Just over a week ago, the Canadian Immigration and Citizenship website crashed following the conclusion of the U.S. presidential election. After hearing about this, I started to wonder, how difficult would it really be for Americans who are dissatisfied with the outcome of the recent election to flee to Canada?
Aside from entering the country on a student or work visa, certain individuals wishing to immigrate to Canada may apply for Express Entry as a skilled worker, caregiver, or a refugee. Americans with family in Canada may also be able to apply directly for immigration to a province through the Provincial Nominee Program.
Individuals qualifying for immigration to Canada who may be considering doing so should not neglect cross-border tax and estate planning issues that may result from their relocation before proceeding with such a move.
When moving from one jurisdiction to another, it is important that one takes extra steps to ensure that elements of existing incapacity and/or estate plans will be recognized in his or her new home.
If new Canadian residents own assets cross-border, it may result in difficulty in administering property during incapacity and/or following death. It is important that fiduciaries are chosen appropriately, so as to facilitate their access to assets in the relevant jurisdiction, without triggering cross-border tax issues and issues of inaccessibility. Depending on the jurisdiction, taxes may be payable with respect to foreign assets based on citizenship, residence, location of the individual or his or her assets, domicile, or any combination of these factors.
It is also important to remember that simply immigrating to Canada may not exempt U.S. citizens from the payment of American inheritance tax. As my colleague, Noah Weisberg, blogged last month, President Elect Trump has vowed to abolish inheritance tax altogether. However, Mr. Trump has proposed to replace current U.S. inheritance tax with what is being referred to as a capital gains tax that applies to assets of certain estates valued at $10 million or greater. At this point in time, it remains unclear which of the policies upon which the incumbent president’s campaign was based will ultimately be implemented.
Have a great weekend.
Given the intrigue and extensive coverage that the current US election has had north of the border, it is only fitting that we dedicate today’s Hull & Hull Blog to reviewing the position taken by Clinton and Trump with respect to changes to estate tax.
A recent article in Forbes explains that current US laws exempt estates worth $5.45 million or less from paying estate tax. Estates valued higher pay 40% tax.
Hillary Clinton seeks to increase the taxes owing by the wealthiest from 45% to 65% based on the value of the estate, apparently the highest it’s been since 1981. Specifically, estates over $10 million would be taxed at 50%, those over $50 million at 55%, and those exceeding $500 million (for a single person) at 65% As well, Clinton also seeks to lower the exemption for estates valued at $5.45 million to $3.5 million.
Trump, on the other hand, seeks to eliminate the estate tax altogether.
According to the Wall Street Journal, the Republicans see the tax as “a patently unfair confiscation of wealth that punishes family-owned business”, while the Democrats view it as “a levelling tool necessary to combat concentration of wealth”.
In Ontario, while there is no inheritance tax, estate administration tax is charged on the total value of a deceased’s estate. Subject to certain exceptions, this includes the following assets: real estate; bank accounts; investments; vehicles and vessels; all property held in another person’s name; and, all other property, wherever situated, including goods, intangible property, business interests, and insurance proceeds.
As discussed in prior Hull & Hull LLP blogs, new provisions came into force on January 1, 2015, which requires payment of $5.00 for each $1,000, or part thereof, for the first $50,000 and $15 for each $1,000, or part thereof, of the value of the estate exceeding $50,000. There is no estate administration tax payable if the value of the estate is $1,000 or less.
This week on Hull on Estates, Noah Weisberg and Nick Esterbauer discuss a recent decision of the Tax Court of Canada that addresses the use of property transferred to spouses to satisfy tax liabilities pursuant to the Income Tax Act. A copy of the Kuchta v. The Queen decision is available here: http://bit.ly/1QcncGi
Should you have any questions, please email us at email@example.com or leave a comment on our blog.
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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I recently tweeted this article from the Financial Post, which discusses different methods of charitable giving and the tax benefits associated with each method.
With respect to inter vivos charitable gifts, the methods include:
- A one-time gift using cash, cheque or credit card;
- Gifting publicly traded securities;
- A one-time gift using flow-through shares; and
- Gifting real estate or private shares.
One-time gifts using cash, cheque or credit card, which are familiar to most individuals, are the most common type of gift and are often gifts of smaller amounts. The other type of one-time gift, which makes more sense for larger gifts, is a gift of “flow-through shares”. These are a particular type of stock involved in materials or energy exploration that qualify for significant government credits. This option is better for individuals comfortable with advanced tax strategies and high taxable incomes. The two remaining inter vivos methods of gifting publicly traded securities, private shares, or real estate, are best for large gifts and result in tax benefits with respect to capital gains.
With respect to testamentary giving, the article discusses leaving money in a will, leaving money through an insurance policy, and donating RRSPs and RRIFs. Gifting money to charities via a bequest in a will is familiar to many individuals. However, there are often more tax-efficient ways to give, since money in your estate has been fully taxed and probated along the way.
The other methods of testamentary giving discussed are less common. Leaving money through an insurance policy involves paying premiums on a policy for which a charity is the beneficiary, and receiving a tax receipt on the payment of that premium. This method is said to often deliver a higher rate of return than investing and leaving money to a charity in your will. It also has the benefit of providing certainty with respect to the amount you will be donating to the charity. Donating your RRSPs or RRIFs has a benefit in that, often, the taxes on an RRSP or RRIF may be the largest tax liability on an estate. By donating the balance of the RRSPs or RRIFs, you can effectively use a charitable gift to cancel out the tax.
If charitable giving is something that you consider important, consider gifting in a tax-efficient way so as to gain a benefit yourself, and to provide even more of a benefit to your chosen charity.
Thanks for reading.
Drafting and administering multiple wills can be challenging. There is no shortage of potential pitfalls that can derail an otherwise well devised estate plan. Inadvertent revocation of the primary will, conflicts between multiple sets of Estate Trustees (“Trustee”), and limited liability protection for the Trustee of the non-probated will are just a few of the difficulties sometimes encountered. However, one of the most challenging aspects is determining from where the taxes will be paid. Tax apportionment can complicate the estate plan for the Testator and drafter early on in the process; or afterwards, as the Trustee is left to interpret the directions (or lack thereof) in both wills.
For instance, two carefully drafted wills which seek to distribute the assets evenly among the Testator’s children can be significantly altered if the tax apportionment clauses do not reflect this intent. Imagine that one child receives real property under the primary will and the other receives privately owned shares of an equivalent value under the secondary will. If the income tax is payable solely from the assets of the primary will, one child may no longer receive an equal value of the estate; contrary to what the Testator intended.
There is some debate on whether the distinction between a one or two estate model can help determine tax apportionment issues. The question is whether the Testator has created two distinct estates or one estate that is governed by two documents? Clare Sullivan suggests the latter; however, Martin Rochwerg and Leela Hemmings advocate for the two estate model. They describe dual wills as dividing the estate into a primary and secondary estate. This distinction may have tax liability implications when the wills do not contain any tax apportionment clauses whatsoever. When the issue is one of interpretation, the answer is a much simpler one.
In interpreting tax apportionment questions, it all comes down to the Testator’s intent. The interpretation of wills is based on the armchair rule that seeks to place oneself in the mindset of the testator. The same approach is applied to interpreting from where the taxes will be paid when the wills are unclear. In other words, a close examination of both the primary and secondary wills themselves will determine where the Testator intended the tax to be paid from. External factors such as the sophistication of the testator may also be considered when interpreting the documents. If the wills are altogether silent, the default tax rules will apply.
From a practical perspective, this means that the issue of tax liability should always be stated in unequivocal terms in the wills. The Trustee, in administering the estate, should also never blindly assume that the tax is payable out of the primary will. They should carefully read the documents before making this determination and if it is unclear, an application to the court for interpretation is an available recourse.
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The amendments to the Income Tax Act (R.S.C., 1985, c. 1 (5th Supp.)) (the “I.T.A.”) have eliminated graduated rate taxation for testamentary trusts, which were previously taxed at rates applicable to individuals. Starting next year, testamentary trusts will be taxed at the highest marginal rate of taxation, subject to a couple of exceptions, one of which applies to a testamentary trust that can be considered a Graduated Rate Estate (GRE). The purpose of these amendments is to try to eliminate unequal treatment of testamentary trusts as compared to inter vivos trusts, which are taxed at the highest marginal tax rate, while testamentary trusts have enjoyed graduated rates for decades.
Starting December 31, 2015, the I.T.A. s. 248(1) will contain a definition for a GRE. In order to qualify as a GRE and benefit from graduated rates of taxation, no more than 36 months can have passed after the death of the testator whose estate established the trust, it must designate itself as a GRE, and only one GRE can be designated per individual. Going forward, as noted in this article from a national law firm, only GREs may benefit from graduated tax rates, use certain loss carry-back provisions, and have a non-calendar year end.
Another exception to the elimination of graduated rates of taxation applies to a qualified disability trust. The I.T.A. s. 122(3) states that in order to be a qualified disability trust, it must: (i) be a testamentary trust; (ii) the beneficiaries of the trust must have made a joint election with the trust for the trust to be a qualified disability trust, and (iii) s. 118.3(1)(a) to (b) must apply to such beneficiaries.
There have also been changes to treatment of charitable donations made in a Will. Whereas, in the past, a charitable gift was considered to be made immediately preceding the death of the testator, the new rules provide that the gift is made at the time it is actually transferred to the donee. The value of the property will also be determined on this basis. The amount of the charitable donation can then be allocated between the deceased or the GRE, as per I.T.A. s. 118.1(1), as long as the Estate can be considered a GRE at the time. The amount of the gift can be deducted by the deceased in the year the donation was made or used in the preceding taxation year. Alternatively, the gift can be deducted by the GRE in the year of the donation, carried forward, or carried back for up to the 36 months that a GRE may exist as such.
Thank you for reading.
The United State’s federal estate tax, more commonly known as the “Death Tax” is a tax applied to the transfer of a person’s assets at death. It is defined by the U.S. Internal Revenue Service as “a tax on your right to transfer property at your death.”
The Death Tax is paid by the recipients of an inheritance and is due within 9 months of the decedent’s death. If there is not sufficient cash in the estate, personal property and business assets must be sold to pay the tax.
As noted in one of our prior blogs, due to changes made by Congress during the George Bush administration back in 2001, the Death Tax was due to fall from 45% to 0% on January 1, 2010. Many thought this loophole would be addressed before the start of the year. However, due to a Congressional tax standoff, no action was taken in time and the Death Tax has been repealed. However, the repeal is not permanent and the Death Tax is scheduled to be resurrected on January 1, 2010, at a rate of 55% on all assets above $1 million (the current exemption amount).
It remains to be seen which way the political winds will blow, as Congress will likely address the issue this year. In the interim, estate planners in the U.S. are in uncharted territory, as no one can predict whether/when the Death Tax will be resurrected and if so, whether Congress will make it retroactive to the beginning of the year. This may ultimately be a matter for the courts to decide. Stay tuned!
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Ontario’s new harmonized sales tax is coming into effect on July 1, 2010. One of its effects will be to impose PST on funeral services: services that have previously been exempted from PST.
According to the harmonized sales tax, funeral services will now be taxed at the rate of 13%, up from 5%. The effect on a $5,000 funeral would be to raise the tax payable from $250 to $650.
The new harmonized tax may also have an effect on prepaid funeral services. According to a May 27, 2009 Toronto Star article, there are 224,257 prepaid funeral contracts in Ontario, and about 1 in 4 funerals in Ontario are prepaid.
The Ontario Minister of Finance has indicated that the government hopes to implement some sort of grandfathering clause, so that funeral services prepaid before a certain date remain exempted from the PST. However, nothing has been finalized yet. The cut-off date would likely be some time before July 1, 2010.
Those considering a prepaid funeral would be wise to complete their plans sooner rather than later. The new tax, like death, is approaching.
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It’s Friday in late April. The May long weekend and all that cottage fuss is just around the corner. (I like the cottage, but understandably a lot of people choose the backyard.)
In Ontario, we do not have inheritance tax like they do elsewhere, including the United Kingdom. In some cases, the several-generation home has to be sold to cover a £14,000 tax bill or, in one instance, a painting donated in lieu of inheritance tax of £700,000.
To be certain, we have taxes here. At death, often there is a deemed disposition of property unless steps have been taken in advance. An article from last year provides some thoughts on how one might plan to avoid the situation where the capital gains tax cripples an estate or the next generation.
Apparently, and maybe not surprisingly, the cottage market may be down by about 20% this season. Good news for buyers. Maybe it is also good news for those who are looking at estate planning this year.
If the goal is to keep a cottage in the family, relative to the previous few years it might be an opportunity to trigger a disposition by transferring the property this season and, presumably, incurring a lower capital gain. Each situation requires specific tax advice.
The economy is lousy but it might be a chance to avoid financial strain and family tension for the next generation.
Have a safe weekend, wherever you spend it.