Last year I blogged about some possible changes to the CRA’s Voluntary Disclosure Program (“VDP”). The new VDP rules came into effect March 1, 2018.
One of the concerns that had been raised in relation to the VDP changes in advance of them coming into effect, is that it seemed the CRA was attempting to make the VDP less accessible for taxpayers. For example, the changes created a “tiered” system for VDP applications, meaning that applications would fall under either the “general program” (for more minor non-compliance) and the “limited program” (for major non-compliance). Another example is the apparent elimination of the “No-Name” method for submitting disclosure (which allows the taxpayer to gain some understanding of how their situation may be treated by CRA in advance of officially submitting his or her application).
According to this article, in July and August 2018, the CRA responded to the first round of disclosure applications that had been filed under the new rules. The CRA’s approach in practice was troubling to the article’s authors.
In particular, the CRA appears to be taking the position that it will be rejecting VDP applications if the relevant tax returns aren’t enclosed. This seems to be contrary to the guidelines set out in CRA’s Information Circular IC00-1R6. While CRA takes the position that it will reject applications that do not enclose tax returns, the Information Circular seems to indicate that a taxpayer may submit additional information or documentation to complete the VDP application up to 90 days from the day that the CRA receives the application. The article’s authors are of the view that the language of the Information Circular in this regard would include the relevant tax returns, as these are clearly documents required to complete the disclosure. The position taken by CRA provided confirmation to the authors that CRA was seeking to make the VDP inaccessible for taxpayers.
As we previously set out in this blog, the VDP can be relevant to an Estate Trustee if the deceased was not in compliance with his or her obligations to the CRA, such as failure to file income tax returns, or reporting of inaccurate information. The VDP may allow an Estate Trustee to voluntarily disclose such non-compliance and avoid penalties. Unfortunately, with the new VDP rules in effect, and the apparent uncertainty regarding how the CRA will apply its guidelines, it may be tricky for Estate Trustees to make effective use of the VDP. It will be interesting to see how the new VDP rules develop, and any further feedback to their practical application.
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Previous entries in our blog have covered inheritance taxes in the United States and other jurisdictions and President Trump’s proposed elimination of the tax altogether. Recent news coverage has zeroed in on how the family of the American president has allegedly evaded over half a billion dollars in tax liabilities that should have been paid on the transfer of significant family wealth.
Certain exceptions apply, but inheritance tax (more frequently referred to as “death tax” by President Trump himself) of 40% typically applies to assets of American estates beyond an initial value of $11.18 million. This means that estates up to this size are exempt from inheritance taxes, while the wealthy engage in complex planning strategies to minimize tax liabilities triggered by death (some of which mirror those used by Canadians in an effort to avoid payment of estate administration taxes on assets administered under a probated will).
Despite Trump’s previous statements that he has independently earned his fortune without reliance on prior family wealth, The New York Times reports that he and his siblings together received over $1 billion from their parents’ estates and that $550 million (55% under the old inheritance tax regime) ought to have been paid in taxes. However, in 1999-2004, during which years the estates of Fred and Mary Trump were administered, a rate of closer to 5% was paid in taxes. Whether the tax-minimizing methods used by the Trump family were legitimate or questionable remains unclear:
The line between legal tax avoidance and illegal tax evasion is often murky, and it is constantly being stretched by inventive tax lawyers. There is no shortage of clever tax avoidance tricks that have been blessed by either the courts or the I.R.S. itself. The richest Americans almost never pay anything close to full freight. But tax experts briefed on The Times’s findings said the Trumps appeared to have done more than exploit legal loopholes.
Sometimes, the line between legitimate tax-minimizing planning strategies and outright tax evasion can appear thin. It is important to avoid improper strategies that put the assets of an estate and their intended distribution at risk, and which may ultimately serve only to complicate and delay the administration of the estate.
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Immigrants come to Canada from many countries around the world and when they die their estates in Canada can involve foreign beneficiaries and asset transfers. According to an article in the Ottawa Citizen, most Canadians don’t seem to have the foggiest notion of how many immigrants and refugees this country admits every year. When asked the question, during one of Citizenship and Immigration Canada’s annual tracking surveys, 43 per cent of the Canadian adults polled wouldn’t even hazard a guess. Fully one-third thought the number was less than 100,000 a year. In fact, from 2001- 2014 Canada opened its doors to about 250,000 immigrants and refugees a year. (Only nine per cent of those surveyed suggested a number remotely close to that.) Although this newspaper article is from August 27, 2014 the statistics are likely much the same today.
The total number of foreign-born Canadians is interesting. According to the 2016 Census, there were 7,540,830 foreign-born individuals who came to Canada through the immigration process, representing 21.9% or over one-fifth of Canada’s total population. This proportion is close to the 22.3% recorded during the 1921 Census, the highest level since Confederation in 1867. In urban areas the percentage is higher, with Toronto currently at approximately 46%. Historically, immigrants and their families have always comprised an ongoing significant contribution to Canada’s population composition.
So what are some of the challenges an estate trustee or lawyer faces when there is a deceased person with beneficiaries outside of Canada? There are many tax considerations to be dealt with on an average estate, even without any international aspects to it. One additional concern with international inheritance is Section 116 of the Income Tax Act which creates a potential additional obligation and liability for estate trustees and lawyers. Persons in Canada, who handle money that is paid to a “non-resident” will want to review Section 116 of the Income Tax Act . After reviewing the section everyone should consider whether a hold back of 25% of the monies to be paid would be appropriate, until further clearance is obtained.
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Financial planning is a tricky business at the best of times – especially for longer-term goals like retirement and estate planning. But when the tax framework on which you’ve built your plan changes, that tricky business becomes that much harder.
If 2017 taught us anything, it’s that nothing lasts forever when it comes to financial planning for your future. For the hundreds of thousands of small businesses and professional corporations in Canada, the federal government’s new rules on income sprinkling and holding investment income in a corporation are creating both uncertainty and a need for many to go back to the drawing board and revise what they have in place. You can find a quick overview of the changes here.
While no one knows with certainty what future tax changes will be, we do know this: tax change itself is a certainty. The current tax framework in 2018 will not be the same in 2028. Governments will continue to tinker, creating new tax policies to address emerging needs and new tax policies to shutdown strategies that the government sees as “too tax effective” from a tax policy standpoint.
A recent article in the Globe and Mail highlighted a good example of what could change in the future – the TFSA. What began as a modest but very tax-effective savings vehicle is now almost 10 years old, with lifetime contribution limits approaching nearly $60,000 for those who were age 18 when TFSAs were introduced in 2009.
Is this one of the strategies that could be too effective to be sustainable long term? Time will tell. In the meantime, some suggestions for your financial planning:
- Diversify – avoid putting all your financial eggs in one strategy basket if possible, as your chosen basket may not look the same in 20 years;
- Monitor – make sure your financial planner or tax advisor has their ear to the ground in terms of proposed changes and possible impacts on you; and
- Be flexible – be prepared to change strategies, because future tax changes are a given and they could require you to change course.
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A recent article featured in the New York Times highlights the need to reconsider estate planning strategies in light of developments in the law of inheritance taxation.
As our blog has previously reported, during his presidential campaign, Donald Trump vowed to eliminate inheritance taxes, then payable on the value of American estates exceeding $5.45 million, altogether. To the disappointment of many wealthy citizens of the United States, President Trump has not carried out his promise and, while the exemption has been increased, inheritance tax remains payable in the United States in respect of estates of a size greater than $10 million.
The New York Times reports that these changes to the exemption in respect of inheritance taxation are temporary in nature and that the measures currently in effect will expire in 2026. At that time, Americans (and individuals who hold property of significant value in the United States) may need to amend their estate plans with a view to tax efficiency.
Gifts, including testamentary gifts, are not typically subject to taxation in Canada. While there is no Canadian estate or inheritance tax, assets that are distributed in accordance with a Canadian Last Will and Testament or Codicil that is admitted to probate will be subject to an estate administration tax (also known as “probate fees”). Many of our readers will already be aware of the relatively new requirement (as of 2015) that estate trustees in Ontario file an Estate Information Return with the Ontario Ministry of Finance within 90 days of the processing of a probate application. In some circumstances, details regarding both traditional estate assets and assets typically considered to pass outside of the estate are required, notwithstanding that the latter category may nevertheless be exempt from probate fees. Some anticipate that the law in Ontario may at some point be amended to require further details regarding assets passing outside of an estate in Estate Information Returns and/or the payment of estate administration tax or other fees in respect of these assets. Like variations in the exemptions to American inheritance tax, changes to estate administration taxes may in the future necessitate amendments to existing estate plans with a view to limiting the taxes payable on the transfer of wealth.
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If a Registered Retirement Savings Plan passes outside of an Estate, for example to a spouse or child, who pays the tax – the recipient beneficiary or the Estate?
In order to answer this question, first consider the terms of the Will.
If the Will does not clearly set out who is responsible, attention must be turned to the statute and common law.
According to section 160.2(1) of the Income Tax Act, the deceased testator and the recipient of the RRSP are jointly and severally liable for the payment of the tax. The section specifically states that “…the taxpayer and the last annuitant under the plan are jointly and severally, or solidarily, liable to pay a part of the annuitant’s tax…”.
Ontario common law has, however, held that the payment of any tax liability with respect to an RRSP remains the primary obligation of the estate. Payment should be sought from the RRSP recipient, only if there are insufficient assets in the estate to satisfy the tax obligation.
In Banting v Saunders, Justice J. Lofchik held that:
“…the estate, rather than the designated beneficiaries, is liable for the income tax liability arising from the deemed realization of the R.R.S.P.’s and R.R.I.F.’s so long as there are sufficient assets in the estate including the bequest to Banting, to cover the debts of the estate and it is only in the event that there are not sufficient assets in the estate to cover all liabilities that the beneficiaries of the R.R.S.P.’s and the R.R.I.F.’s may be called upon.”
Nonetheless, as set out in O’Callaghan v. The Queen, the CRA may first seek payment directly from the RRSP recipient, instead of the estate, especially if there is a possiblity that there are insufficient assets in the estate to satisfy the tax.
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Submissions from the Joint Committee on Taxation Regarding Proposed Changes to Voluntary Disclosure Program
Last month, I blogged about some changes proposed by the CRA to the Voluntary Disclosure Program. It was noted that the CRA would be accepting comments with respect to the proposed changes until August 8, 2017.
The Joint Committee on Taxation of The Canadian Bar Association and Chartered Professional Accountants of Canada (the “Joint Committee”) made submissions in this regard in a letter to the Minister of National Revenue dated August 8, 2017.
In their letter, the Joint Committee recommends that the Minister reconsider a number of points, including, among other things, the introduction of a multi-tier system including the “general program” and the “limited program”. The Joint Committee states that part of the success of the Voluntary Disclosure Program is due to the fact that taxpayers applying to the Program are able, to a certain extent, to predict the consequences of initiating a voluntary disclosure. This allows non-compliant taxpayers to assess the benefits of the Program as opposed to the ongoing uncertainty of non-compliance and the risk of assessment and/or prosecution. The Joint Committee submits that the proposed changes may lead to uncertainty, and therefore, may encourage non-compliance, which would be inconsistent with the objectives of the Voluntary Disclosure Program and with encouraging non-compliant taxpayers to become compliant.
The submissions from the Joint Committee also comment that the draft Information Circular setting out the proposed changes apparently provides that the No-Name method of disclosure, wherein certain information may be provided to a Voluntary Disclosure Program officer without identifying the taxpayer, in order to obtain a better understanding of how the taxpayer’s disclosure may be addressed, will no longer be available for disclosures commencing after December 31, 2017. In the Joint Committee’s experience, non-compliant taxpayers are more likely to proceed with a voluntary disclosure if the process is perceived as transparent and predictable. If they are correct and the Minister of Revenue proposes to eliminate the No-Name disclosure method, the Joint Committee urges the Minister of Revenue to reconsider this proposed change.
The letter from the Joint Committee makes a number of other submissions that are beyond the scope of this blog, but can be read in full here.
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We have previously blogged about the CRA’s Voluntary Disclosure Program and how it can, for instance, be useful for estate trustees should they encounter a situation where the deceased whose estate they are administering failed to meet their tax obligations. Essentially, the program gives a taxpayer a second chance to come forward voluntarily and change a tax return that was previously filed, or to file a return that should have been filed, and to request relief from prosecution or penalties as a result of any erroneous or incomplete filings.
However, as discussed in a recent article in the Financial Post, the CRA has proposed some changes to the Voluntary Disclosure Program. The draft “Information Circular – IC00-1R6-Voluntary Disclosures Program” prepared by the CRA for discussion purposes can be found here. The key proposed changes would narrow the eligibility for the Voluntary Disclosure Program, and impose additional conditions on taxpayers who are applying. The proposed changes also include less generous relief in certain circumstances, such as cases of major non-compliance.
As discussed in a PwC Tax Insights publication, another proposed change creates two tracks into which the CRA can assign a taxpayer upon application to the Voluntary Disclosure Program—either the “general program” or the “limited program”. The general program is intended for inadvertent and minor non-compliance, while the limited program is intended for major non-compliance. The general program involves mostly minor changes, including a limitation on interest relief. Major non-compliance, which will fall into the limited program, includes, for example, active efforts to avoid detection, multiple years of non-compliance, a sophisticated taxpayer, or disclosure being made after an official CRA statement regarding its intended focus of compliance or following CRA correspondence or campaigns. If an application is assigned to the limited program, the relief available to the taxpayer will no longer include interest relief or relief from penalties other than gross negligence penalties. The determination of which track an application will be assigned to will be made on a case-by-case basis.
Previously, there were four conditions that had to be met in order to be considered as a valid disclosure. The proposal would add a fifth condition, requiring payment of the estimated tax owing along with the application. The changes described above are only a few of the proposed changes, and all such changes can be found in the Information Circular.
The CRA will be accepting comments with respect to the changes proposed in the draft Information Circular – IC00-1R6 – Voluntary Disclosures Program until August 8, 2017. Any changes to the program would come into effect as of January 1, 2018.
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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.
Revisiting a will? The Hull e-State Planner can ensure nothing is missed
The Hull e-State Planner is an interactive Will Planning App designed specifically for Canadian lawyers. It takes a visual approach to will planning, one that’s easy for you to use and easy for your client to understand and verify that their wishes have been properly captured.
You can find out more about it here: https://e-stateplanner.com/about/
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In the recent decision of The Herman Grad Family Trust v Minister of Revenue, the Ontario Superior Court considered the residence of two trusts, for the purpose of taxation. The Court held that although the trustees of the two trusts were resident in Alberta, the trusts were resident in Ontario and required to pay taxes in Ontario.
The Court restated and applied the test from Fundy Settlement v. Canada:
the residence of a trust for Canadian tax purposes is determined through the “central management and control” test that has historically applied to corporations, that is, where the central management and control of the trust actually takes place.
This test requires a fact-driven analysis. The Court must examine who in reality exercised the powers and discretions vested in the trustee and the place where that person resides. If the trust is, in fact, controlled by a person other than the trustees, the trust resides where the decision-maker resides.
The Court considered a number of factors that indicate management and control of the trust. In particular, the Court considered the trustees’ delegation of certain tasks and decision-making. In this case, the trustees had the power to delegate much of the decision-making in regard to investments to third parties. The Court held that because the delegation was exercised with the care required by the trustees, the trustees satisfied their fiduciary responsibilities, even though certain decision-making was made by third parties.
Although the trustees acted properly in the delegation of the investment responsibilities, the management and control of the trust were actually conducted by third parties. The ability to retract a prior delegation of decision-making is insufficient to establish the trustees retained control of the trust. , To establish the trustees maintained control, it would be necessary to show that the trustees had actively supervised the decision-makers.
The Court found it significant that the trustees had kept few notes of conversations between themselves or with the beneficiaries. As a result, there was insufficient evidence that the trustees turned their minds to certain decisions.
Overall, the evidence established that the decisions were made by the beneficiary of the trusts, who resided in Ontario, or the chief financial officer of the beneficiary’s company, acting on his instructions. Evidence that the trustees had not breached their fiduciary duties was insufficient to show they maintained control of the trusts. Therefore, the trusts were resident in Ontario.
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