A couple of months ago, I blogged about a letter from the Department of Finance in which it addressed concerns regarding amendments to the Income Tax Act (the “ITA”) that have come into force as of January 1, 2016. The stated purpose of the letter was to confirm the Department of Finance’s understanding of the issues raised and to describe an option for responding to these issues. There was no promise that the option would be pursued or that any action would be taken.
However, on January 15, 2016, the Department of Finance released draft legislative proposals that would modify the income tax treatment of certain trusts and their beneficiaries. The legislative proposals, along with explanatory notes, can be found here.
Currently paragraph 104(13.4)(a) of the ITA provides that upon the death of a beneficiary of a spousal trust, the trust’s taxation year will be deemed to come to an end on the date of the individual’s death. Subsequently, according to paragraph 104(13.4)(b), all of the trust’s income for the year is deemed to have become payable to the lifetime beneficiary during the year, and thus must be included in computing the beneficiary’s income for their final taxation year. This has been raised as an issue due to paragraph 160(1.4) which makes the trust and the beneficiary jointly and severally liable for the portion of the beneficiary’s income tax payable as a result of including the income from the trust. As such, it is possible that the beneficiary could be responsible for the full income tax liability, to the benefit of the trust and the trust’s beneficiaries.
According to the draft legislation, paragraph 104(13.4)(b) is to be amended and 104(13.4)(b.1) is to be added, such that (b) does not apply to a trust unless all the requirements are met and the trust and the beneficiary’s graduated rate estate jointly elect that (b) apply. It would, therefore, be up to the trust and to the estate of the beneficiary to determine whether they wish the trust’s income to be included in the income of the beneficiary for their final taxation year.
There was also an issue raised with respect to the stranding of charitable tax credits. This situation could arise if a trust were to make a charitable donation after the beneficiary’s death. As the trust’s income for the year has to be included in the beneficiary’s income, consequently, the trust would have no income against which to deduct tax credits. Based on the draft legislation, as long as the beneficiary and the trust do not jointly elect for 104(13.4)(b) to apply, the trust’s income will be included in the trust’s tax return, and any charitable donation tax credits should be able to be deducted from that income.
The press release issued with the draft legislation stated that the Department of Finance had released the draft legislative proposals for consultation and welcomed interested parties to provide comments by February 15, 2016.
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The “Henson trust” is a type of trust often used in estate planning to deal with situations where there is a disabled beneficiary who is entitled to receive support payments from the Ontario Disability Support Program (ODSP). The name of the Henson trust originates from an Ontario case, The Minister of Community and Social Services v Henson,  OJ No 1121, aff’d  OJ No 2093 (Ont CA), where the Court held that a discretionary trust established for a disabled beneficiary would not result in a loss of government benefits, as the beneficiary had no vested right to receive income or capital from the trust.
Under the Ontario Disability Support Program Act, if a recipient of ODSP has assets, or receives income over a prescribed limit, they will cease being eligible to receive support payments. An individual cannot hold more than $5,000.00 in assets (with some exceptions, including their principal residence and a vehicle) and continue to receive ODSP. However, ODSP often does not provide sufficient income, and the restrictions on income and assets cause recipients to subsist on very little, or risk losing their ODSP. One way to address this issue is through the establishment of the Henson trust.
The essential elements of a Henson trust are: (i) that the trustee must have absolute discretion, (ii) that the assets of the trust do not vest in the beneficiary, and (iii) that there is a gift-over following the death of the beneficiary. While usually a beneficial interest in a trust is taken into account in determining an individual’s assets, the Henson trust is an exception, due to the fact that the beneficiary in this type of trust has no vested interest in the assets, nor any right to demand that the trustee pay them from the trust. As such, the beneficiary is not required to treat the trust assets as his or her own and consequently, the Henson trust provides a method of providing additional income to a disabled beneficiary without causing them to become ineligible for ODSP.
The Henson trust, however, is not a perfect solution. First, it relies on the absolute discretion of the trustee in order to meet the requirements of the trust. Because Henson trusts are often created in a will by parents of a disabled beneficiary to ensure that their child will be properly looked after, the parents are forced to repose complete trust in their chosen trustee. That trustee consequently holds a great deal of responsibility. Thus, it is vital to choose a trustee that is unquestionably trustworthy, who will prioritize the best interests of the child and will not take advantage of their position.
Second, the Henson trust cannot avoid the rules with respect to income limits for recipients. Therefore, the payments to the beneficiary from the trust still cannot exceed the income limits for ODSP. Although the trust helps to provide a guaranteed, steady income to a disabled beneficiary, they will likely still be living on quite a low income.
If a settlor of a trust has sufficient assets to provide for a disabled beneficiary, they may want to consider a regular trust arrangement, as opposed to a Henson trust. The downside of course, is that, depending on the amount of payments to the beneficiary, they may lose their eligibility for ODSP. However, it may be worth the trade-off to ensure that your loved one can live comfortably. Before making a Henson trust arrangement, talk to a trusted advisor who can help determine the best fit for you.
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Secret and half-secret trusts are trust arrangements made between a testator and a trustee, without disclosure of the terms of the arrangement, but where an understanding exists between the parties. Secret trusts are not mentioned at all in a testator’s will. Half-secret trusts are explicitly included in a will, but the terms of the trust are not disclosed.
There are certain requirements that must be met in order to form a secret or a half-secret trust. With respect to secret trusts, there are four required elements, as per Ottaway v Norman  3 All ER 1325 at 1332 (“Ottaway v Norman”):
- An intent by the testator to subject the trustee to an obligation in favour of a beneficiary;
- Communication of that intent to the trustee;
- Acceptance of the obligation by the trustee, either expressly or implicitly; and
- The conditions are satisfied before or after execution of the will, but before the testator dies.
With respect to half-secret trusts, the timing of the communication and acceptance is different: it must occur before or at the time of execution of the will.
Due to the nature of these types of trusts, there can be issues proving their existence. Section 13 of the Ontario Evidence Act, RSO 190, C.E-23, requires corroboration.
Accordingly, as in Re Dhaliwal Estate, 2011 ABQB 279 (“Re Dhaliwal”), where the only evidence of the existence of the alleged secret trust were the affidavits of the chief beneficiaries of the trust, the required corroboration was not provided.
According to Re Snowden  CH 528, the standard of proof for proving a secret or half-secret trust is the normal civil standard (i.e. balance of probabilities).
As per Ottaway v Norman, where a secret trust fails, the trustee will be entitled to the trust property absolutely with no obligation to the beneficiary. By contrast, if a half-secret trust were to fail, there would be an automatic resulting trust in favour of the testator’s estate. The distinction is due to the fact that, in the case of a half-secret trust, the will explicitly states that the trustee has no beneficial interest in the trust property.
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When a life insurance policy’s designated beneficiary is the estate of the policy-holder, the proceeds of the insurance policy will be paid into the deceased’s estate. Usually, the value of the life insurance proceeds are included in the value of the estate when applying for a Certificate of Appointment of Estate Trustee. But there may be a case for not including them.
The Ministry of Finance takes the position that the “total value of the estate is all of the assets owned by the deceased at the time of death, including…insurance, if proceeds pass through the estate, e.g., no named beneficiary other than ‘Estate’.” However, the Estate Administration Tax Act, 1998, S.O. 1998, c. 34 defines ‘value of the estate’ as “all the property that belonged to the deceased person at the time of his or her death”.
Therefore, some have suggested that there can be an argument made that, at the time of the deceased person’s death, they did not actually own the proceeds from the insurance policy. Rather, they owned the contract of insurance. The proceeds are only payable after death and therefore cannot be in the deceased person’s possession when they die. Whether this argument would succeed is uncertain, but it does raise an interesting question of a conflict between the clear wording of a statute and Ministry policy.
Considering that, as discussed in this Toronto Star article, Ontario has the highest estate tax in Canada, the issue of what is and is not to be included in someone’s estate for the purpose of determining the amount of estate administration tax is not insignificant. Currently, the rate of estate administration tax is $5 per $1,000 of the first $50,000 of an estate, and then increases to $15 for each $1,000 after that. Keeping an insurance policy outside of the estate could result in significant tax savings.
Of course, there are other ways to avoid including the value of insurance proceeds in your estate. This includes designating a beneficiary other than the estate. In that case the insurance proceeds would pass entirely outside of the estate and no estate administration tax is payable.
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Today on Hull on Estates, Doreen So and David Smith discuss missing beneficiaries and options for locating and dealing with this issue. Should you have any questions, please email us at email@example.com or leave a comment on our blog page.
Today on Hull on Estates, David Smith and Jonathon Kappy discuss procedural nuances on a passing of accounts application. If you have any questions, please e-mail us at firstname.lastname@example.org or leave a comment on our blog page.
This week on Hull on Estates, Paul Trudelle and Holly LeValliant discuss beneficiary designations when a will is revoked. More specifically, they discuss a recent decision made by the Ontario Superior Court of Justice: Petch v. Kuivila, 2012 ONSC 6131 (CanLII).
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In Chanowski v. Bauer, the Manitoba Court of Appeal recently revisited the recurring dilemma posed when the uncompromising law of insurance beneficiary designations runs up against facts that may seem to call for an equitable remedy.
The deceased had a group life insurance policy in the amount of $55,000, which he held through his employer. When he lived with his first common-law wife (on and off for a period of four years), he executed documents listing her as his beneficiary. However, at the time of his death, he had a different common-law wife. Notwithstanding these facts: (i) the deceased had not had any relations whatsoever with the first spouse for some thirteen years, (ii) the first spouse had remarried, and (iii) the deceased had held his house and all assets jointly with the second spouse with whom he had lived for ten years, the Trial Judge found that the first spouse nonetheless received the benefit of the deceased’s group life insurance. The second spouse appealed this finding and lost on appeal.
The Appellant’s counsel gamely tried every available argument but did not succeed. The Court of Appeal "while having much sympathy" for the Appellant, determined that it was bound by Manitoba’s statute (virtually identical to Ontario’s) and found as follows:
"The documents which Ms Chanowski would have the court accept as evidence of a change of beneficiary do not provide the necessary clear and express intention to remove Ms Bauer and appoint Ms Chanowski as his beneficiary. They merely speak to Mr. Miterek’s intention to increase the amount of his death benefits and to insure the life of his current common-law wife. One may speculate that it is unusual for an individual to increase the death benefits for a former common-law spouse, but more is needed here than speculation to override a written designation (emphasis added).
David M. Smith – Click here for more information on David Smith.
On April 7, 2009, I blogged on the decision of Justice Strathy in Richardson (Estate Trustee of) v. Mew. In that decision, His Honour considered the situation where a deceased’s first spouse was unexpectedly the named beneficiary of a life insurance policy owned by the deceased, the second spouse seeking to remedy what she argued to be an unjust situation. As I noted, His Honour, while not exercising his jurisdiction to rectify the policy, left open the possibility that, in the right set of circumstances (i.e. clear evidence of a mistake), the court could properly employ such a remedy.
The Ontario Court of Appeal released a unanimous decision on May 14, 2009 upholding Justice Strathy’s decision. Of particular significance to the trusts and estates bar, the Court of Appeal clearly stated that, after the mental incapacity of the donor, the attorney under a power of attorney was not permitted to change a beneficiary designation even in circumstances where there was compelling evidence that the donor would have done so if capable: "As a fiduciary in a role rising to that of trustee, [the second wife] was bound to use the power only for Mr. Richardson’s benefit."
In commenting on the case, The Lawyer’s Weekly has noted that counsel for the disappointed second wife is seriously contemplating an application to the Supreme Court of Canada for leave to appeal. In question: is there ever a situation in which the attorney under a Power of Attorney ought to have power to act in the best interests of the donor to effect a testamentary disposition that accords with his or her last known intentions before becoming incapable?
David M. Smith
Declarations of beneficiaries of Life Insurance policies are sometimes thought to be “unassailable.” However, where a deceased’s first spouse is unexpectedly the named beneficiary of a life insurance policy owned by the deceased, the second spouse may have recourse to various legal remedies in an attempt to remedy what is argued to be an unjust situation. Inevitably, a Separation Agreement between the deceased and his or her first spouse is central to any such argument.
The recent decision of the Honourable Justice Strathy in Richardson (Estate Trustee of) v. Mew considered such a situation. The case also stands as an excellent summary of the recent jurisprudence that has developed in this area.
In short, the disappointed spouse can seek the remedies of either constructive trust or rectification. Justice Strathy points out that “except in exceptional circumstances” the Insurance Act requirements for the change of a beneficiary designation must be strictly interpreted. His Honour clearly had difficulty with understanding “how the designation of a beneficiary under a life insurance policy could be anything other than a juristic reason for an “enrichment.” Although he did not find this to be a case for the exercise of the court’s jurisdiction to rectify the policy, he left open the possibility that, in the right set of circumstances (i.e. clear evidence of a mistake), the court could properly employ such a remedy.
David M. Smith