In today’s podcast, Noah Weisberg and Sayuri Kagami discuss the Alberta decision of Re Morrison Estate, 2015 ABQB 769, and the issue of who is responsible for the often hefty taxes payable on registered accounts of a deceased person: the beneficiary of the account or the deceased’s Estate.
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The recently proposed tax changes by the federal government have left many Canadians on edge. In particular, tax planning for those owning small business corporations is currently under attack, and changes seem inevitable. (You can get a good overview of the proposed changes here.) As we grapple with the implications of these proposed changes in Canada, it is worth noting that our neighbours to the south are in the midst of a tax battle of their very own.
The United States is currently contemplating the new GOP tax bill, which President Trump aims to sign into law by the end of 2017. While discussing the entire breadth of the bill is beyond the scope of this blog (not to mention my caffeine supply), I think one aspect of the proposed bill is particularly worthy of discussion: the planned changes to estate taxation.
Currently, Americans can leave estates worth up to $5.49 million without passing any federal estate or gift tax. Estates worth more than that are subject to a 40% tax. Congress has already raised the estate assets threshold many times over the years; for example, in 2000, 52,000 estates had to pay the tax; it is now down to 5,000.
Congress is looking to raise the threshold once again, with the proposed GOP tax bill doubling that threshold to $11.2 million in 2018 and then doing away with the tax entirely by 2024. According to the Washington Post, the reduction and ultimate elimination of the estate tax would cost American tax payers $172 billion over a decade.
This provision to slash (and ultimately do away with) the federal estate tax has received a lot of buzz, which is perhaps disproportionate considering the proposal’s negligible impact on the American budget overall. According to Congress’ Joint Committee on Taxation, the vast majority of Americans – 99.8%- are no longer affected by a federal estate tax. Of the .2% of Americans who are affected, nearly all those who do pay are among the wealthiest 5% of Americans, with the richest 0.1% paying 27% of the total tax. Thus, the crux of the debate over this provision would seem to rest on principle.
The Republican party argues that the estate tax, sometimes called a “death tax”, should be repealed because it is unfair by its very nature. In an interview with Fox News last Sunday, Speaker Paul Ryan (R- WI) stated the party position as follows: “We just think it’s unfair. Death should be not a taxable event, and we should not be stopping people from being able to pass their life’s work on to their kids.”
Democrats, on the other hand, are widely rejecting this provision, arguing that the proposed estate tax elimination constitutes a giveaway to the mega-rich, and that the money could be used more appropriately elsewhere.
Whether or not the proposed estate tax deduction will pass as part of the GOP tax plan remains to be seen; however, reports suggest progress is being made towards the goal of having a final bill signed into law by the President before Christmas.
Thanks for reading,
Suzana Popovic-Montag and Lindsay Anderson (Law Student)
They love football, we love hockey. Their zee is our zed – and their Trump is our Trudeau. While we share a common border with the U.S., there are many differences between our two nations – and the reasons for setting up a trust can differ significantly by country as well.
The U.S. has a high estate tax for wealthy individuals – up to 40% on assets, with the first $5.5 million or so exempt. Not surprisingly, trusts are used aggressively in many situations to reduce estate values and minimize this estate tax as much as possible.
In Canada, there is no estate tax per se – although there is an estate administration tax (probate fee) in some provinces and there are often taxes payable on capital gains. But with no capital gains taxes on principal residences, the need for trusts as part of U.S.-style estate planning simply isn’t there.
This doesn’t mean that trusts aren’t a valuable planning tool in Canada. They can still be used to shift income from higher-taxed family members to those in lower tax brackets, or to provide dedicated funding for dependants, such as a disabled spouse or child, or as means of creditor protection amongst many other reasons. But there’s a kinder, gentler push behind trust planning in Canada, owing to the less punitive (in most cases) taxation of estates here.
This Globe and Mail article provides a good overview of the many potential uses of trusts in Canada today, and why a more aggressive approach isn’t needed here: https://www.theglobeandmail.com/globe-investor/personal-finance/a-tax-tool-thats-not-just-for-trust-fund-babies/article22996097/
The complexities of cross-border beneficiaries
Trust issues can be clean and tidy in Canada and the U.S. when everything about a trust stays fully north or south of the border. But what happens when trust worlds collide?
In short, it can get complicated, and specialized planning is often needed to avoid additional taxation. While avoiding a cross-border trust arrangement is one way around these issues, avoidance isn’t always possible, such as when a Canadian trust is settled with a Canadian beneficiary, but that individual moves permanently to the U.S. and becomes subject to U.S. tax laws.
This Collins Barrow advisory offers a more detailed discussion of some of the cross-border issues relating to Canadian/U.S. trusts: http://www.collinsbarrow.com/en/cbn/publications/u.s.-citizens-and-canadian-trusts.
Thank you for reading … Have a great day!
Remember the good old days? Vacations without smartphones, real letters in your mailbox, tax-effective testamentary trusts? Ah yes, those testamentary trusts.
Before 2016, income and realized capital gains within most testamentary trusts were taxed favourably in the trust, at graduated personal tax rates, not the top tax rates associated with inter vivos trusts. It was an estate planning tool that let many trust beneficiaries, typically spouses or other family members of the deceased, lower their overall taxes through income splitting, with trust earnings taxed in the trust and the beneficiary’s other income taxed personally.
Today, testamentary trusts are taxed at the highest marginal rate, with only two exceptions:
- Graduated Rate Estates – which are trusts arising as a consequence of the death of a testator, rather than because a trust was expressly provided for by the terms of a will. These are still taxable at marginal rates for the first 36 months after the testator’s death; and
- A Qualified Disability Trust, which is a testamentary trust with a beneficiary who qualifies for the disability tax credit. These trusts are still taxable at marginal rates.
With the graduated tax rate advantage now eliminated, those planning their estates are weighing alternatives, specifically alter ego and joint partner trusts that are available to those age 65 and older. Advisor.ca has a good discussion of these alternatives in light of the new tax treatment of testamentary trusts: http://www.advisor.ca/tax/estate-planning/alternatives-to-testamentary-trusts-158703.
But it’s also important to remember that testamentary trusts can still play an important role in estate planning, even without the benefit of graduated tax rates. Testamentary trusts can still be beneficial from a tax standpoint if beneficiaries have low levels of income, they still offer protection from creditors, and they’re still a very effective tool in second marriage situations, providing income to a second spouse for their lifetime and capital to children from a first marriage thereafter.
This Globe and Mail article provides a good overview of the many potential uses of testamentary trusts today: https://www.theglobeandmail.com/globe-investor/personal-finance/taxes/consider-these-testamentary-trusts-in-your-will/article27031380/.
While the good old days for testamentary trusts may be over, there’s still life left in this estate planning structure in a number of situations.
Thanks for reading … Have a great day.
As we have previously discussed on our blog, the assets left behind by individuals who live and die in a number of jurisdictions other than Canada may be subject to an inheritance tax. For example, in the United States, inheritance tax is payable on the value of assets beyond an initial $5.45 million exemption.
Inheritance tax may not be payable on all assets inherited by one’s surviving family members. Tax-avoidance vehicles that are well known in Canada, such as joint ownership, inter vivos gifts, and trusts can be used in certain circumstances to limit one’s exposure to inheritance tax. However, fewer of our readers may be aware that a limitation may also apply to inheritance tax payments in respect of assets being passed on to a surviving spouse.
Sub-section 2056(a) of the U.S. Internal Revenue Code specifies as follows:
For purposes of the tax imposed by section 2001, the value of the taxable estate shall, except as limited by subsection (b), be determined by deducting from the value of the gross estate an amount equal to the value of any interest in property which passes or has passed from the decedent to his surviving spouse, but only to the extent that such interest is included in determining the value of the gross estate.
The application of subsection 2056(a) would typically result in the exclusion of assets passing to a surviving spouse from the calculation of inheritance tax. However, there are certain limitations to the marital deduction, which are described under subsection 2056(b) of the legislation. For example, the marital deduction may not apply if the surviving spouse’s entitlement in an asset is limited to a life interest.
Litigation recently emerged in respect of the estate of author Tom Clancy, who altered his estate plan by executing a codicil that had the effect of qualifying the share of his estate being left for his second wife and her child for the marital deduction. Clancy’s will established three trusts: (1) one for the benefit of his second wife, (2) one for the benefit of his second wife and their child together, and (3) one for the children of his first marriage. The children from Clancy’s first marriage argued that, notwithstanding the terms of the codicil, the marital deduction should not apply to funds held in trust for both Clancy’s wife and their child. If the second trust had not qualified for the marital deduction, the approximate $16 million in inheritance tax would have been deemed payable out of the assets of both the second and third trust, rather than exclusively borne out by the third trust. The result would have increased the total inheritance taxes paid (from approximately $12 million), but reduced the tax burden to be paid out of the share left for Clancy’s children from his first marriage. The matter proceeded to court in Maryland and it was determined (and upheld on appeal) that the codicil did, in fact, have the effect of qualifying the second trust for the marital deduction.
Thank you for reading.
Our blog has previously discussed Graduated Rate Estates (“GRE”) and changes to the Income Tax Act, which now limit the benefit of graduated rates of taxation for up to 36 months from the date of death if the estate qualifies as a testamentary trust, and is designated as a GRE in its first taxation year.
Changes to the tax benefits of testamentary trusts raise a number of planning considerations that should be considered when making an estate plan. First, when drafting a testamentary trust, a key consideration should be whether it would be beneficial to the estate and its beneficiaries to delay the distribution of the estate for up to three years to potentially maximize the progressive taxation rates of all income in the trust.
If a testamentary trust is established with a view to take advantage of the new tax regime, then another important consideration is the extent of discretion that a testator wishes to grant to his or her Estate Trustee. Since an estate must maintain its status as a GRE, a testator may wish to clearly direct his or her Estate Trustee to take steps necessary to use or manage the estate assets in a manner that is consistent with the GRE requirements set out in section 248(1) of the Income Tax Act. Alternatively, the testator may wish to authorize his or her Estate Trustee to determine whether it is necessary or beneficial to preserve the estate’s status as a GRE in light of circumstances that may arise post-mortem.
All estate planning considerations that are intended to take advantage of changes to the Income Tax Act should be discussed with a tax professional throughout the estate planning process.
Thanks for reading!
The “death” of Alyanna Lapuz was recently “fixed” by the Canada Revenue Agency after Ms. Lapuz received a letter addressed to the “Estate of the Late Alyanna Lapuz”, dated January 7, 2016. Ms. Lapuz was shocked by the letter because she was 21 years old and eagerly awaiting the start of a dental hygienist program in April.
According to Ms. Lapuz, she believes that the error may have occurred when she called the CRA to arrange for a direct deposit of her GST refund. Ms. Lapuz then became quite concerned that the error would affect her student loan application because her social insurance number was rendered invalid as the result of being clerically deceased.
Click here for the CBC’s coverage of Ms. Lapuz’s story.
Ms. Lapuz’s story is also not unique. A similar incident was previously covered by our blog here.
According to the CBC, 5,489 Canadians were erroneously entered as deceased in the CRA’s system between 2007 and 2013. In a statement to the CBC, CRA advised that the rate of such errors has decreased since 2013.
For those of you who are interested, click here for the Ombudsman Special Report on this very issue.
Thanks for reading!
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.
It’s hard to ignore the news of slashed oil prices in Canada. Low oil prices have meant a break for drivers across the country, yet they have also resulted in negative economic impacts, particularly in Alberta. Now, that Province is attempting to make up for the shortfall by revisiting tax breaks.
News outlets report that the Alberta government has announced that, by 2016, the tax credit rate will drop from 21% to 12.75% for charitable donations exceeding $200. The Alberta government has rationalized that tax credits are not generally a main motivation for charitable donors. However, according to a Calgary Herald article published last week, charities in Calgary are worried that this measure will result in a drop in donations.
While charitable donors may continue to give, the tax credit dip clearly has the potential to adversely impact donations. It appears that taxes, in fact, are a factor when it comes to charitable giving.
Taxes also come into play when discussing charitable giving in the context of an estate plan. Recently, British researchers, in a report titled A warm glow in the after life? The determinants of charitable bequests, examined the behavioural science behind why people donate. Significant points made in the article include:
- most people would like to donate more than they currently do;
- people are more attracted to charitable pleas featuring a narrative – such as one individual’s story;
- people can be influenced by what their peers choose to do; and
- giving can be contagious – when people see others giving, they may tend to do the same.
Further, of note, was the finding of the Report that when considering wills, the likelihood of an individual choosing to leave gifts to charity doubles when the concept is suggested.
Thank-you for reading.
Benjamin Franklin said that only two things in life are certain: death and taxes. A third item could be added to the list: Major League Baseball’s All-Star Break.
Yesterday, the 82nd Major League Baseball All-Star Game was played: the National League beat the American League, 5-1
I am taking the occasion of the All-Star Break to take a break from our usual blog topics. However, I will refer to the issue of taxes (and baseball).
On Saturday July 9, the New York Yankees’ Derek Jeter hit his 3,000th career hit. The milestone hit was a home run, caught by Christian Lopez. Some estimate that the souvenir ball may be worth $250,000. However, rather than keep the keepsake, Lopez returned the ball to Jeter!
His good deed did not go unrewarded. Apparently, the New York Yankees gave Lopez luxury box tickets for the rest of the season, including post-season; signed baseballs, bats and jerseys from Jeter, and four premium front row seats to last Sunday’s game.
However, as no good deed goes unpunished, the downside is that the IRS will likely treat the benefits to Lopez as income, and he may be liable for taxes estimated between $5,000 and $14,000.
Enjoy the dog days of summer.
Paul E. Trudelle – Click here for more information on Paul Trudelle.