personal liability for rejected creditors’
claims until they get a clearance certificate from CCRA.
 The issuance of a Clearance Certificate affects only the personal liability of an
estate's personal representatives for tax, but not the liability of the estate itself.
Legal fees
The Waxman Estate v. The Queen 94 DTC 6229 FCA:
Legal fees incurred for the administration of an estate are not deductible unless they are
related to the income earning process. In the present case, however, the Minister had not
been provided with information demonstrating that the legal fees in issue had been
incurred by the estate for the purpose of earning income from property. Conversely, those
fees appeared to have been incurred to administer the estate and to distribute the assets
thereof to the heirs
 Legal fees incurred for the administration of an estate are not deductible unless
they are related to the income earning process
19
Probate fees can be very expensive. It is possible to transfer assets into a private
corporation to avoid: Law Fees and Probate Act stipulates a rate of .6 of 1%. (1.5 of 1%
in Ontario). ( $6 per $1000, or $6000 per $1,000,000.) Applied retroactively to 1959.
In Trustee Act S, 90, executor can obtain fees as may be allowed by judge. Rules to
determine what reasonable fees are:
 3-5% of value of assets, or
 at least ten years of work involved. Look at the time the time used, and the
complexity of the estate. (see Estate Trusts and Pension Journal, Vol 19, p1).
o Five factors to consider: size of estate, care and responsibility, time, skill
and ability, success.
 See also Re: Dimmock Estate, Saskatchewan QB
Tariffs
QB Rules 74.14(4) gives the tariff that can be charged. Tied to value of estate, plus
discretion for Court. Must request exercise of discretion.
Executor (if lawyer): gets 40% of tariff, plus remuneration as Executor.
QB Rule 74.14(12), if all adult beneficiaries agree, can get cost of tariff without going to
court.
Fees earned as Executor are taxed under s. 5 if the ITA as income from
employment/office.
From the point of view of the Estate, the executor fees are not deductible, unless involved
directly in the business or property, in which case the fees can be deducted under ITA s.
18(1)(a). Re: McIntyre Estate 97 DTC 245 TCC; Greenstone v. MNR 90 DTC 1 TCC.
The same rule applies to legal fees, unless directly incurred to produce business income.
Pappas v. MNR 90 DTC 1646 TCC
Waxman Estate 94 DTC 6229 FCA
GST is not chargeable by executor on fees. But Marc’s notes say lawyer would charge
GST to estate.
Roy v. MNR (1977) TRB
Executor was also the residuary benef. Still had not wound up the estate after 5 years.
MNR says that income of estate was income of benef, and exec was keeping income in
estate so have 2 taxpayers. Ct found that the estate had not been fully administered yet –
income of estate. (Cy says judge was a pushover.)
 Watch out for undue delay. Income to estate may be attributed to beneficiary,
although you can always argue Roy.
J104(1)]  obligations on the taxpayer are placed on the executor/trustee BUT are
not mixed w/ their personal incomes.
20
What happens to income of the estate
Periodic Payments (accrued rent, etc.)
Apportionment Act, [70(1)] says that periodic, accrued income split between T and
benefs/estate depend on when T died.
Income earned before death
Will or Intestate says who gets it
Income earned after death (dividends to holder of the shares)
If held by estate when earned – estate pays the tax
Whoever has rt to property gets the income from it
If no underlying right to property  residuary benef
Examples
Real property income
X owns apt block, and died one week into February. Left apt block to sister, residue of
estate to bro. Sister’s rights take upon death, so she gets the income from the latter part
of the month on a pro rata basis (1/4 of monthly rent). The bro takes the income from the
earlier part of the month, which goes into the residuary of the estate (3/4 of rent).
Dividend income
A person who is getting shares gets the dividends from point of death to probate.
Dividends owing before death go into residuary. (Note filing requirements under 70(2)
noted in first section.)
Interest Owing to Beneficiaries
General legacy (gift of money)
Interest executor year (end of first year of death) goes to estate, and becomes part of
residue. After that, beneficiary has an ultimate right to the interest – even if it is held
in the estate until it is finished being administered.
Residue gift
All income generated goes back into residue during executor’s year. After that 
beneficiary. In effect, all income from residue ends up in hands of residuary
beneficiary.
Trust
All income earned during admin of estate  goes to income benef
BUT if Personalty is part of residue
- Howe income benef only gets up to 4% rate of income from PP – if trust earns
more than that  excess is capitalized
- Chesterfield says if earn < 4%  encroach on K
May want to have an exemption from these rules (as on p. d-26) b/c 4% can be difficult
to achieve.
Calculation of the Income


S. 3 income comes from property, K gains and business (v. rare)
BUT K gains exemptions NOT available to trusts s. 110(6)(2) and (2.1)
21




o BUT when trust allocates K-gains income – no loss of “status” – benef
gets to then use their exemption [104 (21, 21.2)]
trusts can claim a deduction for all income payable to a benef [104(6)(b)(i)]
AND benefs include it as their income [J104(13)(a)]
- Dealing w/ “payable” income  actually pd or due to benef [104(24)]
- No income until payable b/c not entitled to it until then (even if in will)
- BUT IT286R2 says that if all benefs agree – CCRA will include the income
earned by the estate amongst all the benefs and NOT the estate
if estate disposes of property  use the ACB given under 70(5), 69 to calculate K
gain/loss.
if estate has more K losses than gains or other terminal losses that cannot be eaten
up  can send some back to terminal year of the deceased [164(6)]
- K losses can be used against ALL income in the terminal year
- BUT cannot send these K losses to the year preceding the terminal year
How is Income Taxed

 def’n of trust – includes a testamentary trust
def’n of testamentary trust – includes an estate
 104(2) Trusts (and thus estates) are deemed to be individuals
 Estate’s taxation year: Begins at date of death. Ends either when estate administered
and all property given out, or at the year-end chosen by Executor. (104(23)(a))
 BUT [249(1)(b)] says that the taxation year of an individual = calendar year
 BUT [104(23)(a)] says that a testamentary trust (which includes an estate) can
select a year end that it sees fit as long as is its not longer than 12 mths
 AND [150(1)(c)] says that return must be filed w/in 90 days of year end
 AND [104(23)(e)] says that estate does not have to make ¼-ly pmts – but
must pay all taxes owing w/in 90 days of year end
Choosing a year-end:
(a) If beneficiary in a high marginal tax rate. The best sol’n usually will be to choose the
12-month period which terminatges on the anniversary of the dece4ased’s death,
obtaining the maximum deferral.
(b) If beneficiary has little or no income: The income-splitting effect produced by a
selection of the calendar year will be more beneficial (with a substantial estate in higher
tax brackets).
(Cy says consider a potential deduction. E.g. estate will accrue $60,000 in K gains
income – ½ before Dec 31, ½ after. Pick Dec. 31 as year-end, and split income between
the 2 years.)
108(1)
Tax Rates
 estate and T trusts pay the tax rates of an individual via [104(2)] BUT WATCH
 inter vivos trust pays top marginal rate on all income [122(1)]
- done to avoid income splitting. S. 122(1) requires 29% federal rate on all income.
Mb has a similar override (4.1(3) Mb ITA)  46.5% on all income in an inter
vivos trust.
22

What a wealthy TP can do is created as many testamentary trusts as they want to 
lower marginal tax rates for each, as long as the trusts beneficiaries are not identical
to each other. (s. 104(2)) (But, multiple administrative fees can be expensive.)
Example: Four kids, A,B,C and D.
TRUST 1
TRUST 2
TRUST 3
TRUST 4
^
^
^
^
 A and B
 C and D
 A and C
 B and D
This has the further advantage of deferring taxes annually until 3 mo’s after year-end, b/c
104(23)(e) says testamentary trusts do not have to make quarterly payments. Inter vivos
trusts do not get the same exception.
The concept of payables from trust.
S.104(6)(b)(i) A trust can claim a deduction from income in respect of income payable in
the year.
S. 104(13)(a) A ben. must include in income any amount payable out of trust.
S. 104(20)(4) An amount is payable if
 it is paid to the beneficiary in the year, OR
 if beneficiary is entitled to enforce payment of the amount in the year.
Issue: at C/L, no ben has any right to property or income during estate or administration
of estate. Re Neeld (1962).
Exceptions:
(1) sometimes executors know they have more than enough to cover claims, so they pay
some or all of the income. If that happens, then a “payable” arises.
(2) If all ben’s agree, then the estate will be entitled to deduct all income, and ben’s will
include income in their hands according to their allocations. But this is all or nothing.
All ben’s must agree, and all income must be paid out. (IT 286R2)
When to exercise this option? Estate in high tax bracket. All ben’s in lower brackets.
Cy says this is contrary to the law, and CCRA shd play by the book. (I guess b/c
104(13.1) and (13.2) allow partial payment – so estate shd be able to pay only to
those in lower brackets.)
ONCE ESTATE ADMINISTERED  USE 107(2) TO “transfer” TO BENEFS
REMEMBER  70(9), 70(9.2), etc.  ROLL DIRECTLY TO BENEF
Executors then become “functus officio” and trustees take on their duties. At that point it
is not appropriate for executors to continue to treat the estate as a separate entity from the
beneficiaries.
Criteria to determine if administration of estate has been completed (article at E-8)
When all duties other than distribution of properties have been completed by executor.
(inc: ascertaining the beneficiaries, gather all the assets of the estate, paying debts and
specific bequests, ascertaining value of residue and preparing, and having approved, the
final passing of the estate’s accounts.
It is a question of law whether at any point in time:
23

a beneficiary is entitled to enforce payment of the income or capital of the estate,
and
 beneficial ownership of the property is considered to have passed to the
beneficiary
Relevant factors: executor’s assent, relevant statutes, C/L, caselaw.
(If these are satisfied, then it will be considered that the property is held by a
trustee for the beneficiary, or in an inter vivos trust.)
Cases: Roy (exec and sole beneficiary delayed windup for 5 years. Okay)
Grayson: Exec and sole ben immediately converted all assets to cash, and placed
in a trust (even though will did not provide for one). Interest income was attributed to
ben, b/c he had legal entitlement to enforce payment. (Commentators say contrary to
C/L. Not cited by courts. Court did not consider assent of exec as a factor. BUT: you
could argue that Grayson’s decision to transfer the money to a separate trust indicated his
implied assent to transfer of beneficial ownership.)
Relieving provision re K-losses for first year of Estate
 Use if Estate’s K-losses exceed K-gains, or terminal losses accrued under S.
20(16) have no counter-balancing income. (An exception to the principle that one
person’s losses cannot be transferred to another.)
S. 154(6) Estate can elect to move its losses to terminal year of the deceased (by filing an
amended return).
Example: X owns Holdco worth $1,000,000. ACB of $1.00. Co holds cash, GIC’s and
such liquid assets. Upon death, there is a deemed disposition, and therefore a $1M gain
under 70(5).  big tax. (effective rate of about 1/3). The company is then left with a
$1M loss from the sale of assets – a $1M K-loss that is useless to the estate, where it now
sits. That loss can be carried back to the terminal year of the deceased.
Wind-up under 84(2)
When administration is completed, executor goes to surroge division fo QB. Show
assets, payments to creditors, what’s going to ben’s, i.e. that administration is completed.
QB approves. Exec can then distribute property. If exec is the trustee of the subsequent
testamentary trust, they can then put on their trustees hat.
Capital property and land inventory.
When it passes to beneficiaries, there is a transfer between taxpayers  dispositions
(actual or deemed).
S. 248(1) “disposition”: property coming out of a trust is a disposition.
S. 69 requires disposition to be at FMV “except as provided in the Act”.
s. 107(2) all property in trusts can be rolled over to beneficiaries. CCRA 2000-0018665.
24
Chapter F – Taxation of Trusts and their Beneficiaries
Trusts
 created by a settlor
o inter vivos: any trust that is not testamentary – S.108(1). Flat tax rate
(highest)
o testamentary: a trust created by death, or any trust created by will.
Graduated marginal tax rates.
 UNLESS trust also receives any funds from a living person
 BUT 9725495 allows an i-free loan to a testamentary trust
 need the 3 certainties AND VESTING IN TRUSTEE
o intention to create (can be oral, need not move the assets)
o of the subject matter
o of the beneficiaries
 trust is irrevocable unless instrument say otherwise
o even if settlor is the trustee - Koons
 trustee is NOT a conduit like an agent
o obligations on the trustee [104(1), 104(2)]
 BUT must not mix in personal assets, etc.
o trustee fully owns the assets
o trustee can become a prtner – but all income for the benefit of the benefs
o the trust is NOT a separate legal entity (that’s why stuff in Tee’s name)
 Regime de Rentes – MNR must issue notices, obligations, in name
of trustee NOT trust
 Trust is deemed to be an individual, but the trustee is liable.
(should have a legal indemnification clause, as in D34 or G-87, but
when trustee commits a tort, there is no way to limit liability.)
 Beneficiaries hv no legal liability (possible exception: w- income
trusts, set up to reduce payable taxes from 60% to 46%, US
caselaw says beneficiaries are liable.)
o Trustees MUST act unanimously
o If sued  sue the trustee (will want indemnification by the trust
document)
o BUT if Trustee sued for non-trust stuff  trust assets are safe (Kimniak v.
Anderson)
How to sign on behalf of trust
Improper:
AB Trust
Per ____________ (trustee)
____________ (trustee)


Proper:
__________
__________
(in their capacity as trustees of AB Trust)
Trusts survive the death of the trustee
constructive trusts
o ct granting a remedy due to unjust enrichment
25

o Rawluk  arise at date of wrong, not date when ct declares wrong
o 9812527  CCRA says will treat trust for tax purposes as if it was made
when ct declared that it existed.
bare trusts
o trustee only holding the property, and must take instructions from Ben.
 e.g. when lawyer holds $$ in trust for client.
 Individual or shell company holds for multiple investors for
convenience.
o if benef has the real control – is a principal/agent relationship
 like a lawyer holding funds in trust acct
o S. 104(1)says that such a bare trust is NOT a trust for tax purposes
 therefore, any income received by agent  income of principal
 Pendray Farms, Legace, Pigott
 Get around this by giving trustee some independent powers
Residence
 S. 2 Resident at any time?  report world income
 S. 2, 115, 212 say if non-resident  report employment, business and K gains earned
in Cda
o [212] has a flat w/holding tax for property source income
 70(6) (spousal trust) demands that trust and deceased be a resident of Cda. Goes by
where trustees are resident.
 Thibodeau  ct looks at de jure control  how does trust declare mgmt and where
is majority of mgmt residing
o Here had majority decisions and majority of trustees in Bermuda, but guy in
Canada made all decisions. Judge anti-CCRA. Seen as poor decision. What
do you do if 3 trustees live in 3 different countries?
 IT 447: CCRA ignores Thibodeau and looks for de facto test – where is the
residence of the de facto control? (DeBeers case from 1st term)
 Location of assets/benefs = irrelevant.
 Elaborate deeming provisions to defeat overseas trusts. S. 94.1.
o Principal management is in Canada, or property comes from a Cdn., or settler
non-resident but has relatives in Canada and was at one time resident here for
several years (e.g. deceased retired to Bermuda but left prop in Cda in a trust
for beneficiaries. If beneficiaries now in US, look to tax treaties to avoid
double taxation.
o Exception: relatives never resident in Canada, set up trust offshore for Cdn
beneficiaries. Tax free in Cda, b/c not captured by 94.1
26
Taxing Trusts – General
Property goes in  need a cost base
 for T trusts  either FMV or rolled ACB
 any transfer to inter vivos trust = disposition (unless to a bare legal trust)
o use sale price
o or if a gift  [s. 251(1)(b)] deems benef and trust or person related to
benef and trust NOT to be at arm’s length  s. 69 kicks in  11.1.
Transaction at FMV.
- BUT [s.73(1)] says that a gift to a “spousal trust” inter vivos trust rolls unless
elect out of roll
Year ends
- estates and T trusts pick theirs
- inter vivos has calendar
Tax installment pmts
- estate and T don’t have any  taxes due 90 days after yr end
- inter vivos make ¼ly pmts and taxes due March 30
 estates and T trusts taxed at individual rates – no personal tax credits
 inter vivos taxed at top marginal rates – no personal tax credits
 if substantially all of property of 2 trusts for same benef – CCRA taxes as one
- [104(2)]
- thus, make different benef or combo of benefs [Mitchell 56 DTC 521]
Taxing Trusts – Computation
-
S.3 applies w/o employment income (business, property, K gains)
NO K gains exemptions
104(6)(b)(i)  deduct all [3] amts payable to ben, or for benefit of ben under 105(2)
(benefit other than income)
What amount is payable?  amt paid or benef could enforce pmt of [104(24)]. Look
to the terms of the trust.
- example – if trusts says must pay out all income – is due at year end –
becomes payable then even if not pay out till later
- income becomes that of the benef [104(13)(a)]
- if discretionary trust – need some paper trail so benef could enforce it (b/c
trust may not actually pay it out but will deduct from trust income)
- declaring on tax return NOT enough.
- Cole: parents were trustees of infants 2 inter vivos trusts. Typical
discretionary trust. Reported on trusts’ tax return that trusts had paid out
income to infant, but in fact had not. $$ was sitting in the trusts’ capital
account.  trust was taxed on the income. Moral of the story: if you’re
going to make income a payable, get trustee resolutions to that effect, and
make financial statements consistent with the tax return. (If trustees really
don’t want to pay out the money, they should issue promissory notes as
evidence of payment, and record the notes as a liability.)
27
must make “payable” decision in year income earned. Problem: trustee may
not know what earned until after year end.
- Ginsburg: if trustees pass a resolution to pay all income when the amount
is determined, that is sufficient. IF handled that way, then ben declares in
year earned, even if doesn’t take till following year, when there is no tax
consequence of getting the $$ in that year.
- If decision made in 2 mths following year end  CCRA says OK
(9606227)
There’s a catch!
Consider definition of income. Trust could have income for tax law which is not income
for trust law. Trustee will allocate income of the trust according to the C/L definition of
income (K-gains not income under trust law).
 So in situation in which all income is to be paid to beneficiary, there could still be
capital gains income to the trust, which is taxable.
 Cd do a trust which says income is income for tax purposes, but not usually done.
 This is applicable to spousal trusts under s. 70(6), b/c trust instrument can say all
income goes to wife, preserving rollover status, but K-gains are not paid to her, and
instead are combined with the Trust capital and ultimately go to the capital
beneficiary.
 Power of encroachment cd be used to pay out K-gains of the trust. You cd then make
the K-gains payable  deduction for trust, and declarable income for beneficiary.
-
Income that is not payable can be deemed to be payable.
104(18)  overrides 104(24)
If income retained in a trust for a benef under the age of 21 and it vests in the
benef w/ the only condition to him receiving the money that he reach a certain age (<40)
 deemed to be payable before age of 21.
This is a tax benefit for the trust. However, kid has to pay the tax BUT does not
get any money to pay it w/!! Without the power to encroach, it has to come out of his
pocket or his parents’ pockets.
Vestment
A vested interest: beneficiary will get a fixed %age of the trust. Possession is postponed.
Two types:
1. subject to divestment (Ben gets 30% of K at age 30. If he dies first, his 30% goes
to someone else.
2. indefeasible. Ben knows what he will get, but payment cannot be defeated by any
event. If ben dies, then amount paid to estate upon death. (Arises in spousal trust
under 70(6) – sp must hv indefeasible right to interest.)
Measuring benefits from trust
105(1) – non income payments
- all benefits received by a taxpayer MUST be included in income unless other
section already dealt with it OR is a distribution of K
- rent-free use of trust property e.g. – Peardon (granaries)
28
interest-free loans are NOT a benefit – Cooper (if Parl had wanted to
include them, as with corps, it wd have sd so.) BUT, trust instrument must
include these as a power of the trustee, otherwise to give an i-free loan
would be a breach of fiduciary duty.
- all benefits to any taxpayer are taxable  they need not be a benef
- if trust pays for a parents legal obligation to provide necessities to child
benef
- if just for kid = OK  kid gets the benefit taxed to them (as long as it
is not basic maintenance, which parent responsible for under FMA)
- but if pay off mortgage  parent gets benefit  nailed
105(2) quantify and account for the benefit
- Rent: NOT FMV rent  no  element  maintenance and taxes costs only
- Trust deducts the benefit amt – added to benef income
- if income not paid out  K as retained earnings. Gifts made to trust  K
- Ansell (66 DTC 5508@5517)
- Hansen (91DTC 213)
Capital is paid out TAX FREE b/c already taxed as income (if K gain  tax on that)
-
s. 105(1)(b) payment of capital of a trust to a beneficiary not a taxable under s. 105
What is capital of a trust?
Retained earnings (inc any income not payable to income beneficiary, PUC
(contributions of capital from settler, usually).
Ansell: retained earnings which will ultimately be paid to a capital beneficiary
cannot be considered payables in the year prior to disposition of the capital. They
are capital.
Abrahamson: A US professor transferred his pension into an IRA, moved to
Canada, and withdrew $$ from IRA. CCRA taxed it. Court sd it was capital, and
non-taxable.
Burns Executors: Income that lacks a designated beneficiary will become retained
earnings, and part of capital. IT is not taxed when paid out, b/c the income was
already taxed (although any K-gains can be taxed.)
S. 104(6)(b) a trust can deduct any benefits taxable to the beneficiary
– an offsetting deduction for income paid under s. 105.
Trust Losses
108(5)(b) a trust CANNOT flow out losses.
- There may be a CL requirement to pay off losses since if don’t – eats K. So, it is to
everyone’s benefit if trust pays out less than the amount payable to the beneficiary.
This allows the trust to use the tax advantage of the loss, to offset income.
104(13.1) and (13.2) (  overrides 104(13)(a))
- permits a trust to say that some of the income that is payable to a benef isn’t and
therefore is taxable to the trust
- hence can then deduct losses from that income
29
CANNOT report that $$ decreased to only one benef – same % from each
according to their pro rata entitlement
- NOT actually holding back the money – just who reports it
- Only applies to C/L income, not capital gains.
- If there’s a holdback for CCA – income benef must agree to pay any future
recaptureb/c hurts K benef when sell K
- Get security – b/c trustee on hook if income benef no pay
- If doing a holdback for an income benef – trust may not have the cash to pay
the tax – get benef to pay. (Can deduct the amount of tax payable from the
cheque)
- Problem: when ben gives $$ to trust to cover taxes, this wd normally be seen
as converting a testamentary trust to an inter vivos trust. BUT: IT-381R3 
CCRA will NOT see it as a contribution that destroys the T trust
- 923042, 9501395  CCRA will not see the payback as a violation of a 70(6)
trust where spouse to get all income
104(13.2)  lets you hold back K gains
104(21), (21.2)  keep K gain designation for benef
Note: These provisions are only for income tax reporting. They do not reverse the actual
cash flow. If trust says pay $50,000, it will be paid. But ben will not have to declare it
all, if these reporting provisions are used. However, it wd probably make sense to deduct
the amount from the cheque written to the ben, just to keep things from getting messy.
-
CALCULATING HOLDBACK
104(13.1) regular income holdback
- Claim under 104(6)(b) = Total income – losses
- Claim under 104(13.1) amts not payable to each benef
- = {A/B} * {C - D - E }
- A = benef share of the CL income
- B = all of the CL income of the trust
- C = income that would normally be all benef’s income
- D = actual amt claimed under 104(6)(b)
- E = amt claimed under 104(13.2)
104(13.2) capital gains holdback
- Claim via [104(6)(b)] = Total income – losses
- Claim via [104(13.2)} amts not payable to each benef
- A x C
B
- A = benefs share of the taxable K gains
- B = total taxable K gains
- C = amt of K gain kept by the trust
Beneficiaries’ accounting
108(5)(a)  all income from trust is deemed to have prop source for the benef
108(5)(b) no flow through of deductions or net losses of the trust.
(obiter in DeMonde, Fraser)
30
BUT:
Capital gains exception
 104(21) – net taxable K gains to the trust can be deemed as taxable K gains for the
beneficiary for s. 3 (also for s. 111 – the carry-forward carry back provision for
capital gains/losses.)
 104(21.3) defines net taxable K gains = taxable K gains – allowable K losses – carry
forward K losses [111 – carry back 3 years, forward forever]
Dividends exception
 s. 104(19): taxable dividends can flow through to beneficiary as dividend income. In
the tax return of the trust, have to make the designation. Duplicate filed by
beneficiary w- return.
Depreciation under Trust Accounting Principles
At C/L, if you have a trust in business, can take normal depreciation. But I from property
source? Then can’t take depreciation on property. (Property tends not to depreciate)
Katz (Ont HC)
Income ben gets $100, but taxable on $90 b/c CCA deemed deducted. Later, if asset sold
for $100, then there wd be $10 recapture. Trust would have to pay this out of capital.
This harms the capital beneficiary, and appears to breach the even-handed rule.
Disallowed.
 Can’t take depreciation for tax purposes, but can take CCA.
 Trustees are not entitled to deduct depreciation from the gross income derived
from the rental of residential real property in order to arrive at a "net" income,
which they are directed by the will to pay to the life tenant.
Re Zive
 Capital beneficiaries should not have to pay for CCA benefit to income
beneficiaries.
21 Year Rule
Assets held in a trust are subject to a deemed disposition every 21 years.
- [104(4, 5)] – cannot move to new trust. Same rule applies to appreciable and nondepreciable property.
- [104(4)(a, a.1)]  spousal trust
- deemed disposition of pre-1972 trust where taxpayer alive in 1976 on Jan 1/93
- [104(4)(b)(iii), (4)(c)]  deemed disposition every 21 years thereafter
- [104(4)(b)(i)]  all other trusts created prior to 1972
- deemed disposition on Jan 1/93 and every 21 years thereafter [104(4)(c)]
- [104(4)(b)(ii)]  all other trusts created after 1972
- deemed disposition every 21 years [104(4)(c)]
for non-dep K and land inventory
- deemed proceeds and acquire at FMV and re-sets new ACB=FMV [104(4)]
for dep K property
- deemed proceeds and acquire at FMV
31
-
BUT if FMV < original ACB
- Keep original ACB and CCA down to FMV
FMV less than original cost? 104(5)(a) The difference will be locked in as potential
recapture, to be taken into account in a later disposition or deemed disposition.
Spousal Trust
There is a deemed disposition upon death of surviving spouse.
 The trust does not get a deduction for any deemed income under s. 104(4) and (5)
even if payable in the year. [S.104(6)(b)(i)(c)]
 Where surviving spouse has an available K-gains exemption at death: If the
trust has property that qualifies for a K-gains exemption, the trust can use the
surviving spouses exemption.
o Use the surviving spouses K-Gains exemption, or whatever is left of it.
 3-year delay in disposition of spousal trust. At any time prior to 3rd anniversary
of death of surviving spouse, can distribute property to residual beneficiaries.
Example: trust owned shares of private company, and company has done well. Shares
have ACB of $1. Now worth $1M. There is a deemed K-gain under s. 104.  taxes paid
(K-gain of spouse possibly used). If will says distribute assets to kids, share’s wd hv a
high cost basis. Kids pay taxes again when the shares are handed over to them  Double
taxation. To avoid this, the trust can wind up the company. It gets the dividend, and a Kloss on payout. The trust can carry the loss bck against its gain  tax only on $1M
dividend.
 make sure trust instruments allows for a hold period, so that trust is not obliged to
distribute shares. The hold period allows it to dispose of assets first, eliminating double
taxation.
Avoiding disposition in inter vivos trust at 21-years
Practical Issue: Non-spousal trust owns share of private co – Opco – worth $1M.
Coming up to 21-year-rule. K-property rolls out of trust on a wind-up, at ACB to
beneficiaries. But, may not want to give control of assets to children. But, if trust does
not hand over assets, then it is hit with a K-gains tax, and may have to sell the corp to pay
the tax.
How can settler maintain control of assets beyond 21-years, and avoid the K-gains
tax?
Opco is held in Holdco, which is owned by the trust:
Holdco holds voting control pref shares in Opco worth $100. Capital beneficiaries are
given $1M shares in Opco.  Holdco and trustees maintain control. Beneficiaries gain
ownership. Disposition is avoided b/c beneficiaries do not pay tax on transfer of K-asset.
32
Selling Interests in the Trust / Winding Up the Trust / Encroachments
Income Interest
- if selling your interest in the income of the estate : CL income
- personal trust = no one has pd consideration for an interest in the T or inter vivos
trust
- settlor can also be a benef under a personal trust.[J108(7)(b)].
- But if settler paid for her interest? Wd lose status as a personal trust.
108(7)(b)(i) and (ii)A – maintains personal trust status.
[J106(1.1)(a)] deems cost of income interest to be nil unless you bought it
from another benef
- [J108(7)] settlor/benef’s cost of income interest = nil
- [106(1)] if beneficiary buys an income interest (second-stage beneficiary) –
deduct cost from income received from trust, and deduct it incrementally over the
years.
- [106(2)(b)] if sell income interest to another person then proceeds = income NOT
K gain
-
-
if trust buys back your income interest for $$
- [106(3)] trust gets FMV of whatever give to benef – K gain/loss to trust
- also = ACB of what benef got
- BUT [106(2)(a)] – what benef gets is NOT included as income b/c really getting
K which will earn interest and you will be taxed at that point
- AND [106(2)(b)] stops it from being a K gain
Capital Interest
(Any right a beneficiary has other than a right to income.)
- If trust distributes capital, 106(3) and 2(c)  deemed to be acquired at FMV, and is
taxable.
- [J108(1)] defines it as anything that is NOT an income right
- [J107(1.1)(b)(i)]deems cost = nil unless bought from another benef
- settlor/benef  also nil cost [108(7)(b)]
If sell to another person
- benef K gain/loss = proceeds – ACB
- ACB defined in [107(1)(a)] as greater of
- Normal ACB = nil OR
- The benefs proportional share of (UCC’s + ACB’s – liabilities of the trust)
- Cannot have a K loss unless bought the interest from another benef
Important: Trust buys back K interest OR trust winds up – avoid 21 year rule
 If distributing hard assets, then there is a rollover of assets. Perfect rollover.
Beneficiary steps into the trust’s shoes. No gain or loss.
 [107(2)(a, b)]  property is rolled to benef at cost amount (ACB, UCC, cost if
inventory)
33
-
benef cannot have a K gain b/c proceeds cannot be greater than the ACB of
the capital interest (trust may be hit w/ a K gain b/c disposition)
- benef cannot have a K loss either
(This was the situation in the advance tax ruling at F-67 - F-69)
TRUST WINDS UP AND DISTRIBUTES K  NO TAX!!
(b/c the proceeds of disposition cannot be greater than the ACB of the capital interest.)
Why is this significant?
b/c trusts have deemed dispositions every 21 years. What this permits you to do is set up
a trust, run it for 21 years, and then wind up the trust and distribute assets without tax.
Ben’s can then carry the assets until they die, or distribute.
(Same rule applies to an estate. NO 2nd set of tax consequences. Assets  beneficiaries
on a roll-out basis. Estate included in definition of a trust.)
For encroachments
- same result as above  creates a rollover w- no tax to benef
For spousal trust?
Usually there is a deemed disposition at windup at FMV. Cuts off rollover. S. 104(4)
and (5). Disposition at day of death of spouse. When property is distributed and trust
winds up, there’s a roll-out at cost on day of death. (note benefit of delaying this for
three years, allowing shares in co. to be sold, and deferring tax.)
Chapter G – Estate Planning
EVASION = rely on fact that CCRA does NOT become aware of something
AVOIDANCE = upon complete disclosure you have grounds for a fight. An arguable
position.
There are new civil penalties on tax professionals involved in shady deals, not just on TP
(who can face criminal charges). Pro cd be a co-conspirator.
s. 163.2(4) penalties against professional who has assisted a client to do something
wrongful. Mostly used against accountants.  greater pressure for receipts.
Dating Documents
3 scenarios
1) putting into a writing an agreement made on certain date
- parties agreed on ____ . Agreement reduced to writing today
- Falconer  allowed if there are “explanatory recitals”.
2) “As of” Agreement
- state that agreement effective “as of” earlier date
- need not put down today’s date
- “as of” warns CCRA document was signed at a later date.
34
-
Parties can adjust rights between them on a retroactive basis. (Trollope)
CCRA may disallow if it has advantageous tax consequences, BUT OK to
try (i.e. not unethical)
3) saying document executed on a date when it was not  favourable tax consequences.
- This is evasion – UNETHICAL.
- What if client asks for undated document. Can send w- a cautionary letter noting no
“as of” or explanatory recitals, and that document must not be back-dated.
GAAR S. 245
Stubart  can arrange stuff for the sole purpose of avoiding taxes. Need not have a
business purpose test.
Two step test:
1. Have to have an avoidance transaction. s. 245(3) (a matter of evidence).
2. GAAR does not apply if there is no “misuse” or “abuse” of the ITA. Courts so far
have said practice must be clear, or GAAR will not apply. S. 245(4)
Nichols
3 lawyers owned a co., which owned a building, which was sold to pay tax. They cd take
dividends, but must pay tax if they do. Instead, they sold co. to a 3rd party for cash, and
claimed a K-gains exemption. TJ sd policy of Act was to see that dividends are paid.
Rejected the transaction under GAAR, and applied the dividend tax. (Cy says should
have been appealed)
 The GAAR test can be tough, with tough consequences.
Examples that GAAR will catch
1) if own shares in a corp worth millions that are eligible for K gains exemption
- don’t want to dividend out  tax
- sell shares to your RRSP @ FMV for a note
- RRSP redeems shares – not taxed on $$ it gets
- You get K gains exemption
- RRSP pays you back
2) Mr. X owns 100 shares of OPCO w/ FMV = 2 mill and ACB=0
- Can sell shares to arms length person for 2 mill and use 500,000 exemption
- OR sell ½ of corp to wife for 1,000,000 note NOT a rollover [73(1)]
- Mr. X uses exemption for 500,000 of it
- Mrs. X has 50 shares w/ an ACB = 1,000,000
- Mr. X rolls his 50 shares to Mrs. X
- Mrs. X now has 100 shares w/ FMV = 2 mill and ACB = 1 mill
- Sell to 3rd party for 2 mill
- Use her 500,000 exemption
- doubles the exemption for the family
35
3) OpCo has lots of cash. If it pays cash to S/H, then the S/H pays tax on the deemed
dividend.
 Alternative? Sell shares to spouse for a note, then report K-gain. Lower tax rate.
 Spouse takes shares and sells to a New Co for a note. Opco then redeems shares
to NewCo, which gets a dividend (tax free).
 Newco pays debt on note to wife, wife pays to husband on note to him  K gain.
12% tax advantage.
Cy says there’s a material risk here, b/c of lack of commercial or business reason.
But, if TP loses, wd hv to pay interest on unpaid tax. Downside much smaller than
potential upside.
OSFC Holdings – leading case on GAAR
 To argue GAAR, CCRA must be able to show that a clear policy of the Act is
being defeated.
ESTATE PLANNING
-
not GAARable says GAAR explanatory notes
spouse now means spouse and common law partner
and CL prtner now means [248]:
- persons of opposite sex cohabiting in conjugal relationship and have child in
common
- or persons of either sex who have been cohabiting for one year or more in a
conjugal relationship
- conjugal = relationship like a husband and wife. Malodowish v. Penttinen: social,
sexual activity, perception of others, children
3 objectives of estate planning
- 1)  deemed gains via [70(5)] when die
- 2) maintain control over property until you die
- 3) income splitting
Problems
- Attribution rules
- [69] – non-arm’s length transfers deemed to occur @ FMV
ATTRIBUTION RULES
[74.1(1)], [74.1(2)] – Between Spouses
- when there is a transfer/loan property to spouse or trust to a spouse, any
income/loss is attributable back to the original spouse (2nd generation safe)
- includes K gains/losses [74.2]
- if divorce or end C/L relationship for 90 days – no attribution
- if separated – attribution of property source income stops [74.5(3)(a)]
- if separated – attribution of K gains continues [74.5(3)(b)] unless both parties
claim out of it
- [74.1(2)] – [69] Minors
36
-
if transfer/loan property to child, grandchild, niece or nephew or a trust for
their benefit the income or loss from the property or substituted property is
attributed back until kid reaches 18
- Inter vivos trust, taxed at top rate
- does NOT apply to K gains/losses unless is farm property of farm corp shares
transferred [75.1]
DETAILS
- money need not go back  just taxed as if it was – [74.3].
(trust for a sp and adult kids: settlor deemed to have earned income.)
(loan from bank to trust? Repayment of loan does not stop attribution.)
- transfer = gift or sale for full or partial consideration
- Sachs 80DTC6291@9295 transfer is a sale or gift
- 74(2) If spouse loans or transfers any taxable K gains/losses, attributed back.
Exemption: K-gains transfer between parent-child, grandparent-child, neice, etc.
Only spouses.)
- [74.5(7)] Could be a guarantee of a loan
- [74.5(9)]  benefit defined as “beneficially interested”  defined in [248(25)]
as person who is an absolute or contingent beneficiary
- 248(5) substituted property? (Sp gives $$ to sp, who buys shares. Dividends will
be attributed back to 1st spouse.)
- Heller v. MNR: interposing a trust will not defeat attribution.
- income from business source NOT attributed back. Only I from property.
Lackie 1979 CTC 389 @ 391
The taxpayer transferred a farm to his wife. Thereafter, she sold gravel from
the farm at a stipulated price per ton under an agreement calling for certain
minimum payments. She in fact received the minimum amounts payable
under the agreement. The Minister attributed such income to the taxpayer,
who then appealed unsuccessfully to the Federal Court -- Trial Division (78)
DRS P80-492. The Court found attribution to be proper, since the anticipated
payments depended to some extent on use of the land, and could be
characterized as income from property. The taxpayer appealed to the Federal
Court of Appeal, contending that attribution was not proper because the
payments represented business income rather than property income.
HELD: The taxpayer's appeal was dismissed. The activity permitted on the
land over several years by the taxpayer's wife did constitute use of the
property within the meaning of the relevant statutory provision. The profits
were dependent on that use. The taxpayer's wife did not sell gravel as a
business but simply granted a licence to work a gravel pit on her land.
The payments represented income from property, and were properly
considered as part of the taxpayer's income. His appeal was therefore
dismissed.
- BUT If property transferred (e.g. prtnership interest where transferor NOT
active in the business)  property source [96(1.8)]  attribution
37
-
-
[Robins1963CTC27] Husband advanced wife’s portion of payment for a
partnership agreement. CCRA wanted to attribute I to him, but court allowed
accepted argument he owed his wife $$, and this was payment on the loan.
74.5(12) – if parent/spouse paying a salary to person = OK – [69]
reasonableness!!
74.5(2)  commercial term exception
- if loan made with interest paid at the specified rate, or pd no later than 30
days after year end, then no attribution. (calendar year). As long as loan is at
prescribed rate at the start, don’t have to keep adjusting.
- if miss one interest payment – SOL forever
(different from rules for connected corps, which have a 1-yr limit.)
[74.5(1)]  FMV consideration back = no attribution
- but spouses have to elect out of S.73 rollover
- if part of price is a note, must meet [74.5(2)] rules
- MUST get real proceeds NOT just [69] deemed proceeds
[56(4.1)] – INTEREST FREE OR LOW INTEREST LOANS
between non-arms length parties, where motive is to avoid tax.
DOES NOT APPLY WHEN 74.1, 75(2) APPLIES
1) Ind gives loan or takes back a debt and individual earns income from property
2) Ind gives loan or takes back a debt from trust and trust pays income to benef
3) Ind transfers property to a “creditor” trust which loans or takes back debt from an
individual
4) Ind transfers property to creditor who loans or takes back debt from another trust who
then pays the benef
 And 2 people are NOT arm’s length
 And motive was to avoid taxes = ATTRIBUTION OF PROPERTY SOURCE
INCOME NOT K GAINS
 DOES NOT APPLY TO KIDS < 18.
 BUT have [56(4.2)]. If ITA interest rate paid, then no attribution.
 Onus on TP. Assumption: One of the main reasons was to avoid tax.
38
Loan $$ to #2 or takes back debt in
exchange for property
Person #2
Person #1
Gets $$ or I
from prop
makes loan
- $$ to A or
#2,
- Prop to B
Trust A
Trust B
Gets $. buys
prop, transfers to # 2
or Trust B
Gets loan and
I  #2, or
Gets prop fr A
Pays I to #2,
or
S. 56(4.1)(a)(i)
}
(4.1)(b)
}
(cause attribution for first 2 lines in diagram)
(4.1)(c)(i)
}
Where #1 gives a loan (or takes back debt in exchange for property) to #2 or to Trust (B),
and #2 ends up with the income, even if trust is interposed.
S. 56(4.1)(a)(ii)
}
(4.1)(b)
}
(cause attribution for third and fourth lines)
(4.1)(c)(ii)
}
Where #1 transfers property to #2, or to trust (A), and income is earned from the property
that ends up in the hands of #2.
Bottom line: if you have adults, where one earns income from $$ borrowed from the
other, there will be attribution, regardless of interposing trust, if motive test is met.
If there is an absolute gift? No problem.
Caveat: even if debt is paid off, if the transferred property is generating income for #2,
then attribution still applies.
Why use a trust? There is still one advantage to using trusts. They are creditor-proof.
So, instead of giving loan or property directly to beneficiary, can put it in a discretionary
trust with the power to encroach, and keep the asset safe.
VALID WAYS TO SPLIT INCOME
39
1. CCRA does not catch 2nd generation income. Re-invest income that was
attributed back – results NOT attributed back. (no caselaw or TIB on this)
2. Transfer property to person @ FMV, but consideration = non-income producing
assets (jewelry)
3. Higher income earner can buy the assets of the other spouse, who can invest
proceeds which get taxed at lower rate.
4. Property earns business income
5. Get high earner to pay for everything so low income earner can build up assets at
a faster rate.
6. Lend money to a child and get them to generate K gains
7. Poorer spouse takes out loan, and invests proceeds. Rich spouse pays interest on
loan. But, make sure rich spouse does not guarantee the loan, b/c 74.5(7)
attribution would kick in.
8. Can gift property to adult children – but NOT loan [56(4.1)] But if worried about
potential marriage breakdown, Mom can settle a trust with her assets, w- adult
children as beneficiaries, Dad as K-beneficiary. Trust distributes I to child. No
attribution b/c no debt or loan, and control of property is not lost. (cd not make
self the beneficiary) (Maybe CCRA will plug this hole some day.)
S. 75(2) Trust for benefit of self.
75(2)(a)(i) property put into trust can revert to the settlor.
 Property source I and K-gains attributed to settlor. It doesn’t matter whether I is
reported by trust or beneficiary.
- Does not matter if property ever reverts
- NO AGE RESTRICTIONS
- Covers 2 things
- 1) settler remains K benef
- 2) revocable trust (a revocable trust only arises at C/L where it is explicitly
stated as being revocable. If silent, irrevocable. Cdn Deposit Ins. Corp.
Revocable trusts are often blind trusts for politicians, e.g. Technical problem:
if settler dies while trust in place: is the right to revoke an asset or property.
- There is no 74.5 exception (when commercial interest rate is paid on the benefit).
So if TP sells $100,000 FMV of shares to trust, and gets $100,000 back, TP will
be taxed on the interest from the $100,000 cash, plus will pay tax on the dividends
on the shares in the trust.
75(2)(a)(ii), 75(2)(b) Where settlor is the sole trustee
- Settler is NOT a K benef BUT sole trustee re investments and/or discretionary
trust and it attributes back. Statute says, in effect, if you maintain control it’s like
having the property yourself.
- ATR #80 rules does not apply if there are 2 trustees – better to have 3
- OK if person is just an income benef – b/c will be taxed on that as you get it
107(4.1) Will take effect
- if have a 75(2) trust – NO tax free roll out to benefs unless they are the settlor
or the settlor’s spouse – LOSE ROLL ON ALL PROPERTY
- STOPS discretionary roll to 3rd parties
40
-
107(2) roll does not apply
107(2.1)applies – roll at FMV
- trust distributes K property to other K benef
- settlor hit w/ K gain
S. 69: if you move property at non-arms –length, FMV applies  K-gains/recapture.
 You can’t avoid s. 75 by giving away assets while you are alive. A trust won’t help.
S. 85 Rollovers – The Estate Freeze
Avoids the kinds of problems that arise with attribution and trusts. Assets go into
company, and parent takes back FMV in shares/note/combination thereof. Fixed value
pref shares, with no dividends, or demand note w- no interest.
This causes an exchange of income-producing assets for non-income producing assets wa fixed value. The co. now has the growth asset.
Low I family members brought in as common S/H. As the assets rpoduce I,l the co. will
pay I by way of dividends. As assets grow in value, entire increase is realized in the
value of the common shares.
(Finance doesn’t like it, but GAAR does not apply. Strange that it’s allowed. Not in US.)
Nuemann (1998) SCC: N had a co. Shares were rolled to a new co (MelNeu). N got pref
shares. Brought in wife for common shares. She got dividends. As soon as she got the
dividends she gave them to hubby. SCC allowed it. So CCRA brought in the following
legislation.
[74.4(2)] Penalty provision – interest imputed to TP
OLD ESTATE FREEZE
- Parent [85] rolls asset into a NEWCO
- Parent take back a note = ACB = EA and PS w/ voting control that were
retractable/redeemable at a set price
- CS then issued to Family Trust or spouse or kids
- As asset  in value – all goes into the CS
- Could also dividend to trust who would then distribute to benefs = income split
- When die
 note FMV = ACB = 0 gain
 PS gain = 200,000 = original gain
 all other gain in kids hands
NEW SITUATION
74.4(2) – imputing of interest – transfer of property
1. a TP transfers property to a corp
2. one of the main purposes is to  the income of the TP
3. and benefit a designated person (s. 74.5(5) sp, child, grand-c, neice, nephew,
under 18) who is a specified s/h of the corp (holds at least 10% of the class)
 parent is forced to take back:
ITA interest rate on the outstanding amt
41
less
less
(the difference btwn FMV and what was actually paid,
not counting debt/shares of the corp)
any interest received
5/4’s of all taxable dividends
A slight variation when TP loans $$, instead of transferring property
74.4(3) applies.
 TP is forced to take back:
ITA interest rate on the outstanding amt
(the loan)
less
any interest received
less
dividends paid to the designated person
EXCEPTIONS
1. Estate Freeze: Corp is a small business corp = CCPC w/ 90% of assets in active
business OR CCPC w/ 90% of assets in shares/debt of a corp that is a SBC
a. Have to meet 90% at all times
2. Assets held in 74.4(4) trust for designated benef s/h (for non-SBC co)
b. trust set up so no benef < 18 can receive any income or K. Or, if a
spousal trust, then surviving sp cannot get any income or K as long as
freezing spouse is alive (not even an interest free loan).
c.
ESTATE FREEZE
If you do a freeze, and bring in minor kids, you cannot gain a lower tax rate for the kids.
They they will have to pay the top tax rate, b/c of the Split Income Rules.
Split Income Rules (The Kiddies Tax)
s. 120.4(2): a specified individual must pay a tax of 29% on split income.
s. 120.4(1): specified individual is someone 17 or less at the end of the calendar year.
s. 120.4(1) split income: includes taxable dividends from a private company, received
either directly or through a trust.
s. 20(1)(ww) don’t include split I in regular tax calculation.
What’s left?
1) Never let 74.4(2) apply.
2) Do a freeze with spouse and underage kids by putting a cap on your value.
E.g. s. 70(5)- deemed disposal of K-property at death.
3) Do a split with adult kids.
4) Do a split with your spouse (in some situations) (no benefit until you die)
5) Never do a split with underage kids.
Most common examples of Estate Freezes today
42
1) parent has sole proprietorship. Rolls into Newco. S. 85. Takes back shares and/or
debt.  Newco has the business (an SBC). Common shares go to other family members,
(or into a family trust).  Can split income with spouse and adult children (not minors).
2) Parent has an Opco that is an SBC. Can interpose a Newco. If >90% of its shares are
in an SBC, it too is an SBC. So, can do a s. 85 rollover  freeze, and income split with
spouse and adult children. Example at G-51.
Potential problem: co makes more $$ than anticipated, and more than you want
to split. Cash can build up in co, jeopardizing SBC status. What do do?
a. Do a reverse freeze.
b. Or, if family trust owns another company, which is a also beneficiary
of the trust. Flow dividends to the trust, which can pay to the
beneficiary company. When a trust receives a dividend, it is passed on
to an individual. But if passed to a company, co. receives the dividend
tax free.
(Cy had a client who wanted to keep cash in co., but wanted to
creditor-proof it. Co owned by trust cd receive the money, and cd lend
the $$ back to the company as a preferred creditor if needed. If co
went under, the trust wd be first in line.
3) Parent comes in w- passive assets. Cash, stocks, apt building. If transferred to
Newco, wd hv 74.4(2) problem. Not an SBC. Solution? Create a “74.4(4) trust” (See
“Exceptions” to imputed interest penalty provision. Can get the freeze, and split I wadult kids, but not spouse or minor kids.
Cd do this sort of thing with a portion of assets. Doesn’t have to be all.
4) Parent has a passive company. Have it transfer assets to Newco, which wd be owned
by family, who wd own the common shares. The passive co wd hold shares (or fixedprice no interest demand note) in the Newco w- a frozen value.  can split I w- spouse
and adult kids.
From Grower outline:
-
4) Parent owns shares in a CCPC that does not meet 90% active business test
- PUC out + BOOT = PUC in via [84.1]
- OR see if can get rid of asset (if parent owed money by corp – get back tax free) – then go to
(3)
- OR go to (6)
- OR go to (7)
- OR note that 74.4(2) only applies when an individual transfers prop to a corp
- Thus roll ASSETS of OLDCO into NEWCO = REVERSE FREEZE
- EA = tax cost of all assets
- EA = boot + $1 PUC for new PS
- Notes  Dmd promissory w/ 0% interest
- PS  voting, retractable rts
- Want set cumulative dividend or upper limit or non-cum w/ limit
- Price valuation clause = (FMV – FMV Boot)/# of shares
- OLDCO takes PS w/ value above
- NON-Revocable Family Trust takes CS issued by corp [75(2)]
- Have non-parent be settlor w/ a coin
43
Want 3 trustees so no 75(2) arguments – parent be one
Loan from 3rd party w/ prescribed rates so no attribution – buy CS
- Pay back w/in one year [74.5(2)] – stops 74.1 to 3rd party
- Dividends out to pay back loan NOT PARENT
Can split w/ adult kids and spouse b/c 74.4(2) no apply
BUT PAIN TO MOVE ACTUAL ASSETS (unless something like public shares)
Cannot just dump passive asset into a Corp leaving a SBC b/c OLDCO still owns that
cash via the sub you rolled it into
-
-
5) OR wrt (4)
- Could have the OLDCO loan $$ to NEWCO (if it has any) for 0 interest and then the loan freezes
the OLDCO value – NEWCO issues CS to THE trust
- Avoid 74.4(2) b/c not an individual giving the property to the corp
-
6) [86] Freeze  for freezing a corp ONLY
- Parent owns CS in a corp
- s. 167 of MBCA and s. 173 of CBCA allow articles of amendment to allow ing CS into PS 
DON’T NEED CCRA ELECTION
-  the old CS into PS freeze shares – rolling old CS in for PS
- must take back PS w/ value = CS value – like rolling only for shares - no note
- CANNOT destroy the pregnant gain
- PS  voting, retractable rts
- Want set cumulative dividend or upper limit or non-cum w/ limit
- Price valuation clause = (FMV – FMV Boot)/# of shares
- Parent takes back the PS
- IF SBC – trust OK
- [74.4(4)] Trust takes CS issued by corp OR pay 74.4(2) interest b/c 84(9)
- Have non-parent be settlor w/ a coin
- Want 3 trustees so no 75(2) arguments – parent be one
- Loan from 3rd party w/ prescribed rates so no attribution – buy CS
- Pay back w/in one year [74.5(2)] – stops 74.1 to 3rd party
- Dividends out to pay back loan NOT PARENT
- No benef < 18 can get income
- No spouse can get income if freezing spouse alive
- NO BOOT – MBCA and CBCA don’t allow it
- NO PUC grind b/c MBCA, CBCA say PUC stays same
- BUT parent may want a HOLDCO in between trust and OPCO
- Also HOLDCO often lends $$ to OPCO who then pays back w/ dividends and drains the corp
for creditor proofing
-
7) Stock dividend option
- declare a stock dividend of retractable PS = pregnant gain
- since PS have a set value – drives value of CS  to an amt = ACB
- sell the CS to a family trust for the ACB
- no attribution b/c trust pays FMV = ACB
- no 74.4(2) b/c nothing transferred to the corp
- BUT s. 41 of MBCA says that PUC must  by declared amt of the dividend
- BUT if you  PUC – [84(1)] nails you with a deemed dividend
- THUS – declare dividend to = $1
-  PUC by $1,  RE by $1 (OK b/c still have the cash)
- and ACB of PS =  in PUC via [52(3)] so = $1 – have gain locked in
- If cannot do this – may not matter if have corp owing the shares – inter-corp dividend
- neat option w/ (7)
- after issuing PS stock dividend = pregnant gain
- sell the CS (which are now valued at amt = ACB) to new s/h’s and get 0 K gain
44
Mandatory Criteria for a S. 85 Election
a. Transferor must take back FMV consideration. If less, 85(1)(e.2) wd deny
rollover to the extent of the shortfall. Cannot deplete yourself. Have to get a fair
exchange back.
b. Can take back boot (e.g. debt), up to elected amount (S. 85(1)(b)). Debt may be
simpler, b/c don’t have to go to the trouble to redeem the shares.
c. Freezer cannot deplete value. Cannot lose unrealized gain in a current asset.
Share taken back must reflect that. S. 85(1)(f, g, and h)
How to freeze:
Take back demand promissory note, w- no interest payable.
How to structure pref shares to make them frozen:
2 kinds of pref shares:
a. In marketplace, provide for a fixed redemption amount at maturity or at date
company winds up. They have a cumulative dividend of, e.g. 5%/year. Issued to
raise capital. But: order of distribution of assets: debt holders, then pref shares,
then common shares. Can be voting or non voting.
b. For estate freezes: Redemption amount fixed, but rather than having a fixed date
for redemption. Can redeem them at any time on short notice. They are like a
demand promissory note. No cumulative dividend  increase of value.
a. Can be for greater value than a demand promissory note, which is
restricted by s. 85 to be a maximum of EA.
b. They can have ability to have dividends paid, but for flexibility better not
to have mandatory dividends. Cy says the dividend should have a a
reasonable ceiling. 8% is common, but seems a little high in 2003.
(Winram: Freezor took pref shares w- voting control. No cap on
dividends. Court sd tantamount to common shares.)
c. What you take back should be = to what was put into company.
d. Put an “internal share rights price adjustment clause” into the share
rights. If you are wrong about the value you put into the company, CCRA
will permit a price adjustment, but the price adjustment clause must be in
the share rights (not in the contract for sale). But, adjustment will only be
permitted if your initial effort to set price was honest. Can’t set low, and
hope to take advantage of the clause if you get challenged. Rollover wd be
disallowed.
e. Set a nominal value for the common shares. (e.g. $1 for 1000 shares.)
f. Good idea to attach voting rights to pref shares, but not common shares.
That way freezer maintains control, can give self a healthy salary, e.g., and
control dividends paid on common shares.
45
Paid-up Capital on Pref Shares
PUC: on redemption or windup of co., under 84(2) there’s a deemed dividend on the
amount of share, less the PUC.
S. 89(1) defines PUC: Stated capital under corporate law, subject to adjustment by
certain sections:
a) 85(2.1)
b) 84.1
applies when doing an [85] election, and [84.1] does not apply (84.1 applies to an 85 roll
of a CCPC) (So, 85(2.1) applies when freezing anything except an SBC, i.e. a R.E. asset,
or a sole proprietorship, or shares in publicly-held co, or a company whose assets are not
all, or substantially, all, shares in an SBC.)
E.g. rolling an asset $10,000 into company:
ACB = 3000 }
EA
= 3000 }
Note = 3000 }
Shares = 7000 (pref) (w- no ACB)
-
-
Normally, wd put 7000 into PUC. When the shares are redeemed, there’s a $7000 Kgain. CCRA doesn’t like the idea you can do a s. 85 roll, and take out surplus from
company as a capital gain.
Putting PUC into contributed surplus (possible under the Mb Act) means when the
shares are redeemed  dividend. CCRA wants this to happen all the time.
 PUC Grind
s. 85(2.1)(a) causes PUC reduction of the particular class of pref shares.
This section applies when freezing anything except an SBC, i.e. a R.E. asset, or a
sole proprietorship, or shares in publicly-held co, or a company whose assets are
not all, or substantially, all, shares in an SBC
The formula:
(A – B) X
C = PUC grind (how much to subtract from total value
A
of shares to get the final PUC)
A = increase in PUC of all classes of pref shares issued.
B = corp’s cost of the transfer of the acquired asset, minus any boot.
C = increase in PUC of the particular class of PUC shares.
C
A
is usually 1, b.c there is usually just one class of pref shares.
 S. 85(2.1)(a) limits the amount of PUC to s. 85 EA less the boot.
46
 This means redeeming the pref shares results in a deemed dividend,
rather than a capital gain.
These rollovers result in pref shares with a high redemption amount. But they have
zero basis, or PUC. On redemption/windup, TP ends up with a deemed dividend,
and no K-gain.
 If you take assets out of a company, they come out as a dividend.
(Cy says might not seem fair, b.c if asset had never been put into the company, then it
could be sold and taxed as a capital gain. But, after redemption, company still has the
asset, and can sell it  K-gain. Thus, if you sell the shares, they shd come as a
dividend.)
PUC grind where individual rolls private shares into Newco
S. 84.1
84.1 applies to an 85 roll of a CCPC. Applies when INDIVIDUAL rolls private
shares in CCPC into NEWCO
Example:
TP owns OPCO
-
FMV = 1000,
ACB = 500 and
PUC = 100
- If wind-up  Deemed Dividend = 900 and 400 K loss
- If [85] roll at EA = 500 and get 1000 PS at $1 each
- PUC = 1000
- Wind-up  Deemed Dividend = 0 and K gain = 500
Grind = A – B x (C/A)
- A = Corp PUC = FMV - Boot
- B = Amt that PUC of the shares transferred in - BOOT
- (C/A) = same
S. 84.1(1)(a) forces PUC down, so freezer who tries to liquidate pref shares is in the same
position as someone who tries to liquidate common shares.
The formula:
(A – B) X
C
A
A = increase in PUC of all classes of pref shares issued.
B = corp’s cost of the transfer of the acquired asset, minus any boot. (EA – boot)
C = increase in PUC of the particular class of PUC shares.
C
A
is usually 1, b.c there is usually just one class of pref shares.
47
Example (at p. G-51)
OPCO
Assets
Liabilities
450 Shares w$650,000 FMV
(ACB is $5000.)
Nil
Equity
PUC: $450 for 650,000 pref shares
Contributed surplus: $649,550.
Vendor (J Golden) sells his shares in Opco, worth $650,000, to Golden MB Ltd.
The buyer (Golden Mb) pays by issuing the vendor 6500 Class A shares w- a redemption
amount of $100 each.
Golden Mb then issues 100 common shares to the Golden Family Trust.
Another way for an SBC to do a freeze
Instead of rolling to a Holdco under s. 167(1)(g) of the Mb Companies Act, can file
articles of amendment freezing common shares into pref shares.
“The ___ common shares of the corp, registered to and owned by “X” are
changed into ___ fully paid and issued Class A Shares of the corporation.”
S. 86: Cost base of the old common shares becomes the cost base of the pref shares.
S.86(2): to get that rollover, have to take back pref shares = value of common shares. No
boot taken back.
S. 84(9) When you do this, it will be considered that the S/H has disposed of the common
shares to the corporation.
S. 37(4) of The Companies Act moves the PUC from common shares to pref shares.
Can’t play with PUC for tax purposes.
Advantage? Don’t have to interpose a holding company, with the related costs
associated with that.
Disadvantage? Holdco can creditor-proof the Opco, if Opco pays large dividends to the
Holdco, and Holdco lends the money back.
48
Setting up Family Trusts in an Estate Freeze
Why? Provide flexibility. Don’t have to set percentages for each child, and allocate
shares accordingly. If one child to go into the family business,k wd likely get more
shares. Wdn’t necessarily want strict equality. The only constraint on when to make a
decision re: percentages is s. 104(4) and (5) (21-year-deemed realization rule).
Requirements
a. Settlor: shd be parent or grandparent, but not the freezor.
b. Need a gift: Must est. that there is a real gift. (Can have $$ kept in separate bank
account. Better: purchase a small gift. A gold coin serves the purpose well.)
c. Keep gift separate: don’t use gift for purchase of shares.
d. 2-3 trustees: (for trust to hv integrity, and avoid 75(2)). Can include settlor.
Caveats
If freezor wants to be a beneficiary, can be both a trustee and beneficiary, but for sure
should not be settlor. 75(2) wd kick in.
If trust silent on revocation, then irrevocable. (Can be revocable, as with politicians’
blind trusts.)
Settlor amends the trust document unilaterally? Academic commentary: this means the
trust may not be valid. No certainty, e.g. of objects. Power to amend means open to
challenge. But can argue Schmidt:
Schmidt v. Air Products of Canada: Co was settler and made contributions to
pension plan. Co reserved right to amend document. Decided to revoke the trust.
SCC sd power to amend did not extend to revocation. But, court seemed to
accept that trust valid, w- a power to amend. (hard case = bad law).
Creation of a trust cannot be back-dated, as w- contracts.
Assume you’ve avoided 74.4(2). You may still end up with a 74.4(4) trust, which will
freeze, but w- no hope of income splitting, b.c spouse can’t take while settler spouse still
living, and kids can’t take while underage.
Avoid attribution. Settlor shd be someone for whom attribution rules do not apply, e.g.
uncle. Can also get non-resident relative to make the loan/gift to create the trust. Easiest:
get a loan from a friend or relative at prescribed interest rates (74.5(2)) to override
attribution rules (now 3%).
Kiddies Tax gets in the way of splitting I with kids, but can still split with spouse or adult
kids. In all cases, should be able to accomplish a freeze, such that future values accrue
to the beneficiaries subject to deemed realization at 21 years. Any growth  shares in
the trust.
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Effect of s. 107(2) (roll to beneficiaries at cost amount)
Prior to 21-year deadline, can roll out the appreciated shares to beneficiaries. Can then
decide on percentage allocations to beneficiaries – the primary reason for the trust.
Freeze means the kids get the pregnant gain in their shares. BUT, they don’t pay K-gains
until they sell their shares.
 Trust has tax advantages for up to 21 years.
Various matters re family trusts
Edell v. Sitzer (Ont SC): Trust created under a mutual will of parents. Surviving parent
then cut out one of the kids. Kid argued that there was a constructive trust b.c of will.
But court upheld the Trust’s override of even-handedness rule. Under appeal.
Cheadle v. Mayott (1997): Override of even-handedness valid, but discretion must be
exercised in good faith.
Martin v. Banting: when the trust has a clear provision overriding the even-handedness
rule, the beneficiary cannot challenge exercise of discretion.
Liability clauses protecting trustees: valid, even for gross negligence. Only willful acts
of fraud or breach of duties will give rise to trustee liability. Armitage v. Nurse. (But no
protection for harm to 3rd party. Tort  liability.)
Normally a trustee has to recuse when dealing with benefits to self, but trust instrument
can override that.
Conflict of Laws
An interpretation clause can require that the laws of the province will govern. Otherwise,
different jurisdictions could apply to different heads of potential conflict. E.g. rule
against accumulations. Applies to ability of trust to grow after death of settler.
Abolished in Mb by statute.
Delegation
Trustees can now delegate investment decisions, as long as done in a sensible and
reasonable way, to someone competent and qualified.
But, cannot delegate policy decisions of the trust. E.g. pay out or accumulate I?
Encroach? Dist. K? don’t delegate, b/c central to fiduciary obligations.
Family Trust Example
G-71 Discretionary trust.
Note condition at g-85 – the trustees can invest in anything they want to, or spend money
in any way, and shall have all of the powers of a beneficial owner, “provided that the
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power is always subject to the fiduciary obligation of the Trustees to act in the best
interests of the beneficiaries.”
G-87 (f) principle of even-handedness prevails, unless expressly overridden, as it is here.
Allows trustees to cut out a divorced spouse, or wayward child. But if cut out b/c child
married someone of another faith, or joined a political party  repugnant to public policy
and will not be upheld.