Changes to the Taxation of Estates and Testamentary Trusts · Changes to the Taxation of Estates and Testamentary Trusts ... alter ego trusts, joint spousal trusts, ... 4 STEP Inside

Changes to the Taxation of Estates and Testamentary Trusts

Post Mortem Planning for Private Corporation Shares – Page 7Whose Mistake? Part II – Page 11

2 STEPInside•FEBRUARY2015•VOLUME14NO.1

STEP Inside

EDITORIALBOARD

Christine Van Cauwenberghe, ChairKaty Basi

Bernadette Dietrich Paul FesterygaElena Hoffstein

Joyce Lee Barbara Novek

Shamim PanchbhayaMarina Panourgias

Corina Weigl

STEP Inside is published three times a year by the Society of Trust and Estate Practitioners (Canada), an organization of individuals from the legal, accounting, corporate trust and related professions who are involved, at a specialist level, with the planning, creation, manage-ment of and accounting for trusts and estates, executorship administration and relatedtaxes.STEPCanadahasbranchesintheAtlanticregion,Montreal.Ottawa,Toronto, Winnipeg, Edmonton, Calgary, andVancouver;andtwonewlyformedchaptersinLondonandSouthwesternOntarioandtheOkanaganValley.

ArticlesappearinginSTEP Inside do not necessarily represent the policies of STEPCanadaandreadersshouldseekthe advice of a suitably qualified profes-sionalbeforetakinganyactioninreli-ance upon the information contained in thispublication.

Allenquiries,commentsandcorrespon-dence may be directed to:

STEP CanadaOneRichmondStreetWest,

Suite700Toronto,ON,M5H3W4

www.step.ca

Tel416-491-4949 Fax416-491-9499

[email protected]

Copyright©2015SocietyofTrustandEstate Practitioners (Canada)

ISSN:14960737

Poor Process and Problematic Legislation Go Hand In Hand

TheproposedfederaltaxlegislationdatedAugust29,2014,whichwas

subsequentlytabledasBillC-43(theproposals),willsignificantlychange

therulesregardingthetaxationoftrusts.Theseproposalswillcreatediffi-

cult practical problems, including those that arise in the context of second

marriages.Whilewerecommendthatprofessionaladviserspaycloseatten-

tiontothemanydiscussionsabouttheproposalsthatwilltakeplaceinthe

comingmonths,wefocusourcommentaryhereontheconsultativeprocess.

Consultation concerning policy and technical matters is the cornerstone

oftheCanadianself-assessmenttaxationsystem.Arguably,agovernment’s

failure to support appropriate consultation is tantamount to taxation with-

outrepresentation.Realrepresentationonsignificantandcomplicated

technicalmatterscannotemanatefromthepoliticalprocessalone;itmust

alsoarisefromtheworkofgroupswithspecializedtaxexpertise.Thesocial

contractmandatesthattheDepartmentofFinanceconsidersubmissions

fromqualifiedexperts.

Inamere30days,STEPCanada(throughtheeffortsofacommittee

chaired by Pamela Cross) and other organizations (including the Joint Com-

mitteeonTaxationoftheCanadianBarAssociationandtheCharteredPro-

fessionalAccountantsofCanada)providedthoughtfulandexpertanalysisof

theproposals.Giventhetechnicalproblemsthattheproposalswillcreate,

somepractitionersandcommentatorshavesuggestedthatboththe30-day

timeframeandthedepartment’sresponsetosubmissionswereinadequate.

Thedepartment’sresponse,thoughperhapsinadequate,mayhave

beenaffectedbytimingandadministrativeconcerns.A60-to-90-day

period has been suggested as the minimum time frame for useful con-

sultation: brief enough to focus attention but lengthy enough to allow for

technicaladjustmentsbythedepartment.Aspractitioners,weknowthat

thedraftingoflegislationrequiresdetailedandthoughtfulconsideration.

The implications of particular turns of phrase, whether emanating from

theDepartmentofFinanceorfromindustry,arenotalwaysimmediately

apparent.(Asaresultoftheconsultativeprocess,sometechnicaladjust-

ments to the foreign affiliate dumping rules were adopted, and other mat-

terswereaddressed,ifnotentirelysatisfactorily,inthetechnicalnotes.)

The substantive corrections that we have suggested will be as valid a

year from now as they are today, and we hope that the considerable efforts

expended during the consultative process, both by the department and by

industry,willeventuallyleadtotheappropriateamendments.Ourother

hope,however,isthattheDepartmentofFinanceandindustryhavenow

become aware of the need for a more meaningful time frame for consulta-

tion.Clearly,30daysisnotenough.Bothtaxpayersandthedepartment

deservea60-to-90-dayconsultativeperiod,duringwhichlastingbenefits

canbeproducedforallconcerned.

PaMELa CroSS, TEP

Partner, Borden Ladner Gervais LLP;

Secretary, STEP Canada; Member,

STEP Ottawa

PauL TayLor, TEP

Associate, Borden Ladner Gervais LLP;

Member, STEP Ottawa

OnDecember17,2014,Bill

C-43receivedroyalassent,

ushering in a new era of estate

planning with proposed changes to the

IncomeTaxAct.Ingeneral,testament-

ary trusts will be subject to flat top

rate taxation at the highest marginal

rate, rather than at graduated rates,

asiscurrentlythecase.However,the

legislative amendments were intro-

duced with a number of unexpected

and previously unannounced meas-

ures that will have a significant impact

on post mortem planning that relates

to private company shares, charitable

donations made on death, planning for

beneficiaries with disabilities, and very

common planning using life interest

trusts (spousal trusts, alter ego trusts,

joint spousal trusts, and joint common-

lawpartnertrusts).Thekeyfeatures

of the new rules, which will apply as

ofJanuary1,2016,aresummarized

below.

Taxation of Testamentary TrustsBeginninginthe2016taxationyear,

existing and future testamentary

trusts, other than graduated rate

estates(GREs),whicharediscussed

below, will be subject to the same

rules that currently apply to inter vivos

trusts.Insummary,thefollowingbene-

fits will no longer be available to testa-

mentarytrusts,unlesstheyareGREs:

1. Ability to use graduated tax rates.

Testamentary trusts will be sub-

ject to the highest federal tax rate,

whichiscurrently29percent.The

provinces will probably align their

tax legislation accordingly, result-

ing in an effective combined tax

ratethatapproaches50percent

inmanyprovinces.Qualifieddis-

abilitytrusts(QDTs),whichare

discussed below, will continue to

be able to use graduated rates to a

certainextent.

2. Exemption from remitting tax instal-

ments.

3. Exemption from alternative mini-

mum tax.

4. Ability to allocate investment tax

credits to beneficiaries.

5. Ability to have a non-calendar year-

end.

6. Extended period for filing a notice

of objection to a tax assessment.

Testamentary trusts will be

required to file a notice of objec-

tionwithin90daysofreceiving

thenoticeofassessment.

7. Relief from the application of the

stop-loss rules. This relief allows

forcertainlosscarrybackpost

mortem planning to avoid double

taxationwhenthedeceased’s

assets include private company

shares.

8. Increased flexibility in claiming tax

credits associated with charitable

donations on death.

Existing testamentary trusts

thatdonotqualifyasGREswill

have a deemed year-end on

December31,2015,whichmay

result in two fiscal periods in

2015.Forplanningpurposes,

it may be advisable to trigger

incomeorgainsin2015tomake

use of the last year in which grad-

uatedrateswillbeavailable.

Graduated rate EstatesGREsmaycontinuetoobtainthebene-

fits, described above, that are currently

availabletoalltestamentarytrusts.A

GREisdefinedasanestatethatarose

on and as a consequence of the death

of an individual if:

1. nomorethan36monthshave

passed since the date of death,

STEPInside•FEBRUARY2015•VOLUME14NO.1 3

Changes to the Taxation of Estates, Testamentary Trusts and Life Interest Trusts

As long anticipated, testamentary trusts will generally be subject to flat top rate taxation

at the highest marginal rate, rather than at graduated rates as is currently the case.

2. the estate is a testamentary trust

undertheIncomeTaxAct,

3. the estate designates itself as

aGREinitsfirsttaxreturnthat

endsafter2015(itisunclear

whether late designations will be

permitted),

4. no other estate designates itself

asaGREofthedeceasedindi-

vidual, and

5. thedeceasedindividual’ssocial

insurancenumberisprovided.

OnlyanestatecanqualifyasaGRE.

Generally speaking,adeceased’s

estate exists during the period of time

in which the executor deals with the

deceased’sassetsbeforedistribut-

ing them to beneficiaries (or to trusts

establishedunderthedeceased’swill).

It appears that neither a testamentary

trust established under a will nor an

insurance testamentary trust (whether

established under a will or otherwise)

canqualifyasaGRE.Totheextentthat

anestatetakesmorethan36months

to administer – as a result of estate

litigation or the existence of complex

assets–theGRElosesthebenefitsset

outabove.Atthetimethatanestate

ceasestoqualifyasaGRE(whether

becausethe36-monthperiodexpires

orbecausetheGREceasestoqualify

as a testamentary trust), a deemed

taxationyear-endwillbetriggered.

EstatesinexistenceonJanuary1,2016

mayqualifyasGREs,providedthatall

oftheaboveconditionsaremet.For

example, the estate of an individual

whodiesin2015mayqualifyasaGRE

until the third anniversary of the indi-

vidual’sdeath.

If a deceased individual held private

company shares and post mortem loss

carrybackplanningisdesirable,itwill

be necessary in many cases to ensure

thattheestatequalifiesasaGRE.Itis

not uncommon for individuals to use a

combination of vehicles, such as mul-

tiple wills (which are often used to deal

with multijurisdictional assets or to

facilitate the administration of estate

assets without court proceedings) or

insurancetrusts.Anysuchplanning

should be reviewed in light of the new

rules because it may be necessary for

thesevehiclestoqualifyasaGRE,and

modifications to current planning may

be required to ensure that there is one

estatethatiseligiblefortheGREdesig-

nation.Planningmaybefurthercompli-

cated when it is desirable, for non-tax

reasons, to appoint different executors

ortrusteestodealwithdifferentassets.

Changes to the rules regarding Charitable GiftsCurrently, gifts to qualified donees

made “by will” are deemed to be made

immediatelybeforeanindividual’s

death.Thetaxcreditcanbeusedin

the year of death (reducing taxes trig-

gered by the deemed disposition on

death)orcarriedbacktotheimmedi-

atelyprecedingyear.Thisregimemet

with criticism because unused credits

could not be carried forward and used

bythedeceased’sestate,andbecause


the requirement that the gift be made

by will created some confusion and

uncertainty in drafting donation pro-

visions that ensured that the credit was

available to the appropriate taxpayer

atthedesiredtime.

The new rules significantly change the

way in which donations on death will be

treatedfortaxpurposes.Giftsmadeby

will, made by beneficiary designation

gifts, and gifts made by an estate will

all be deemed to be made by the estate

at the time that the property is actually

transferredtothecharity.Thevalueof

the gift will be the value at the time of the

donation.Theestatecancarryforward

theunusedtaxcreditforfiveyears.

Special rules will apply to gifts

madebyestatesthatqualifyasGREs

atthetimeofthedonation.Inthese

cases,thecreditcanbeclaimed(1)

by the deceased individual in the year

of death or the immediately preced-

ingyear,(2)bytheGREintheyearof

the donation or any prior year of the

GRE,or(3)bytheGREinanyofits

next five taxation years (provided that

itremainsinexistence).Theserules

increase flexibility in maximizing the

taxcreditsavailable.Theexemption

from capital gains for publicly traded

securities will continue to apply to gifts

madebyGREs,resultinginnodeemed

disposition immediately before death,

provided that the securities are subse-

quently donated to a qualified donee

bytheGRE.

Althoughthenewruleswillalleviate

the issue of unused tax credits in cer-

tain situations, many existing plans

maynolongerbetax-efficient.For

example, gifts made by an alter ego,

joint partner, or spousal trust (after the

death of the settlor or spouse) can no

longer be used to shelter the gain trig-

geredinthetrustondeath.Asaresult

of(1)proposedchangesdiscussed

below that will, first, trigger a year-

end in the trust at the end of the day

on which the settlor or spouse, as the

case may be, dies and, second, deem

the income for this tax year to be pay-

able to the settlor or spouse, and (2)

the fact that the charitable donation

will not be made by the trust until a

later tax year, it will not be possible for

thetrusttocarrybackthecharitable

tax credit to shelter the tax triggered

asaresultofthedeath.

Qualified Disability TrustsTheQDTregimecreatesanexception

to the taxation of testamentary trusts

atthehighestmarginalrate.Inorder

foratrusttobeaQDT,

1. the trust must be a testamentary

trust (created by will or through a

beneficiary designation),

2. the trust must be resident in

Canada for the year,

3. the trust must jointly elect with

one or more of the beneficiaries

(the electing beneficiary) who are

named under the will or benefi-

ciary designation trust,

4. the electing beneficiary must

qualify for the disability tax credit,

and

5. the electing beneficiary cannot

have made the joint election with

anyothertrust.

There does not appear to be any relief

intheeventofalateelection.Accord-

ingly, it will be important for a trustee

ofatrustthatiseligibletobeaQDT

to ensure that the proper joint elec-

tion is filed in a timely manner by the

trustee and the disabled beneficiary

or, if appropriate, his or her guard-

ian.Thisfilingrequirementmaycause

some complications because many

individualswithdisabilitieswholack

mental capacity may not have court-

appointed guardians and accordingly

will be unable to file the joint election

untilsuchaguardianisappointed.

ThelimitofoneQDTperdisabled

beneficiary means that only one trust

established for the disabled benefici-

ary will be eligible for graduated rates,

even if the aggregate income from all

such trusts would, if combined, be

taxed at rates that are lower than the

highestmarginalrate.

ThetaxreliefgrantedtoQDTsis

notabsolute.QDTsaresubjecttoa

recovery tax that is triggered in a year

inwhich(1)thetrustceasestoqual-

ifyasaQDT(whichwilloccurifany

of the above conditions are not met)

or (2) a capital distribution is made

toanon-electingbeneficiary.This

tax is intended to recover tax savings

obtainedbytheQDTasaresultofthe

application of graduated rates in prior

years.Therecoveryiscalculatedby

determining the amount that would

have been payable if the income of

the trust that is never distributed to the

electing beneficiary had been taxed at

thehighestmarginalrate.


Giftsmadebywill,designatedgifts,andgiftsmade by an estate will all be deemed to be

made by the estate at the time that the propertyisactuallytransferredtothecharity.

Changes to rules regarding Life Interest TrustsOneofthenewrules’mostsignificant

changes will have profound implica-

tions for planning that involves spousal

trusts, alter ego trusts, joint spousal

trusts, and joint common-law partner

trusts (herein referred to as “life inter-

esttrusts”).

Starting in 2016, life interest trusts

will undergo a deemed disposition trig-

gered at the end of the day of the death

of the last surviving life interest bene-

ficiary (either the settlor or the spouse,

depending on the nature of the life

interest trust). All of the trust’s income

for the taxation year, including capital

gains arising on the deemed disposition

of assets triggered by the death of the

life interest beneficiary, will be deemed

to have been made payable to the life

interest beneficiary and will be included

in his or her terminal tax return.

Althoughthisdeemedpayablemech-

anism may address concerns about

having the trust income taxed in the life

interest trust at the highest marginal

rate, it may create significant financial

hardship in certain circumstances in

which trusts are commonly used to retain

control over the distribution of income or

capital.Thishardshipisillustratedbythe

examplethatfollows.

A spousal trust is established in

John’s will to provide for his second

wife, Jane. On Jane’s death, the capital

of the spousal trust is to be left to John’s

children of his first marriage. In her

will, Jane leaves her estate to the chil-

dren of her first marriage. If John dies

first, his assets will pass to the spousal

trust. On Jane’s death, the spousal

trust will undergo a deemed dispos-

ition of its assets. Under the new rules,

all income (including taxable capital

gains) will be deemed payable to Jane,

such income will be reported in Jane’s

terminal return, and the tax will be

borne by Jane’s estate. Because Jane’s

beneficiaries (her children) are differ-

ent from the remainder beneficiaries

of the spousal trust (John’s children),

and her children will not receive any of

the assets of the spousal trust, they will

effectively bear the tax burden of the

spousal trust without benefiting from

its assets. This situation results in a

windfall for John’s beneficiaries.

The new rules provide that the life

interesttrust(John’sspousaltrust)

will be jointly and severally liable

withthe life interestbeneficiary’s

(Jane’s)estateforthetaxliability.In

response to concerns about the new

rules, theDepartmentof Finance

released revised explanatory notes

inlateOctober2014,statingthat“it

isintendedthattheMinister[ofRev-

enue assess the trust] in respect of an

amount owing … as though the trust

were liable in the first instance for that

amount.”However,giventhatthenew

rules are clear that the estate of the

lifeinterestbeneficiary(Jane’sestate)

is primarily liable for the tax and that

it is the administrative practice of the

CanadaRevenueAgency (CRA) to

assess and initiate collection proceed-

ings against the primary taxpayer and

only to initiate proceedings against

other taxpayers as a last resort, it is

unclear if the provisions can, or will,

be administered as suggested by the

department.Further,eveniftheCRA

exercises its discretion to enforce dir-

ectly against the trust assets, it will

not necessarily forgo its rights against

thelifeinterestbeneficiary’sestateto

theextentthatthetrustassetsare(1)

illiquid (or otherwise difficult to realize)

or(2)insufficienttofundthetax.The

CRAhasnotcommentedonthenew

rules or whether it intends to enforce

themassuggestedbythedepartment.

Althoughthepotential financial

hardship is clearly problematic, the

new rules may have other unexpected

results.Becauseoftheuncertainty

regarding which taxpayer (the trust or

thebeneficiary’sestate)willultimately

bear the tax burden, and the fact that

the tax liability will not be determined

until after the life interest benefici-

ary’sterminaltaxreturnisfiledand

assessed, it may be difficult for the

trustees and executors (even if they

are cooperating) to ensure the timely

paymentofthetax.Totheextentthat

the taxes are collected against the

trust rather than the estate of the life

interest beneficiary (as is intended by

the department), the trustees of the

trust may be obliged, by virtue of their

fiduciary duties, to litigate to recover

taxes from the estate of the life interest

beneficiary.Further,areimbursement

by the life interest trust to the benefici-

ary’sestateofthetaxestriggeredmay

cause the estate to lose its status as a

testamentary trust (and therefore lose

itsstatusasaGRE),whichmayhave

significant adverse affects on other

planning(asdescribedabove).

The new rules represent a signifi-

cant change for taxpayers and their

advisers.Everyoneshouldreviewhis

orherestateplanningbefore2016

to ensure that it remains appropriate

andthatitwillachieveitsobjectives.

Those whose arrangements (such as

existing irrevocable life interest trusts

and planned charitable donations)

are already in place and those who are

incapable and unable to amend their

existing testamentary planning may

find it difficult or impossible to adhere

tothenewrules.Itistobehopedthat

theDepartmentofFinancewilladdress

these practical concerns in an amend-

mentbeforetheJanuary1,2016imple-

mentationdate.n


SHELaGH rINaLD, TEP

President, Rinald Tax Advisory;

Member, STEP Vancouver

When a Canadian-resident

individual dies owning

appreciated shares of a

private corporation, the shares are

exposedtodoubletaxation.Provi-

sionsexistintheIncomeTaxActto

eliminatethisproblem;however,the

methodologyfortakingadvantageof

these provisions is not self-evident,

and executors and beneficiaries may

not be able to use the provisions with-

outproperplanning.

ThisispartIofatwo-partarticle.

It describes how double tax exposure

arises, gives a general overview of

the tax-planning strategies that can

mitigate this exposure, and outlines

the circumstances that are relevant to

implementingthesestrategies.Part

II,whichwillappearintheMay2015

issue of STEP Inside, discusses the strat-

egiesingreaterdetail.

Thetaxplanningtobeundertaken

after the death of an owner of appreci-

ated private corporation shares depends

on the tax attributes and the nature of the

assets of the corporation at the time of

death, as well as the intentions of the

beneficiarieswithrespecttotheshares.

Anestateplanmustbesufficientlyflex-

ible to accommodate the mechanisms

formitigatingdoubletaxexposure.

The discussion in this article

assumes that the testator, estate,

beneficiaries, and corporation are all

Canadianresidents.Italsoassumes

top marginal tax rates and a personal

capital gains rate that is lower than

the tax rate on dividends (both eli-

gible and ineligible) and lower than

the corporate capital gains rate on a

flowthroughbasistoshareholders.In

general terms, the exposure to double

taxation can be described as follows:

• With certain exceptions, when

a Canadian-resident individual

dies, he or she is deemed to have

disposed of all capital property

immediately before death at fair

marketvalue, thusrealizingall

accrued capital gains and losses

andpayingtaxaccordingly.Asa

result, the executor receives the

property from the deceased at an

adjustedcostbase(ACB)equalto

thefairmarketvalueimmediately

before death, which will ultimately

becometheACBofthepropertyto

the beneficiaries of the estate (the

newshareholders).

• Later,when thecorporation is

wound up or the corporate assets

are sold and any gains inherent

in these assets are realized, it is

assumed that the net assets of the

corporation are distributed to the

new shareholders through a repur-

chaseofsharesbythecorporation.

Anyproceedspaidbythecorpora-

tion on the purchase of its shares in

excessofthepaid-upcapital(PUC)

of the shares give rise to a dividend

for Canadian tax purposes and a

capital loss to the new sharehold-

erstotheextentthattheACBof

thesharesexceedsthePUCofthe

shares (as a result of the reduction

in the proceeds of disposition of the

shares for the amount of the divi-

dendreceived).

• There is no mechanism by which

the new shareholders can apply

this capital loss against the gains

realized at the time of the original

shareholder’sdeath;therefore,if

the new shareholders do not real-

ize any capital gains against which

this capital loss can be applied,

double taxation occurs: first as a

result of the taxation of the capital


Post Mortem Planning for Private Corporation SharesPART I: ALTERNATIVES FOR MITIGATING THE DOUBLE TAX EXPOSURE ARISING

ON THE DEATH OF THE OWNER OF PRIVATE CORPORATION SHARES

When a Canadian-resident individual dies owning appreciated shares of

a private corporation, the shares are exposedtodoubletaxation.


Estate, spousal trust, alter ego trust, or joint spousal trust owns shares of a private corporation (2)

Intentiontowindupcorporationinlosscarrybackperiod(3)

Shares of the corporation are to be sold to a third party or capital loss on wind-up is to be used by

beneficiaries(4)

CorporationhasGRIPandRDTOHorCDAbalances(5)

NettaxbasisincorporateassetsisatleastequaltoACBofcorporateshares(6)

Corporation has non-depreciable capital property

YES

NO

NO

NO

NO

GRIPand RDTOHorCDA

balance incorporation

YES

YES

NO

NO

YES/PARTIAL

NO YES

YES

Assetscanbe sold in

first tax year

Acquisition-of-control

or bump-denial

issues

YES

Losttaxdeferral if

property is sold to trigger

gain (7)

NO

NO

Noactionrequired

regarding loss

carrybackor bump planning

Subsection 164(6)or

loss carryback

planning (8)

Hybrid planning (8)(9)

YES

NO

Bump and

pipeline planning

before asset sale

(9)

Pipeline planning

(9)

Figure 1: Post Mortem Planning to Mitigate Double Tax Exposure (1)

YES


gain inherent in the shares when

the original shareholder dies, and

second as a dividend to the new

shareholders when the net assets

of the corporation are distributed

tothem.

This exposure to double taxation can

be mitigated as follows:

• If the shares of the corporation

(as opposed to its assets) are sold

by the new shareholders or if the

capital loss that is created on the

wind-up of the corporation or the

repurchaseofthecorporation’s

shares can be used by the new

shareholders, there is no exposure

todoubletaxation.

• If the beneficiaries do not antici-

pate selling the corporate assets for

a significant time, the discounted

present value of the future taxes

payable will be reduced, and the

double tax exposure will be miti-

gatedaccordingly.

• If theACBof thesharescanbe

used to create an opportunity for

the tax-free extraction of tax-paid

capital from the corporation (that

is, thePUC inthesharesof the

corporation or a debt owing from

the corporation to the new share-

holders) that is at least equal to the

ACBoftheshares,theexposureto

doubletaxationwillbemitigated.

This strategy is often referred to as

the“pipelinestrategy.”

◊ In applying the pipeline strategy,

the net tax basis in the corporate

assets (that is, the tax basis of the

corporate assets less the liabilities

of the corporation) should be at

leastequaltotheamountofPUC

or loan to the new shareholders

that is created through the pipe-

linestrategy.Ifthisconditionis

not met, trapped refundable taxes

on the ultimate sale of corporate

assets will give rise to an addi-

tional exposure to double taxation

(effectively,athirdlayeroftax).

◊ Bumpplanningisastrategythat

is used to increase the net tax

basis of the corporate assets to

equaltheamountofPUCorloan

to the new shareholders, which is

created using the pipeline strat-

egy.Bumpplanningallowsforan

increaseintheACBofthenon-

depreciable capital property of

the corporation to an amount up

totheACBofthesharesifcertain

complexcriteriaaremet.

• If the loss that is created on the

wind-up of the corporation or

the repurchase of the corporate

sharescanbecarriedbackand

offset against the gain that is trig-

gered on the death of the original

shareholder to recover the related

capital gains taxes that were paid

on death, the exposure to double

taxationwillbemitigated.These

arelosscarryback(LCB)strategies

and require the loss to be triggered

on the repurchase of shares to the

estate within the first taxation year

followingdeath.InapplyingLCB

strategies, it is essential that the full

amount of the dividend that arises

on the repurchase of shares can be

attributed to a combination of

◊ dividends that are paid on a tax-

freebasisfromthecorporation’s

capitaldividendaccount(CDA),

and

◊ dividends for which there will be

a recovery of refundable dividend

tax to the corporation equal to

one-thirdofthedividendspaid.

• If this condition is not met, trapped

refundabletaxesandCDAonthe

sale of corporate assets and the

distributionofnetproceeds[AU:

please clarify, if necessary] will

give rise to additional exposure to

double taxation (again, effectively

athirdlayeroftax).

• IfneitherthepipelinenortheLCB

strategies can be used to mitigate

the double tax exposure on death

(which is often the case), another

strategy to consider is hybrid plan-

ning.Thisstrategy involvesthe

timely triggering of capital gains on

the transfer of assets to a subsidiary

corporation to provide for the tax-

efficient repurchase of shares by

thecorporationtotheestate.Gener-

ally, pipeline planning allows for the

preservation of the personal capital

gains tax rate arising on death, while

LCBplanningeffectivelyconverts

the personal capital gains tax rate to

personal dividend rates or, at best,

corporatecapitalgainsrate.There-

fore, assuming that the conditions

noted above are met, pipeline plan-

ningispreferabletoLCBplanning

when personal capital gains rates

are lower than corporate capital

gainsrates.However,theriskof

reassessment under subsection

84(2)oftheIncomeTaxActandthe

complexities arising in the applica-

tion of bump planning (both to be

discussed in part II of this article)

can prevent the use of pipeline

planning.Furthermore,whenan

estatefreezehasbeenundertaken

duringthetestator’slifetime,the

timingissuesandtheriskofpre-

paying taxes on the sale of corpo-

rate assets that arise with respect

toLCBplanningcanpreventtheuse

oftraditionalLCBplanning.Inthese

circumstances, hybrid planning can

play a practical and important role

inmitigatingdoubletaxexposure.

Figure1isintendedtoassistindeter-

mining the preferable strategy to miti-

gate double tax exposure in a variety

of circumstances that may exist at the

timeofdeath.Itshouldbeusedonlyin

the context of a full analysis of all rel-

evanttaxmatters.Aswillbediscussed

further in part II of this article, tax leg-

islation that was passed on December

16th,2014effectivefor2016andsub-

sequent years will affect the details for

applying the tax-planning strategies

discussedhere.

1. Figure1isbasedonthefollow-

ing assumptions, which may not

apply in all provinces:

a. corporate capital gains rates on

a flowthrough basis exceed per-

sonalcapitalgainsrates;

b. eligible dividend rates are lower

than the corporate refundable tax

recoveryrate;

c. ineligible dividend rates are

higher than the corporate refund-

abletaxrecoveryrate.

Referencesto“partial”applywhen

the proposed alternative may not fully

minimizetaxonapostmortembasis.If

the partial reference is applicable, both

possibilitiesmustbeconsidered.

2. Subsection164(6)orlosscar-

rybackplanningmaystillbe

required with respect to other

assets owned by the estate or the

spousal, alter ego, or joint spou-

sal trust within the first taxation

year of the estate or the first three

yearsofthetrust,respectively.

3. Riskswithrespecttosubsection

84(2)requirecarefulattention

if pipeline planning is used in

conjunction with a wind-up of the

corporation.

4. Ifitislikelythatthesharesofthe

corporation (as opposed to its

assets) will ultimately be sold by

the beneficiaries of the estate or

if it is anticipated that the benefi-

ciaries will otherwise be able to

use the capital loss generated on

a wind-up against gains that they

realize personally, post mortem

planning may not be required to

mitigate the double tax exposure

inherent in the shares of the cor-

poration.

5. If the beneficiaries of the estate or

trust are not the ongoing owners

of the participating shares of the

corporation, the interests of both

the beneficiaries and the ongo-

ing shareholders of the corpora-

tionmustbenegotiated.Their

competing interests should be

anticipatedintheshareholders’

agreement with respect to the

allocation of general rate income

pool(GRIP)andCDAbalances.

IftherearenoGRIPbalancesin

the corporation, the tax efficiency

of redeeming shares to recover

refundable dividend tax on hand

(RDTOH)balanceswillrequire

careful consideration (because

ineligible dividend rates are

assumedtoexceedtheRDTOH

recoveryrate).

6. If the net tax basis (that is, the tax

basis of assets less liabilities of

the corporation) in the corporate

assetsisatleastequaltotheACB

inthecorporation’ssharesto

the estate or trust, pipeline plan-

ning can be used to mitigate the

double tax exposure inherent in

the shares, providing that the pro-

visionsofsubsection84(2)donot

apply.Ifthenettaxbasisinthe

corporate assets is less than the

ACBinthecorporation’sshares

totheestateortrust,andtheACB

of the assets of the corporation

cannot be increased sufficiently

with a bump transaction, partial

pipeline planning could be con-

sidered in conjunction with hybrid

planning.

7. If a corporate estate freeze has

beenundertaken,thetaxdeferral

arising from the estate freeze (that

is, arising from the increase in the

fairmarketvalueofthecorporate

assets since the estate freeze was

undertaken)wouldbelostifthe

corporate assets were sold within

thelosscarrybackperiodofthe

estate (to generate the refund-

abletaxandCDAbalancesthat

are required for effective post

mortemlosscarrybackplanning).

If so, a hybrid strategy should be

considered.

8. Subsections40(3.6),112(3.2),

and112(3.3)requirecarefulcon-

sideration whenever losses are

created on a post mortem basis

through the redemption of shares

toanestateortrust.Subsection

40(3.61)mayproviderelieffrom

the provisions of subsection

40(3.6)whenlossesarecarried

backpursuanttosubsection

164(6).Thetaxlegislationthat

waspassedonDecember16th,

2014limitstheavailabilityofsub-

section164(6)andthe“50per-

cent solution” in subparagraph

112(3.2)(a)(iii)toagraduatedrate

estatefor2016andsubsequent

years.

9. WhentheACBinherentinshares

is used to create a loan from a

corporation (on the transfer of

the shares to the corporation),

subsection84(2)andsection84.1

requirecarefulattention.n


MarK HaNDELMaN

Counsel, Whaley Estate Litigation

This is part II of a two-part article

examining the Rasouli case and

thestepsthatadviserscantake

to prevent the problems that can arise

when clients have not discussed end-

of-life decisions with their legal or

medicaladvisers.Thefirstpartofthe

articleappearedintheOctober2014

issue of STEP Inside.

Doctors’ MistakesApatientadmittedtohospitalwith

brokenbones is likelytoreceivea

visit from a dietician if he or she is sig-

nificantlyoverweight.Hospitalstaff

membersroutinelyvisitsmokersto

encourage the use of nicotine replace-

menttherapy.Ifapatient’shomelife

couldputhisorherhealthatrisk,dis-

charge planners are available to ensure

a safe transition from the hospital into

thecommunity.However,unlessa

patient’sconditionisimminentlyter-

minal, few hospitals and almost no

doctorsofferadviceaboutmaking

end-of-lifedecisions.

Fewdoctorsunderstandthelegal

process that lies behind an assessment

ofapatient’scapacitytomakehisor

herowndecisions,knowthedefinition

of“capacity”tomaketreatmentdeci-

sions, or are familiar with the hierarchy

ofsubstitutedecisionmakers(SDMs)

and the principles on which substitute

decisionsmustbemade.

Physiciansmaynotspeakclearly

to patients and their families about

thepatient’sconditionandprogno-

sis.Theymaynot takethetimeto

answer the many questions that arise

whentreatmentdecisionsarefinal.

They sometimes (even unintention-

ally)reverttojargon.Forexample,the

answer to the following question is

unlikelytomeetthetestofinformed

consent:“AsaresultofaCVA,your

husband suffered anoxic brain injury

andisnowPVS.We’dliketopalliate

him,ok?”

The following case deserves par-

ticularattention.Thepatient,amanin

his late eighties, was in the final stages

ofdementia.Hewasunabletospeak

andbarelyawareofhisenvironment;

therewasnoprospectofrecovery.His

bedsores were extensive, and his body

wasnolongerabletohealitself.Hesuf-

feredrepeatedboutsofpneumonia;

received nutrition through a feeding

tube inserted into his stomach through

an incision in his abdomen, and could

not breathe without the assistance of

aventilator.

Thisman’swifeinsistedthat“every-

thingbedone”tokeephimalive.This,

she claimed, was what he wanted

because he was a religious man who

believed that the sanctity of life was

paramounttoallotherconsiderations;

he would have wanted to suffer if suf-

fering was necessary to prolong the

fighttostayalive.

Dementiatakesyearstodevelop,

and symptoms usually become appar-

ent before the victim loses his or her

capacity to express capable end-of-

lifetreatmentpreferences.However,

throughout the entire course of this

man’sillness,includingmonthsinhos-

pital,itseemsthatnooneaskedhim

for his views about the end of his own

life.

Patients’ MistakesPatientsshouldexaminethechecklists

provided in this article for lawyers and

doctors, and add any items that are

importanttothem.Afterall,apatient’s

health care and treatment decisions

arehisorherownresponsibility.


Whose Mistake? Part II

A BRIEF CHECKLIST FOR DOCTORS AND OTHERT HEALTH PRACTITIONERS• Assessthepatient’scapacitytomakehisorherowntreatmentdecisionsandchartyourfinding.

• Askwhetherthepatienthasapowerofattorneyforpersonalcare(POAPC)orotherwiseidentifythepatient’sSDMs.

• Enquireaboutthepatient’svaluesandbeliefspertainingtohisorherend-of-lifedecisions.

• Explainthepatient’sconditionandprognosistotheSDMsintermsthattheycanunderstand,andtakethetimeto

answertheirquestions.

• IfyoubelievethattheSDMsaremakingabadtreatmentdecision,explainyourhospital’sdisputeresolutionprocess

and,inOntario,theroleoftheConsentandCapacityBoardinresolvingdisputesbetweendecisionmakersandthe

patient’streatmentteam.

No Heroic MeasuresThe term “no heroic measures” means

different things to different people,

anddifferentthingsatdifferenttimes.

Giventhemanymedicaladvances

over the past half century, some doc-

tors claim that there are no longer any

heroicmeasures,justexpensiveones.

Othersmaintainthatwhatmightbe

considered heroic today will be com-

monplaceinlessthanadecade.

Inmakingend-of-lifedecisions,

patients should be less concerned with

a particular treatment than with their

prospects for recovery and the quality

oflifethatwillfollow.

When my mother was in her mid-

eighties, she needed surgery for bowel

cancer.Wewenttogethertomeetthe

surgeon, who thoroughly explained

therisksandbenefitsofthesurgery.

Motherunderstood,andconsented,

but there was one more issue: the

doctor explained that sometimes

resuscitation is required during sur-

gery, and she was the subject of a “do

notresuscitate”(DNR)order.

Mymotherdidnotrememberthat

shehadeveragreedtoaDNRorder

(ifsheeverdidagree).Herorderwas

ablanketDNR,whichdidnotaddress

the circumstances existing at the time

thatsheneededresuscitation.Suppose

shehadtrippedinherkitchenandfallen

unconscious: should she be resusci-

tated?Iwouldcertainlyhopeso.Need-

lesstosay,werescindedtheDNRorder.

(Bytheway,thesurgerywassuccessful,

she lived almost another decade, and

she had the good fortune to die asleep

inherownbedattheageof94.)

I have given considerable thought

to my own end-of-life wishes and spent

time explaining them to those who will

makethedecisionsformeifIaminca-

pable.Mythoughtsareencapsulated

in my own power of attorney:

Death is as much a reality as birth,

growth, maturity, and old age. It is

the one certainty of life. I recognize

this.

Therefore, while I am incapable,

should a situation arise where my

attending physician determines that

I will not recover from a disability and

that my death is imminent, I DIRECT

MY ATTORNEY to permit me the dignity

of a peaceful passing. I do not wish to

be kept alive by measures that would

only serve to prolong my dying process,

but I rather wish to die with dignity

and in comfort. In that situation, I wish

for treatments that will allow me to

die peacefully, even though they may

abbreviate the dying process, resulting

in a hastening of my death.

Mostimportantly,Ihavespenttime

talkingtothepeoplewhomayhaveto

makethesedecisionsforme:first,to

ensure that they are willing to assume

theresponsibility;second,toensure

that they understand the meaning of

mywords;andthird,toempowerthem

torespectmywishes.

Children: a Special CaseInOntario,thereisnominimumageat

whichapersonisentitledtomakehis

orherownhealthcaredecisions.Chil-

drenofanyageareentitledtomake

their own treatment decisions if able

to understand relevant information

andabletoappreciatethelikelyconse-

quences.Inotherprovinces,thecon-

cept of “the mature minor” is gaining


A BRIEF CHECKLIST FOR PATIENTS• ObtainaPOAPC,namingresponsiblepeopletomakedecisionsforyouwhenyoucannotdoso.

• TalktoyourfutureSDMs,tellingthemaboutyourend-of-lifewishes,ensuringthattheywillseektoachievethem,

andsatisfyingyourselfthattheyhavethenecessarycourageandcertaintyofmindtocarryoutyourinstructions.

• ReadyourPOAPCtoensurethatitreflectsyourwishes.Ifthereisa“noheroicmeasures”provision,consider

whetheritaccuratelyreflectsyourviews.

• Whileyouarestillcapableofdirectingyourowncare,makeinformeddecisions.Understandthetreatmentthat

yourphysicianproposesandaskforexplanationsofmedicaltermsthatyoudonotunderstand.

I have spent time talking to the people

who may have to make these

decisions for me: first, to ensure that they

are willing to assume the responsibility;

second, to ensure that they understand the

meaning of my words; and third, to empower

them to respect my wishes.


prominence, with a bit of a push from

the Supreme Court of Canada in a

recentcase.

InA.C.v.Manitoba(Directorof

ChildandFamilyServices),2009SCC

30,a15yearoldgirlarguedsheshould

be treated as a “mature minor” and her

wishes respected when she refused a

blood transfusion based on her reli-

giousbeliefs.Shewasapprehended

bytheFamilyServicesdepartment,

whichconsentedtothetransfusion.

Hadshebeenapprehendedafterher

16thbirthday,thechildwelfarelegisla-

tion would have presumed her capable

tomakethatdecision.Theargument

was based upon the age-related dis-

criminatorytreatment.TheSupreme

Court “read into” the child welfare leg-

islation–andthereforeManitobalaw—

the presumption of the mature minor,

whose treatment wishes should be

respected on a sliding scale, depend-

inghowcapablehe/shewas.

However,parentsthinkthatthey

knowwhatisbestfortheirchildren

andwanttomakedecisionsforthem,

especially those that involve life-and-

deathissues.

How is itpossible tobalancea

child’sright toself-determination

againstaparent’swishtodowhathe

orshethinksbestforthechild?The

balanceisstruckbymeansofaclear

understanding, on the part of the par-

entsandthechild’streatmentteam,of

thechild’scapacitytomakeanimpor-

tantmedicaldecision.Suchanassess-

ment can be very difficult, requiring

far more probing questions than in the

caseofanadult.

Parentswhoarecalledontomake

substitute decisions for children usu-

ally do so on the basis of their own

beliefsandnot thoseof thechild.

Becauseveryyoungchildrenlacka

system of values and beliefs, decisions

about their care should be based on

objective considerations involving the

child’sbestinterests.

How and When To Talk about DeathAlthoughitisdifficulttobroachthe

subject of death, it is important to find

opportunities to do so, and opportuni-

tiesdoarise.Peopledieontelevision

all the time, and it is not hard to intro-

duce the subject of death between the

end of a medical television show and

the beginning of the evening news, for

example.

When my mother was in her early

eighties,shecalledmeonedaytoask

ifIcouldtakehertothefuneralofa

closefriend.MotherandItalkedabout

her own end-of-life views on the way

homeafterthefuneral.Becauseshe

was upset that her friend had lingered

through the dying process while her

familydecidedwhattodo, Iasked

herforherownviewsaboutdeath.It

wasaneasysegue.Motherwasnotan

educated person, but she was wise and

able to sum up her own views pithily

andsuccinctly:“Whenthere’snobody

home,youturnoutthelights,don’t

you?”

ConclusionTheprocessofinformeddecision-mak-

ing rests with communication between

a health practitioner and either the

patientorthepatient’sSDM.Simply

put,apersonmakinghealthcaredeci-

sionsneedstounderstandtherisks

and benefits of a proposed treatment

(including the worst possible out-

comes) and the alternative treatments

orlackoftreatments.

SDMs need to understand the

wishes, values, and beliefs that inform

an incapablepatient’sdecisions.

A patient’s autonomy cannot be

respected and patient-centred care

cannotbeundertakenintheabsence

ofthisknowledge.n

“Whenthere’snobodyhome,youturnoutthelights,don’tyou?”

POWERSOFATTORNEY:THEIMPORTANCEOFWELL-INFORMEDDECISIONS

JoNaTHaN HooPEr

Associate Lawyer, Coady Filliter

TheLawReformCommissionofNova

Scotia issued a discussion paper in

March2014proposingchangesto

theNovaScotiaPowers of Attorney Act.

Oneoftheproposalsincludesspecific

guidance on how an attorney should

makedecisionsinthebestinterests

of the donor (that is, the person who

appoints the attorney under a Power

ofAttorneydocument(“POA”)).The

LawReformCommissionnotedthat

academic literature and anecdotal

information indicate “that there may

be confusion as to how exactly attor-

neysaretogoaboutmakingdeci-

sions”(LawReformCommissionof

NovaScotia,DiscussionPaper,March

2014,section9.2.1,page125).Incon-

sistencies can result in legal actions

that are costly, both emotionally and

financially,forallparties.Inadvis-

ing clients about powers of attorney

(POAs),estateprofessionalsshould

thereforeexplainthekeyconcepts

thatareoutlinedbelow.

Estate professionals should clarify

the extent of the authority that donors

areentrustingtotheirattorneys.They

should also ensure that attorneys fully

understand their role and responsi-

bilities.Itmaybenecessarytoprovide

ongoing support and information

to attorneys so that they are able to

function effectively in their role as the

agentsforthedonor.Ifprofessional

advice falls short of these standards,

thedonor’sriskoffinancialvulnerabil-

ityincreases,asdoestheriskthatthe

attorneys may not be able to carry out

theirobligationsproperly.

Whether advising donors who

want to appoint an attorney or advis-

ingclientsactingunderexistingPOAs,

estate professionals should provide a

cleardefinitionofaPOAduringthe

initialinterview.Itisessentialthatcli-

entsunderstandthataPOAisalegal

document in which one person gives

authority to another person to act on

his or her behalf with respect to prop-

ertyandfinancialmatters.Thisdocu-

ment creates a legal agency, which

produces a fiduciary relationship

between the donor and the attorney

(or agent) and imposes a legal duty on

the attorney to act for the benefit of the

donor.

In most cases, the legal definition

ofaPOAprovidesinsufficientinfor-

mation to properly instruct donors and

attorneys about how to perform their

duties.Donorsalsoneedtounder-

stand the standard that attorneys are

obligedtomeetwhenmakingdeci-

sionsforthem.Forexample,inNova

Scotia an attorney must exercise the

care that a reasonable person would

exercise when conducting his or her

own affairs ((Re) Isnor Estate,[2001]

NSJ.No.659(SC),atparagraph57)).

Estate professionals should directly

askdonorswhetherthepersonthat

they are considering as an attorney can

meetthisstandardofperformance.

Donors also need to understand

that if an appointed attorney does not

fulfill his or her fiduciary duties, their


I N T H E H E A D L I N E S

only remedy is applying to the courts

tohavetheattorneyremoved.Onsuch

an application, the courts consider the

abilities of the attorney to manage the

financial affairs and property of the

donor when deciding whether the

attorney has met his or her obligations

((Re) Isnor Estate,[2001]NSJ.No.659

(SC),atparagraph60).

Bothdonorsandattorneysneed

tobetoldthatanattorney’sactions

mustbeundertakeningoodfaithand

inthedonor’sbestinterests(Vernon v.

Sutcliffe,2014NSSC376).Thisadvice

sounds straightforward to estate pro-

fessionals, but it is not always easy

for attorneys to understand how this

principle should guide the decisions

thattheymakefordonors.Recently,

the LawReformCommissionhas

put forward four principles to guide

anattorney inacting inadonor’s

bestinterests:(1)theattorneymust

consider if and when the donor may

regaincapacity tomakethedeci-

sion;(2)theattorneymust,asfaras

is reasonably practicable, permit and

encourage the donor to participate,

or to improve his or her ability to

participate, as fully as possible in the

decision;(3)theattorneymustcon-

sider, as far as is reasonably ascertain-

able,thedonor’swishes,intentions,

beliefs, values, and any other factor

that would be relevant to the donor

ifthedonorhadthecapacitytomake

thedecision;and(4)theattorney

must consult with anyone named by

the donor as someone to be consulted

on the decision in question or on any

similardecisions(LawReformCom-

missionofNovaScotia,Discussion

Paper,March2014,section9.2.1,

page129).

Finally,allpartiesmustknowwhen

thePOAwillcomeintoeffect.Typically,

POAsbecomeeffectiveimmediately

after they are executed or when the

donor becomes incapable of managing

hisorherfinancialaffairs.However,in

NovaScotiathefiduciaryobligation

oftheattorneyariseswhenthePOA

document is executed (see BFH v. DDH,

2010NSSC340).Thistimingmeans

thattheattorney’sfiduciarydutymay

arisebeforethedonorisincapable.It

also means that an attorney may be

liable for any decisions that he or she

reasonably contributes to after the

POAisexecuted.

Ifestateprofessionalstakecareto

ensure that both donors and attorneys

understand the concepts outlined

above, all parties should be protected

from the costs of addressing prevent-

ablecomplications.

INALIENABILITYCLAUSE

JENNIFEr LEaCH

Associate, Sweibel Novek LLP

Can a clause in a will prohibiting

the alienation of property by an heir

prevent the heir from including the

object of the legacy in his or her own

will?Thatwasthequestionconsid-

eredbytheQuebecCourtofAppeal

inthe2014decisionofVallée c. Roy,

2014QCCA927.ArthurL.Roydiedin

April2008.Inthefinalyearsofhislife,

helivedwithoneofhissons,J.Martin

Roy,andhisson’sspouse,Mélanie

Vallée. J. Martin Roywas named

as the universal legatee of all the

immovablesinhisfather’sestateon

his death, which included a house and

agriculturallands.Thisbequestwas

made subject to the express condition

that the universal legatee may neither

alienate nor encumber these immov-

ables with a mortgage for a period of

10yearswithoutthepriorconsentof

J.MartinRoy’ssiblings,theresidual

legateesofArthurRoy’sestate.The

willmadeitclearthatArthurRoy’s

wishwastokeepthelegaciesmade

under the will within family control

duringhisheirs’lifetimes.

J.MartinRoydied in2009, just

oneyearfollowinghisfather’sdeath.

Hehadpreparedaholographwill,

whereinhenamedhisspouse,Mélanie

Vallée,ashisuniversal legatee. J.

MartinRoy’ssiblingsandhismother

contested the validity of this will and

the legacy made thereunder on the

basisthatArthurRoy’swillprohibited

the alienation of the immovables left

toJ.MartinRoyfor10yearswithout

thepriorconsentofhissiblings.At

trial,theQuebecSuperiorCourtcon-

firmedthatinmakingMélanieVallée

hisuniversallegatee,J.MartinRoy

had alienated the immovables inher-

ited from his father, in contravention

of the prohibition against alienation

setoutinhisfather’swill.

TheCourtofAppealsoughttodeter-

mineArthurRoy’strueintentionsin

drafting the will by reference to the

rules of contractual interpretation in

article737andfollowingintheCivil

Code of Québec.TheCourtofAppeal

held that in reaching its decision, the

Superior Court had applied the legal

meaningofalienation.However, if

onestoodintheplaceofArthurRoy,

it was clear that his real objective was

tokeephisimmovableswithinfamily

control.Thenotarywhoprepared

thewilltestifiedthatArthurRoyhad

sought to do so by preventing his son

from selling the immovables without

thepriorconsentofhissiblings.The

CourtofAppealconcludedthatArthur

Royhadintendedtoprohibitonlyinter

vivos transfers of the immovables, not

toprohibittransfersonhisson’sdeath.

Therefore, the transfer of the immov-

ablesfromJ.MartinRoy’sestateto

MélanieValléedidnotcontravene

theprovisionsinArthurRoy’swill.


However,MélanieValléewouldremain

subject to the prohibition on inter vivos

transferswithoutthepriorconsentofJ.

MartinRoy’ssiblingsuntil10yearshad

elapsedfromthetimeofArthurRoy’s

death.

QUEBEC’SNEWCODEOFCIVILPROCEDURE

JENNIFEr LEaCH

Associate, Sweibel Novek LLP

On February 20, 2014,Quebec’s

National Assembly unanimously

adopted Bill28,whichestablishedthe

new Code of Civil Procedure.Thenew

Code, which introduces important pro-

cedural changes, is expected to come

intoforceinlate2015.Onechangethat

is of interest in the context of trusts and

estates relates to property that is exempt

fromseizure.Article553ofthecurrent

Code of Civil Procedure providesthat“[p]

roperty declared by a donor or testator

to be exempt from seizure … may how-

ever be seized by creditors posterior to

the gift or to the opening of the legacy,

with the permission of the judge and to

theextentthathedetermines.”

Article696(2)of thenewCode

incorporates the conditions for non-

seizabilityfoundinarticle2649ofthe

Civil Code of Quebec.Itprovidesthat

“property declared by the donor or

testatortobeexemptfromseizure[is

valid]ifthestipulation[ofnon-seizabil-

ity] is made in an act by gratuitous title

and is temporary and justified by a seri-

ousandlegitimateinterest.”

Likecurrentarticle553,article

696(2)ofthenewCodeprovidesthat

the property may be seized on the

request of creditors whose claims are

subsequent to the gift or the opening of

the legacy, with leave of the court and

totheextentthatthecourtdetermines.

Thepostambletosection696provides

that notwithstanding the preceding, up

to50percentofthepropertydescribed

inarticle696(2)maybeseizedtoexe-

cute partition of a family patrimony, a

support claim, or a compensatory allow-

ance.Thisruletakesprecedenceover

anylegislativeprovisiontothecontrary.

ONTARIO’SNEWESTATE INFORMATIONRETURN

JoaN JuNG, TEP

Partner, Minden Gross LLP;

Member, STEP Toronto

TheOntarioEstate Administration Tax

Act,1998wasamendedasaresult

ofthe2011provincialbudgettoadd

audit, inspection, and assessment pro-

visions and to impose a duty to provide

“such information about the deceased

person as may be prescribed” in

applications for the appointment

ofanestatetrustee.Originally,this

amendment was to apply to applica-

tionsmadeafterJanuary1,2013,but

implementationwasdelayed.

Theregulation(O.reg.310/14)

detailing the prescribed information

wasfinallyfiledonDecember22,2014,

and it is effective for applications for

estate certificates made on or after

January1,2015.Thenewform,called

an estate information return, and a

13pageguidemaybefoundatthe

OntarioMinistryofFinancewebsite

www.fin.gov.on.ca/en/tax/eat/.

The estate information return must

bereceivedbytheministry90calen-

dar days after the estate certificate is

issued.Theguideindicatesthatthe

return may be delivered, sent by mail,

orfaxedtotheMinistryofFinance

atthelistedOshawaaddress.Italso

states that the return may be delivered

inpersontospecifiedServiceOntario

locations. It is unknownwhether

receiptswillbeprovided.Unlikethe

federal Income Tax Act, the Estate

Administration Tax Act,1998provides

no deemed date of receipt if the return

issentbyfirstclassmail.Accordingly,

estate trustees must ensure that they

meetthefilingdeadline.Failuretodo

so may produce penalties and lead to

consequences respecting the reas-

sessmentlimitationperiod.

The guide states that if the court

issueda“CertificateofAppointment

ofEstateTrusteeLimitedtotheAssets

ReferredtointheWill”,thenonlythe

assets referred to in such will are to

be reported in the estate information

return.Theplanningtechniqueof

multiple wills involves a primary will

for the disposition of assets requir-

ing probate and a secondary will for

otherassets.Onlytheprimarywillis

probatedusingForm74.4.1,“Appli-

cationforCertificateofAppointment

ofEstateTrusteeLimitedtotheAssets

ReferredtointheWill”andthecourt

issues a limited grant of probate or

technically,a“CertificateofAppoint-

mentofEstateTrusteeLimitedtothe

AssetsReferredtointheWill”.Based

on the guide, only the assets referred

to in the primary will are reported on

theestateinformationreturn.

Boththeregulationandtheestate

information return contemplate dis-

closure of specific information on an

asset-by-assetbasis.Forrealproperty,

the full address, actual value of encum-

brances, assessment roll number,

and property identifier number are

required.Forcash,aloanreceivable,

a security, a contract of insurance with-

out a named beneficiary, a derivative,

a partnership interest, or “any other

investment,” a full description of the

asset is required, including the type

of asset, number of units held by the

deceased, and particulars of the asset

(suchasitsseriesorclass).However,


if the last-described group of assets

are held by an adviser or institution

on behalf of the deceased, it is unnec-

essary to provide an asset-by-asset

description;instead,itissufficientto

provide the name and contact informa-

tion of the adviser or the institution,

the account number, and the total

valueoftheaccount.Ifthedeceased

owned an asset as a tenant-in-com-

mon, the percentage of the asset

owned by the deceased and the total

valueoftheassetmustbedisclosed;

these amounts allow for a simple arith-

metic calculation without any minority

discount.

The regulation also dictates that the

estate representative update informa-

tionaboutthedeceased’sassetsand

file a revised return if any of this infor-

mationisincorrectorincomplete.The

revised return must contain a reason

for updating the information and must

befilednolaterthan30daysafterthe

estate representative becomes aware

that the information is incorrect or

incomplete.Thereisnorequirementto

file a revised return if the estate repre-

sentative becomes aware of the incor-

rect or incomplete information after

the fourth anniversary of the day that

thetaxbecamepayable.Presumably

this anniversary is measured from the

daythattheestatecertificateisissued.

The fourth anniversary of the day

that the tax becomes payable matches

the end of the limitation period in sec-

tion4.5oftheEstate Administration

Tax Act, 1998, during which the min-

ister may assess or reassess the tax

payablebytheestate.Thefour-year

reassessment limitation period was

introducedbythe2011provincial

budget, and there are exceptions to

it.Theassessmentorreassessment

period remains open if the minister

establishes a failure to comply with

section4.1oftheEstate Administra-

tion Tax Act, 1998 (the requirement to

provide prescribed information about

the deceased person in the prescribed

timeandmanner).Giventheamountof

informationregardingthedeceased’s

assets that the regulation requires,

omissionsorerrorsmayarise. It is

not clear if a simple error or omission

amounts to a failure to comply with sec-

tion4.1,therebyleavingthereassess-

ment period open, or if the filing of an

amended return cures the original error

oromissionforthispurpose.

The assessment or reassessment

period also remains open if the minis-

ter establishes that any person made

a misrepresentation attributable to

neglect, carelessness, or willful default

in providing information about the

estate or in omitting to provide infor-

mationabout theestate.Because

there is similar language in the fed-

eral Income Tax Act in the context of

an open reassessment period, related

jurisprudence might provide guidance

regardingtherequiredstandard.The

cases show that an incorrect statement

constitutes a misrepresentation, and

the standard of care is that of a “wise

andprudentperson.”Inlightofthe

detailed information that must be

provided in the required return, estate

representatives should beware of the

possibility of an open-ended reassess-

mentperiod.

TRUSTATTACkCASECOMMENT

NaNCy L. GoLDING, TEP

Partner, Borden Ladner Gervais LLP;

Member, STEP Calgary; Member, STEP

Worldwide Council

In Lafleur Estate (Re),2014ABQB698,a

decisionrenderedinNovember2014,

GreckolJchangedthetermsaffecting

a spousal trust pursuant to a depen-

dant’sreliefclaimbyawidow.

BradleyLafleurhadanestateplan

that included preferred and common

shares in a privately held corporation,

a family trust, a spousal trust, and sev-

eralindividualchildren’strusts.Hiswill

was rather simple, however, because

there were few assets in the estate at

the time of his death and all of them

passedtohiswife,YuliyaLafleur.Brad-

ley’sfatherwasnamedasthetrusteeof

thetrustsandtheexecutorofthewill.

Yuliya received various bank

accounts, money from a life insurance

policy, and a registered retirement

savingsplan;shewasalsoreceiving

income from rental property in the

estate and dividends from the private

corporation.Inaddition,shecontrolled

thefamilytrust.Yuliyaappliedforrelief

for the entire estate to be provided to

herwithoutrestriction.Sheargued

that the trusts failed to recognize her

deserved and desirable independence,

and that they left both herself and her

children vulnerable and at the mercy

ofthetrustee.

The court examined the terms of the

trusts and the money that was flow-

ingthroughthem.Itthenconsidered

Tataryn v. Tataryn Estate,[1994]2SCR

807,andsummarizedtheapplicable

principles as follows:

1. What is “adequate” goes beyond

the “bare necessities,” and the

applicablestatute(theBritish

Columbia Wills Variation Act) does

not contemplate a “needs-based

test.”Anawardunderthestatute

cantakeintoaccountthefamily’s

lifestyleandtheclaimant’srealis-

ticexpectations.

2. The statute attempts to balance

the interests of testamentary

autonomy with the need to provide

economic protection to surviving

familymembers.Ifpossible,the



court should attempt to recognize

bothinterests.

3. Anawardunderthestatute

shouldtakeintoaccountnot

only the legal obligations of the

deceased toward the family but

alsothedeceased’smoralobliga-

tions.

4. What is “adequate” must be

measured against contemporary

community standards, having

regard to what “a judicious person

would do in the circumstances, by

reference to contemporary com-

munitystandards.”

5. The extent to which all legal and

moral claims can be met depends

onthesizeoftheestate.

6. The statute gives the court a wide

discretion.

The court then reviewed Koma v.

Tomich Estate,2011ABCA186, in

the context of balancing the compet-

ing values of testamentary autonomy

and the legitimate claims and expec-

tationsofsurvivingfamilymembers.

Commenting on Tataryn, the court in

Tomich stated that “there is a range of

estate plans that will satisfy the legal

and moral obligations of the testator,

and that ‘provided that the testator has

chosen an option within this range, the

willshouldnotbedisturbed.’”

The court then made a detailed

review of the factors in Boje v. Boje

(Estate of),2005ABCA73,todeter-

mine the level of support that was

adequate for thespouse. Itnoted

thatbecauseBradleywas33yearsold

when he died and his wife was a simi-

larage,itwaslikelythatshewould

remarry.OneofBradley’sinterests

therefore was ensuring that a portion

of his estate would be preserved for

the children of his marriage and would

not be vulnerable to claims by a third

partywithwhomYuliyahadbecome

legally involved, such as a new part-

ner.Thecourtfurtherobservedthat

if this application were successful,

itwouldresultinYuliyaowning100

percentoftheprivatecorporation’s

shares and having complete control

overthecorporation.

ThecourtfoundthatBradleyhad

methis legalobligationstoYuliya

because she had received more than

one-half of the total family assets and

would receive monthly income that

was tantamount to spousal and child

support.Italsonotedthatshewas

young, and because her children were

in school, she had the opportunity to

pursueacareer. Itconcludedthat

Bradleyhadestablishedtheestateplan

and the trusts to secure income that

was adequate to serve the ongoing

needs of his wife and children, includ-

ing their future educational needs, and

that these should be protected against

anyincursionbyathirdparty.

In balancing the interests of tes-

tamentary autonomy with the need

to provide economic protection to

surviving family members, the court

indicated that community standards

dictatedthatYuliyashouldbeableto

makealifeforherselffreelyandinde-

pendently.Therefore,itdirectedthat

Yuliyawouldcontrolanypropertyheld

in the spousal trust, with the exception

of the preferred shares in the private

corporation, noting that it would not

be wise to remove control of the pre-

ferred shares from the trustee since the

majority of the voting shares were held

forthechildren.Thepreferredshares

weretoremaininthecontrolofBrad-

ley’sfather,whowascontinuingtorun

thecorporation.

The result in this case is interest-

ing, not only because it amends what

appears to be a well thought out estate

plan put in place by the deceased with

specified trusts providing sufficient

income to the beneficiaries, but also

because it exempts a spousal trust and

splits its assets into those controlled by

the spouse and those controlled by the

father.

DISCRETIONISNOTUNFETTERED:BINNINGHOUSEANDFRAUDON APOWER

aNDrEa E. FrISBy

Associate, Legacy Tax + Trust

Lawyers; Student Member,

STEP Vancouver

KaTE S. MarPLES, TEP

Principal, Legacy Tax + Trust

Lawyers; Member, STEP Vancouver

The recent case of TLC The Land Conser-

vancy of British Columbia v. The Univer-

sity of British Columbia,2014BCCA473,

hascapturedtheimaginationofBritish

Columbians as a result of its subject

matter,whichinvolvesawell-known

heritagepropertycalled“theBinning

house,” and its focus on the competing

concernsofinsolvencyandtrustlaw.

TheBritishColumbiaCourtofAppeal

applied the equitable doctrine of fraud

on a power in a forceful decision that

upholds the following principles: a

trustee who deliberately uses a power

in a will to benefit non-objects rather

than objects is committing a fraud on

apower;goodfaithbythetrusteeisno

defencetosuchaclaim;andatransfer

that is made as a result of a fraud on a

powerisvoid.

Underthetermsofherwill,Mrs.Bin-

ningexpressedthewishthattheBin-

ning house be preserved and that, if it

was “feasible and practical,” her trust-

ees establish a foundation or other

organization to “hold, maintain and

use”theBinninghouse.Ifthetrustees

determined that it was not feasible or


practical for the foundation to hold the

Binninghouse,thewillprovidedthat

theBinninghouseshouldbesold,and

the proceeds should be given to the

UniversityofBritishColumbia(UBC)to

beaddedtotheB.C.Binningmemor-

ial fellowship fund, a scholarship fund

thatMrs.Binninghadestablishedafter

herlatehusband’sdeath.

The executors of the will and the

trustees of the estate considered

sellingtheBinninghousesinceat

thetimeofMrs.Binning’sdeaththe

estate lackedthe fundsthatwere

necessarytorealizethefoundation.At

thistime,theybecameawareofTLC

TheLandConservancyofBritishCol-

umbia(TLC),anon-profitcharitywith

a mandate to preserve and protect

historicpropertiesforthepublic;TLC

had expressed an interest in acquiring

theBinninghouse.However,when

the trustees initially sought legal

advice regarding the practicality of

transferringtheBinninghousetoTLC

to be maintained and preserved, they

were advised that under the terms of

the will they were empowered only

totransfertheBinninghousetothe

foundation established by the trust-

ees to be held subject to the restric-

tionssetoutinthewill.

OnJuly3,2008,thetrusteesincor-

porated the foundation in the form of

theBinningHeritagePropertySociety,

with two of the trustees and one repre-

sentativeofTLCastheinitialdirectors

andofficers.Thetrusteesresignedas

directors and officers on September

15,2008andwerereplacedbytwoTLC

employees.OnOctober16,2008,title

totheBinninghousewastransferred

from the trustees to the foundation and

immediately thereafter from the foun-

dationtoTLC.Bydeedofgift,thefoun-

dationgavetheBinninghousetoTLC.

Thus,atransferoftheBinninghouse

toTLC,whichcouldnotbeachieved

directly,wasachievedindirectly.

Intheinterveningyearsfrom2008

to2013,TLCheldtitletotheBinning

house.However,inOctober2013,as

a result of financial circumstances,

it entered into a formal restructur-

ing proposal under the Companies’

Creditors Arrangement Act(CCAA).On

October28,2013,TLCreceivedan

unsolicitedoffertopurchasetheBin-

ninghouseforthepriceof$1,600,000.

UndertheCCAAprocess,TLCsought

court approval for the use of the sale

proceeds as operating funds for

therestructuring.Atthistime,UBC

became aware of the pending sale of

theBinninghouseandadvancedthe

positionthatthetransferoftheBin-

ninghousefromthefoundationtoTLC

hadbeenafraudonapowersinceTLC

wasanon-objectunderthewill.UBC

asserted its right as the beneficiary of

the proceeds of sale under the terms

of the will, although it did not object

totheproposedsale.

The trust law argument was heard

by a chambers judge in the context of

theprotectiveCCAAprocess.Inthis

process, a court focuses on assisting

an insolvent company in restructuring

its affairs for the benefit of its ongoing

businessanditscreditors.However,

this meant that the equitable argu-

ment concerning a fraud on a power

was subjugated to the practical pres-

sures of proceeding with an insolvency

plan.Nevertheless,theCourtofAppeal

held that the trust law argument was

fundamental in determining who was

rightfully the recipient of the potential

proceedsofsaleoftheBinninghouse.

It determined that the transfer of the

Binninghouseviathefoundationto

TLCmustbeexaminedinrelationto

the equitable principle of fraud on a

power.

Initsdecision,theCourtofAppeal

reviewed two leading commonwealth

cases concerning fraud on a power

(Wong v. Burt,[2004]NZCA174,and

Kain v. Hutton,[2008]NZSC61)and

adopted the two basic elements of a

fraud on a power that are set out in the

second edition of Thomas on Powers

(Oxford:OxfordUniversityPress,

2012,atparagraph9.02).Theseele-

mentsareasfollows:(1)“adisposition

beyond the scope of the power by the

donee, whose position is referable to

the terms, express or implied, of the

instrument creating the power” and

(2) “a deliberate breach of the implied

obligation not to exercise that power

foranulteriorpurpose.”Inrelationto

the first element, the court interpreted

the terms of the will and determined

thatthedispositionoftheBinning

house to a non-object was beyond the

scope of the power given to the trust-

eesunderthewill.Inrelationtothe

second element, the court held that

the trustees had deliberately used the

power in the will for an ulterior pur-

pose.Thecourtconfirmedthecham-

bersjudge’sfindingthatthetrustees

had acted in good faith, but it deter-

mined that good faith is not a defence

toaclaimoffraudonapower.

The factual outcome of the case is

that the historic building was effect-

ively returned to the estate because

the transfer constituted a fraud on a

powerandwasthereforevoid.The

jurisprudential outcome of the case

is a substantial appellate statement

about fraud on a power that supports

theprinciplethatatrustee’sdiscretion

is not unfettered, but rather is tied to

the content and intention of the instru-

mentthatempowersthetrustee.n


IaN WorLaND

Happy new year!Thankstoourmanyvolunteersandsupporters,2014wasaverysuccessfulyearforSTEPCanada.We were able to exceed our goals and expand our services to members because of the generosity and commitment of

somanyofyou.Onbehalfoftheboardofdirectors,Iwishyouanewyearfilledwithpeace,joy,andsuccessinyourendeavours. ThenewyearbringsanewlookforSTEP.Internationally,STEP is rolling out a new logo designed to represent us as a pro-fessional,international,andoutward-facingorganization.Thephrase “advising families across generations” has been added toourlogotoproclaimthecorevaluesofSTEP.Wewillgraduallychange the branding on all of our products to reflect the new logooverthecomingmonths. Thenewyearalsobringsnewdevelopments.OnJanuary28,weofficiallylaunchedourthirdregionalchapter.ThankstotheinauguralchairofSTEPSaskatchewan,BeatyBeaubier,andExecutiveCommitteemembers,ShawnBaier,PinaMelchionna,CrystalTaylor,andTonyBanik,fortheirdedicationanddrive,which will greatly enhance the membership experience in this newregion.Iattendedthechapter’slaunch,alongwith120otherpractitioners. ThefirstofthreecoursesinSTEPCanada’scertificateinestateandtrustadministration(CETA)programwaslaunchedonscheduleinmid-November.ManyCETAstudentsfromtrustcompanies,aswell as law and accounting firms, are enjoying the robust new online learningprogram.IencourageallmemberstoconsidertheCETAcourseaspartofyourorganization’sprofessionaldevelopmentplanfor the administrators and the professionals who surround and sup-portSTEPmembersinvariousroles.Pleasevisitwww.step.catoviewthecourseobjectivesandcurriculum.Also,pleasenotethatthecourseswillincludeQuebecCivilCodecontent.Toaccommo-date our francophone audience and to fully support the national organizationsthathavemadetheCETAprogramarequirementfortheir estate and trust administrators and professionals, our entire programwilleventuallybetranslatedintoFrench. Students in our Diploma program wrote their examinations onNovember24,andanother33studentshavenowsuccess-fullycompletedtheprogram.Providedthattheyhaveaccu-mulated the necessary industry experience, these students will be invited to apply for the trust and estate practitioner (TEP) designationandforfullmembershipinSTEPearlyintheyear. AsthenationalteamcontinuesitsefforttomeetwiththebranchesandchaptersthatmakeupSTEPCanada,theExecutiveCommitteewilltraveltoHalifaxtomeetwiththeSTEPAtlanticExecutiveCommitteeandlocalmembersinMarch.ThismeetingwillprecedetheregularMarchnationalboardmeeting,whichtakesplacebymeansofaconferencecall. IsincerelythankallmembersfortheircontinuedsupportandmembershipinSTEPCanada.Wenowhaveover2,100TEPsand

studentsstudyingfortheirTEPdesignation.Thisgrowthcon-firmsthattheeducation,events,networkingopportunities,andextraordinary efforts of our committees are relevant and valuable forourmembers.InMarch,allmemberswillreceivetheirannualmembershiprenewalpackages,andIencourageyoutoreturnyourrenewalnoticewithpaymentbeforeApril1toensurethatyourmembershipremainsingoodstanding. AsIwroteinmylastmessage,our17thnationalconferencewillbeheldonJune18and19,attheMetroTorontoConventionCentre;pleasemarkyourcalendars.TheProgramCommittee,ledbyRachelBlumenfeld,BrianCohen,andChristineVanCauwen-berghe,hasbeenworkingdiligentlytodesignanotherwonder-fulprogram.WithBillC-43receivingroyalassentonDecember17,thecommitteeisincludingaseriesofsessionstoaddressthislegislation, its impact on personal planning, and its effect on busi-nesssuccessionandcorporateplanning.ThemuchanticipatedpreliminaryprogramisdueforreleaseinearlyFebruary.Watchfortheearly-birdregistrationofferthatwillcomewithit. Lookingbackattheactivitiesandeventsofthepastfewmonths, I must compliment STEP Worldwide for its flawless plan-ning and execution of the first worldwide congress, which was heldinNovemberinMiami.ThenationalboardofSTEPCanadatravelledtoMiamitoattendthecongressandhelditsregularin-personNovembermeetingthere;italsohostedaverysuc-cessful joint event that brought the executives of STEP Canada andSTEPUSAtogether. TheTrustandEstateTechnicalCommittee’s2014prioritycontinuesinto2015:encouragingprovincialbranchestoreviewtheUniformLawConferenceofCanada’sUniform Trustee Act and considerhowitmightbepromotedineachjurisdiction.Thecom-mitteerecentlycirculatedasurveyonbankingprotocolstoallmembers. OnNovember14,theTaxTechnicalCommittee(TTC)pro-ducedawell-attendedwebcastabouttheOctober2014legislativeproposalsbytheDepartmentofFinance.Thepanel,madeupofPamelaCross,LisaHeddema,andAngelaRoss,deliveredanote-worthy presentation that contained technical information with whichallmembersshouldfamiliarizethemselves.Aspredictedinthewebcast,BillC-43receivedroyalassentonDecember17.Memberscanpurchasethearchivedwebcastfromwww.step.ca. TheTTCwasaskedbytheOntarioMinistryofFinanceforasubmissionconcerningthedraftEstateAdministrationTaxReg-ulations,guide,andformofreturn.ThissubmissionwassenttoDanMichaud,directoroftheAdvisoryandComplianceBranchoftheMinistryofFinanceandsharedwithSTEPmembersonDecember18inaneNewscommunication. OnbehalfoftheSTEPCanadaExecutiveCommittee,madeupofDeputyChairsTimGrieveandRuthMarch,TreasurerChris Ireland, and Secretary Pamela Cross, in addition to board members, past chairs, my colleagues at STEP Worldwide, and the dedicated professional team at the STEP Canada national office,Ithankeveryonewhoismakingpositivechangesinhisorherregion;servingonvariouslocal,regional,andnationalcommittees;andspreadingthenewsaboutSTEP.Youreffortsare very much appreciated and greatly enhance the strength andvitalityofourorganization.n

Documents

Changes to the Taxation of Estates and Testamentary Trusts · Changes to the Taxation of Estates and Testamentary Trusts ... alter ego trusts, joint spousal trusts, ... 4 STEP Inside