Tax planning and estate planning often go hand-in-hand, so when changes to either are pending, it’s wise to keep an ear to the ground.
Here’s the good news: in its recent 2017 budget, the federal government announced relatively few tax changes that had a significant impact on the tax lives of Canadians.
Now the bad news – and it’s really what the government “said but didn’t do” that has wealthy Canadians worried. The government confirmed again its intentions to target tax rules and planning strategies that benefit the wealthy. This goes back to the 2016 budget when the government stated that it was looking to identify opportunities to reduce tax benefits that unfairly help the wealthiest Canadians.
But in 2017, it’s clear that change is getting closer, and a key target is tax planning strategies involving private corporations that “inappropriately reduce personal taxes of high-income earners.” Specifically, the government intends to review three strategies:
- Holding an investment portfolio inside a private corporation to accumulate lower-taxed investing earnings;
- Sprinkling income to family members using private corporations; and
- Using strategies to convert a private corporation’s regular income into capital gains.
The budget document stated the following about next steps:
The Government intends to release a paper in the coming months setting out the nature of these issues in more detail as well as proposed policy responses. In addressing these issues, the Government will ensure that corporations that contribute to job creation and economic growth by actively investing in their business continue to benefit from a highly competitive tax regime.”
Read the government’s full statement in Chapter 4 of the budget document that starts at page 197: http://www.budget.gc.ca/2017/docs/plan/budget-2017-en.pdf
Ensure any changes are reflected in the estate plan
One fact seems clear – tax changes are coming. And lawyers and advisors to wealthy Canadians may be changing structures and strategies in response. When they do, it’s critical to ensure that the estate planning portion is aligned with these changes.
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One would be forgiven if at first instance they did not see any connection between Justin Trudeau’s recent selection of his cabinet and trust law. While most of the attention has been placed on the background of the new appointees, and of their immediate tasks at hand, there is a (however small) connection to the trust world, as many of the newly appointed Ministers and their staff are rushing to place their assets into blind trusts.
At its most simple, a blind trust can be thought of an individual relinquishing control over their assets, and providing them to a trustee to manage them on their behalf. The trustee has complete discretion over how to invest the individual’s assets, with the beneficiary being provided with no information regarding how the investments are being held, and the beneficiary having no say in how the funds are managed. As the beneficiary has no idea what their funds are invested in, the theory is that they would not be inclined to enact government policy which would favour their own investments, and that they would be able to avoid a conflict of interest.
In accordance with the federal Conflict of Interest Act, a “reporting public office holder”, which is defined as including a Minister of the Crown, a “ministerial adviser”, as well as a member of the “ministerial staff” who works on average 15 hours or more a week, must within 120 days of their appointment either sell all “controlled assets” in an arm’s length transaction, or place such assets into a blind trust. Any assets which are placed into a blind trust have annual reporting requirements, with the trustee having to file an annual report to the Conflict of Interest and Ethics Commissioner regarding the ongoing management of the blind trust.
In the context of the recent federal election, the most attention was placed on the recently elected Toronto Centre MP, Bill Morneau, who was appointed as Minister of Finance. As Mr. Morneau himself reportedly has a stock portfolio in excess of $30 million, and with his appointment as Minister of Finance would have a significant influence and impact upon the financial sector, some attention was paid to the transition of his investment portfolio likely into a blind trust. Justin Trudeau himself previously moved his own investments into a blind trust following his appointment as leader of the Liberal Party in 2013.
Most people set up their estate plans to minimize tax and keep their money out of the hands of the government. This is a story about a couple who did the opposite.
A recent article from ABC tells the story of Peter and Joan Petrasek. The couple had prepared wills that left everything they had to the United States government. Earlier this month, the US treasury received a cheque for $847,215.57 USD.
It is unclear exactly why the couple left their estates to the US government, although the article speculates that it may have been out of gratitude to the country that took them in. Peter Petrasek had fled from Czechoslovakia during World War II and escaped to Ottawa, where he met his wife, Joan. The couple moved to the United States in the 1950s.
It seems that they had no children and no living relatives, so they left their estates to the government. In similar circumstances, many would choose to leave their assets to friends or to charity. The Petraseks, it appears, wanted to thank the country that gave them a home.
This story gives us a different perspective on what it means to give money to a government. A tremendous amount of time and effort are spent on crafting and implementing legitimate estate planning mechanisms which are aimed at reducing the amount of tax that has to be paid on a person’s death. Often, testators have spouses, children, or other family that they intend to receive their property on death. Keeping money out of the hands of the tax collector means that their loved ones will receive more from their estate.
It may be that there is a lesson to be learned from the generosity of the late Mr. and Mrs. Petrasek. Governments perform a wide range of functions, many of which are aimed at the delivery of services to the public. A lot of these functions are similar to those performed by charities. Governments use our tax dollars for investments in medical research, public infrastructure, and social programs for those in need, among other things. Paying taxes out of an estate can be viewed a way of giving back to your community.
On a similar note, in 2011, Toronto City Council approved a measure to add a Voluntary Contribution option to property tax bills. Now, Toronto taxpayers are invited to make a voluntary donation to City services each time they pay their property taxes.
While many of us remain tax averse, it is refreshing to be reminded that there are generous souls out there who are grateful to the communities they live in, who recognize the important role that governments can play in that, and who are willing to contribute.
As I noted yesterday, Ontario’s Good Government Act 2009 has received royal assent. Over 300 pieces of legislation have been amended or repealed, including various statutes dealing with the regulation of charities in Ontario.
Of particular note are the following two changes:
1. The Charitable Gifts Act (the “CGA”) has been repealed. This Act has long been criticized for unnecessarily restricting the ability of charities from directly or indirectly owning more than a 10% interest in a business, particularly as the Income Tax Act already imposes various restrictions on registered charities conducting business activities. The repeal of the CGA may be a welcome change to Ontario charities wishing to acquire an interest in a business for investment purposes.
2. An amendment to the Charities Accounting Act (“CAA”) relates to the section dealing with interests in real or personal property held for a charitable purpose. Historically, the CAA restricted the ownership of real estate by an Ontario charity by requiring that land could only be held to the extent that it was used for the charitable purpose. A charity could not own excess land and lease it out. Any excess property was subject to vesting in the Public Guardian and Trustee. The amended section now simply provides that a charity that holds an interest in real or personal property for a charitable purpose shall use the property for the charitable purpose. This amendment will presumably allow charities to hold excess property, both real or personal, and invest such property in order to earn income.
For a more fulsome discussion of the effect of the Good Government Act, 2009 on charities, see Miller Thomson’s informative newsletter.
Bianca La Neve
Bianca V. La Neve – Click here for more information on Bianca La Neve.
On December 15, 2009, the Good Government Act, 2009 received royal assent. This statute amended or repealed over 300 pieces of legislation, ranging from the Accumulations Act to the Off-Road Vehicles Act. There are various amendments that should be of particular interest to those of us who practice estate, capacity and trust litigation.
The Crown Administration of Estates Act is amended by adding a new section 5.1, dealing with the enforceability of compensation agreements. A “compensation agreement” is defined to mean an agreement with an heir of an estate that provides for compensation, directly or indirectly, to one or more persons or entities on the location, recovery or distribution of any interest in the estate to which the heir may be entitled. In cases of estates administered by the Public Guardian and Trustee, there must be fair disclosure before a possible heir is asked to sign a compensation agreement. In addition, there is a cap on compensation of 10 per cent of the value of the possible heir’s interest in the estate. Click here for the complete text of the Act.
The Health Care Consent Act, 1996 is amended to increase the time allowed, from two days to four days, for the Consent and Capacity Board to issue written reasons for decisions. In addition, the Act is amended to allow the Board to direct Legal Aid Ontario (instead of the Public Guardian and Trustee or the Office of the Children’s Lawyer) to arrange for legal representation for a person who may be incapable with respect to a treatment, managing property, admission to a care facility or a personal assistance service. Click here for the complete text of this Act.
Bianca La Neve
Bianca V. La Neve – Click here for more information on Bianca La Neve.
Listen to Deductions from Compensation.
This week on Hull on Estates and Succession Planning, Ian and Suzana finish up the discussion on the question of accounting by reviewing deductions from compensation and briefly sum up the procedure of the passing of accounts.