Common Estate and Tax Planning Issues

Over the years, I have reviewed many individuals’ financial affairs. Most people have their affairs somewhat in order, but there are typically still some issues to be considered or holes to be filled. Today, I list some of the most common issues and gaps.

Estate Issues

The most common estate planning issues I have observed relate to wills, powers of attorney, estate documentation and insurance. I discuss these below.

 

Wills

Wills always seem to have multiple issues and errors of omission when I review them. These five are the most common:

1. No Secondary Will – Depending upon your province of residence, a secondary will can be used to reduce the probate taxes due upon your death. This would most typically apply to shares you own in private companies and other personal items. It is my understanding that Ontario and British Columbia are the two main provinces where secondary wills are used, so check-in with your advisor if you live in a province other than Ontario or B.C.

2. Old or Dead Executors - As many people do not update their wills on a regular basis, I have often found their executors have passed away or they are very old (if your children are not your executors). You may want to review your executor selection and ensure you have at least one “youngish” executor.

3. All the Children are Executors – Keeping with the executor theme, many people have all their children as executors. I suggest that if you can finesse this with your children, in some cases it is better to only have one or two of your financial savvy children as executors, to avoid the estate being bogged down. This is not always practical given family dynamics, but is more efficient and can often reduce sibling friction.

4. Individual Bequests are Missing – Estate lawyer Charles Ticker notes in his book “Bobby Gets Bubkes: Navigating the Sibling Estate Fight that one of the biggest issues children have post-mortem, is where a parent had promised a child a certain personal item, be it jewelry, art, purse etc. and it is not reflected in the will. Parents, make your will consistent with your promises.

5. Blended Family Issues – Blended family issues can be so complicated, there is sometimes “paralysis by analysis” and they are just ignored. In this blog post I wrote in June 2020, I note that estate planning is complicated enough in a first marriage; second or third marriages multiply the risks and complexity. You may want to read the wills and estate planning sections of this blog post on blended families.

Powers Of Attorney

The two most common issues I come across with Powers of Attorney "(POA) are:

1. They are often not done!

2. The personal healthcare POA is out of date and does not reflect the significant health care issues that should be considered from extraordinary health measures to mental capacity (see this blog post) to assisted death.

Estate not Documented

I have seen many estates with no documentation in respect to the assets that constitute the estate and where the assets are located. I wrote about this a couple weeks ago, so I will not re-iterate. Here is the link to the blog post.

Insurance

Most people dislike paying insurance. However, parents often have family legacy assets they wish to keep in the family such as cottages, rental properties, family businesses etc. I have seen several instances where these legacy assets must be sold by the estate or to keep these assets in the family, excess taxes are paid as a work around solution. Often, life insurance, typically permanent insurance, such as Universal or Whole life would have made financial and tax sense and emotional sense (where the parent wanted a legacy asset to remain in the family).

I discuss many other uses of insurance for estate planning purposes in this blog post including the most popular, being life insurance to cover an estate tax liability on death.

Income Tax Issues

Capital Dividend Account

The capital dividend account (“CDA”) is a cumulative tax account that tracks certain amounts (most commonly the non-taxable portion of capital gains) that are not taxable to a Canadian Private Corporation and may be distributed tax-free to the company’s shareholders. See this detailed blog post I wrote on the subject.

Over the years, I have often seen this account not tracked or overlooked. A brief discussion of your corporation’s CDA balance should be part of your annual discussion with your accountant to ensure that you are not leaving any tax-free money on the table.

Charitable Donation Tax Efficiency

I have written several times (the last time being this blog) that many people do not maximize the tax benefits of their donations. If you plan to make a charitable donation and you own marketable securities with unrealized capital gains, it is far more tax-efficient to donate the securities in lieu of cash. This is because the capital gain on the security is not subject to tax when donated. For example, if you own shares of Bell Canada with a cost of $1,000 and a fair market value of $5,000, you would have to pay capital gains tax on the $4,000 capital gain when sold. However, if you donate the shares, the capital gain is deemed to be nil and you still get the donation tax credit.

Where you have a corporation and own marketable securities, it is even more tax-efficient to make a corporate donation, as the capital gain is eliminated and the capital gain gets added to the CDA account discussed above.

Unfunded TFSA

I find it very surprising how many people still have unfunded or partially funded Tax-Free Savings Accounts (“TFSAs”). These accounts allow you to grow your money tax-free and provide substantial flexibility in using and replenishing the account.

In the early days of TFSAs, the contribution limits were not large and people did not want the hassle of opening the account. However, as of Jan 1, 2022, the contribution limit for a TFSA is now $81,500. So, if you have not contributed, get going. If you have contributed haphazardly, check your balance with the CRA and get caught-up.

Capital Loss Utilization

I often see people pay tax on capital gains that is unnecessary, as they could have sold securities that had unrealized losses to reduce the gain and the related tax.

As 2022 has been a tough year in the markets, you may want to undertake some tax-loss selling before the end of the year. I will have my annual tax-loss selling blog in a couple weeks which is very detailed to assist in your tax-loss selling planning.

Estate Freeze

As per my blog Estate Freeze -A Tax Solution for the Succession of a Small Business undertaking an estate freeze in the right circumstances is often a great way to defer a families tax liability to the next generation. However, not everyone agrees as per this blog Are Estate Freezes the Wrong Solution for Family Business Succession?

I am a proponent of using an estate freeze where it fits a families needs. Over the last two years I have seen three estates that caused tax havoc for families that could easily have been minimized with an estate freeze several years ago.

Hopefully you and your advisors have already considered most of the issues discussed above. If not, you may wish to “clean-up” any holes in your planning and ensure the efficiency of your estate and tax planning.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation. Please note the blog post is time sensitive and subject to changes in legislation or law.

Gifting and Leaving Money to Your Grandchild (Part 2)

My previous blog post discussed the concept of  deemed dispositions when making gifts to grandchildren while alive and upon death. It also covered the issues of income attribution and ensuring family law is considered when making or providing for gifts. 

Today, I discuss gifting by grandparents using a Registered Education Savings Plan (RESP), Tax-Free Savings Account (TFSA), or Registered Retirement Savings Plan (RRSP). I also briefly discuss estate planning considerations for grandparents.

RESPs

RESPs are great vehicles to save for a grandchild’s education. A grandparent can contribute under their own plan for a grandchild, but it is very important for the grandparent to ensure they are not duplicating contributions made by the child’s parents.

If both a grandparent and parent have plans for a child, they must coordinate their contributions on a yearly basis. If the grandparent intends to make the annual contribution, the child's parents may not even want to bother opening a RESP for that child. Alternatively, the grandparent can just gift the yearly contribution to the parent, who then puts the money into the RESP they have set up for the child.

RESPs upon the death of a grandparent

If a grandparent (subscriber) dies, things can get very complex and deserve their own blog post.

However, here are two key things to consider in your estate planning:

1. Ensuring you have a successor subscriber so the plan can continue, or the RESP may become part of your estate.
2. A clause in your will setting out your intentions for the RESP, including whether you wish to have your estate continue making the RESP contributions.

Takeaway #1 – If you set up a RESP for your grandchild, ensure their parents don’t already have a plan. If they do have a RESP, communicate each year with them. Ensure your estate planning considers the RESP.

TFSAs

TFSAs are a great tax-free option to help your grandchildren (who are 18 or over) save for education, a house, a car, vacation or even retirement (if they can look that far ahead). 

Care should be taken to ensure you do not over-contribute to the TFSA, as penalties will apply.

TFSAs are far simpler than RESPs when giving money to a grandchild. The TFSA is set up in your grandchild’s name, so you don’t have the estate concerns you have as an RESP subscriber; however, you should not make direct contributions (you should gift the money to your grandchild to contribute), and you have no control over the TFSA and what your grandchild does with the money in their TFSA. If they wanted to, they could cash in the TFSA and travel the world - and you would have no say.

A grandparent does not require a clause in their will to deal with the TFSA. A grandparent could have a clause in their will to have their estate continue making yearly gifts equal to the TFSA contribution limit.

Takeaway #2 – Gifts to fund a TFSA for a child 18 and over are tax efficient and a great way to assist them in funding their education, home purchase or retirement savings. Just be aware, they can decide to use the money for a fancy sports car or vacation and you have no say in the matter.

RRSPs

For grandparents making gifts to grandchildren, an RRSP is like a TFSA in that it is set up in the grandchild’s name, the grandparent has no control over the RRSP. A gift for a RRSP should be on the understanding the grandchild will not touch the money until their retirement. But a grandparent has no way to enforce this.

RRSPs can be set up at any age, as long as the child has earned income and a social insurance number. Practically, there is limited tax savings value in an RRSP when a child has minimal taxable income (although there is a tax-deferred component and it can assist in teaching a grandchild about saving for retirement). A TFSA is often the better choice if you plan to gift $6,000 a year or less to your grandchild.

If you intend to gift more than $6,000 (assuming the first $6,000 goes to a TFSA), an RRSP contribution can be made equal to your grandchild’s RRSP contribution limit. It often makes sense for the grandchild to not claim an RRSP deduction until their income is higher and carry forward the contribution until they can obtain a larger tax refund. In any case, the RRSP money grows tax-free.

The grandparent and child need to ensure they do not exceed the child’s RRSP contribution limit, or penalties may apply.

Grandparent gifting to RRSP: Example

An example may help clarify the above.

Say a child works part-time, is over 18 (so has no attribution concerns) and makes $15,000 to $20,000 a year. The child’s RRSP contribution room is 18% of their annual income, so let’s say $3,000 a year for simplicity's sake (they may also have contribution room from prior years). The grandparent gives the grandchild $3,000 a year for five years to contribute to their RRSP while the child is in university. There would likely be little to no tax refund if the RRSP contribution is claimed each year while the grandchild is in school, due to tuition credits. 

But if the grandchild works full-time in the year after graduation and makes, say, $60,000, they could claim the RRSP carryforward deduction in Year 6 and obtain a refund – likely somewhere in the $4,000 to $5,000 range, while getting the tax-free growth on their RRSP assets from Day 1.

Takeaway #3 – Gifting money for a grandchild’s RRSP will typically be your last option (likely better to gift to RESP or TFSA).

Your will

A will is best discussed with an estate specialist. I will just provide a few considerations:

1. If you are leaving money to your grandchildren in your will, ensure you consider additional grandchildren that could be born after you draft your will or even after you pass away.
2. Is the bequest going to be outright or in trust? You may wish an outright gift for smaller bequests and if the grandchildren are older. If the grandchildren are younger or the bequest is large, a trust (a formal properly executed trust) will likely provide greater protection from the whims of an immature child.
3. Most legal writers suggest grandparents consider their own children’s financial circumstances, as you do not want to skip a generation from your children to your grandchildren when your own children may need the money and unintentionally create resentment with their own children.
4. At what age do you want your grandchildren to have access to the inheritance?

Takeaway #4 – There are multiple trips and traps in leaving bequests to your grandchildren. It is imperative you have an experienced estate lawyer draft your will if you are leaving substantial assets to your grandchildren.

I am finally done, and now I’ll catch my breath. Somehow one brief blog turned into two parts and almost 2,000 words. But long-time readers will not be surprised, I have never been one to buy into the conventional wisdom of keeping everything short because people have short attention spans. Anyways, stepping off my soapbox, grandparents: please consider the various issues I have discussed when considering gifts and bequests to your grandchildren.

The content on this blog has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The blog cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information on this blog or for any decision based on it.

Please note the blog posts are time sensitive and subject to changes in legislation.

BDO Canada LLP, a Canadian limited liability partnership, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms.

Why Can’t People Get Their Financial Affairs in Order?

Over the last year I have met several potential client's for BDO’s Wealth Advisory Services (from both inside and outside BDO). In two specific cases, the meetings went well, and as I often do; I undertook some initial basic discovery about the prospective client’s financial affairs and personal objectives, among other things.

In both these cases, the individuals were either in the midst of selling a business or had sold their business for millions. I thus suggested they may wish to update their wills to reflect their change (or upcoming change) in financial circumstances.

I was shocked that each of the potential clients sheepishly answered they did not have wills to update. I was astonished that these highly sophisticated business people did not have wills. (I know what you’re thinking: Mark, you’ve written on this issue numerous times, like this post on Canadians not writing wills and this one on famous people who had no will, why can't you give this a break. But let just say I sometimes figure if I keep hoping, things will change - sort of like the Maple Leafs prolonged Cup drought).

The excuses

I asked the two individuals, why they had no will. One said it has been on their to-do list for several years and with the sale about to happen it will now move up the list. The other answer had something to do with bad karma in writing a will.

It seems to me that Canadians do not make wills for the following reasons (there are far more, but I will stick with five):

1. We love to procrastinate
2. It is a bad omen to make a will
3. “I am young, so I don’t need to”
4. People aren’t sure how they wish to distribute their estate
5. Some people are oblivious about the impact on their family (dying without a will leaves a mess for the surviving spouse, children, and executors to clean up an estate)

Has your business advisor harassed you to draft a will?

I remember thinking how Prince’s team of advisors could ever have allowed him to not have a will when I wrote the post on famous people dying without a will. When meeting the two people above, I wondered: had their advisors not spoken to them about this topic?

I think many advisors do ask their clients about their personal affairs, including their wills, but may give up when no action is taken or just keep reminding and harassing them to no avail. But I also think many advisors get caught up assisting their clients with their business affairs and often do not connect the business and personal sides. This is why I really like my wealth advisory gig: I get to connect these two aspects and integrate a client’s business, personal, retirement and estate planning into one.

I know many advisors read this blog, so advisors, at your next meeting with any client, circle back on what happens if they die (if you do not have an advisor, have this conversation with yourself :). Make sure they have these basics covered:

1. Will and a secondary will for their corporate interests if their province allows
2. Power of attorney for finances
3. Power of attorney for personal care (medical)
4. Insurance in case of death

I am not letting you off easy

If you are reading this and don’t have a will, powers of attorney or life insurance on your life to support your family if you pass away, you need to get over whichever one of the five hang-ups you have for not dealing with these matters and consider the mess you will leave your family without a will or any of the other key items. Do it for them—today, this week or this month; not “sometime before year-end."

The content on this blog has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The blog cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information on this blog or for any decision based on it.

Please note the blog posts are time sensitive and subject to changes in legislation.

BDO Canada LLP, a Canadian limited liability partnership, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms.

The Top 10 Estate Planning Mistakes

I think it is fair to suggest, that most of us wish to plan our estates to minimize any income tax and probate fees owing upon our passing. Yet, many of us do not seek professional assistance to deal with the various technical income tax, probate planning and "soft family" issues that must be considered when dealing with our estates.  As such, we often end-up eroding our estates because of unanticipated tax obligations and significant legal costs when family members litigate the estate. Today, Neil Milton an estates expert discusses the Top 10 Estate Planning Mistakes he observes in his practice.

The Top 10 Estate Planning Mistakes

By Neil Milton

There are many widely held myths and misconceptions about wills, probate and estates. These myths and misconceptions lead to estate planning mistakes. These mistakes can cause a lot of damage – both to your wallet and to relationships with family members. In this blog we have gathered 10 of most common and yet easily avoided estate planning mistakes.

1. Not Having a Will

The rules for how an estate is divided in Ontario when there is no will (intestate succession) can have some shocking consequences. Remarkably few people are aware that if you die without a will:

• Your common law spouse inherits nothing. Zero. (They might have a claim for support, but that is a very different thing).

• If you are separated but not divorced from a spouse, your legally married, they will inherit the bulk of your estate (The first $200k + a healthy chunk thereafter).

• If you are legally married and not divorced, your parents and siblings get nothing.

• If you have ‘step children’ that you have not legally adopted, they get nothing.

Everyone adult should have a will. If you do not have a will, get one now (74% of Canadians do not have an up-to-date will).

2. Do It Yourself Wills

Sure you can save $500 by doing your own will, but that does not mean you should. You can also do your own dental surgery. For both wills and dental work, the results of DIY are rarely satisfactory and often very expensive to fix.

3. Joint Accounts to Avoid Probate Tax

Do not put your investments or bank accounts in the name of one of your adult children to avoid probate tax without proper advice. You may save probate, but you may trigger significant income tax consequences. In addition, you may create a lot of grief and legal fees to fix the mess where the child whose name you put on the account, claims it for their own and the other children sue.

4. Joint Ownership of Houses to Avoid Probate Tax

Do not put one of your adult children on title to your house (“joint tenancy”) to avoid probate tax without very careful proper planning and documentation. You can create income tax issues and unless you document in writing your intention to give the house as a gift to that child to the exclusion of your other children, you do not save probate tax and you create lots of misery and a legal fee bonanza.

5. Assuming Your children get Along

Do your children really get along? Are they really facing similar financial circumstances and stresses? Many children have serious issues with their siblings. Do not assume that just because they are your children that they trust or work well with each other. This is particularly relevant to your choice of executor.



6. Choosing an Executor who is Not Up to the Job

Being an executor is a difficult job, not an honour. Good executors are a rare breed. They are prudent but decisive, can handle conflict (especially among beneficiaries), are attentive to detail, communicate well, are financially savvy, enjoy accounting and taxes, and must complete, send and receive many letters and forms. An ideal executor is tech savvy, and can scan, print, and email at will.

Your favourite caregiver may be a wonderful person, but that does not mean they will be a good executor. Being an executor is a hard job and you should provide for reasonable compensation (“pay peanuts, get monkeys” applies here). Also consider aging – your executor must be able to perform when the time comes, which may be a long time from now. At the very least, you should have an alternate if the primary choice is unable to act.

I strongly recommend that you consider using a professional to handle this complex job at a pre-agreed fair rate of compensation (which does not have to be a flat 5%).

See Mark's post on the duties of being named an executor for more information.

7. Putting Your Executor in a Conflict of Interest

Enormous trust is placed in an executor, and it is very difficult to force an executor to act at all or decently. If you do not trust someone absolutely to behave quickly, properly and fairly as between all beneficiaries, do not appoint them at all. Too many executors have massive conflicts of interest between their interests and the interests of other beneficiaries, and these conflicts were created by the testator.

For instance, if one child lives with you in your home, and you name that child your executor, they have a clear conflict between their desire to stay in the house as long as they can and to avoid paying rent, versus their obligation to sell the home and distribute the estate. It is unfair to them and the other beneficiaries to put them in this awkward spot – choose an executor without a conflict of interest.

8. Hedging Your Bets With Multiple Executors

Being an executor is a hard enough job without having to chase a co-executor for approval and signatures on everything. In most cases you should choose one person as your primary executor, and name an alternate. Do not name co-executors because you don’t trust one or you are too indecisive to choose between them.

9. Not Thinking Gifts Through or Keeping Them up to Date

Just because someone is your child does not mean that they will outlive you. You need to plan for contingencies. Similarly, if you appoint someone a trustee of funds for a minor child, make sure that they are willing and able to handle the task, and will be able to for the duration of the trust – if a trust for a child might last 20+ years, do not name someone who is already in their 70s as the trustee.

10. Not Giving Enough Away Sooner or to Charity

Gifts of things or experiences to your loved ones (to support their education, or travel for instance) while you are alive often have a much bigger impact on the recipients than lump sums of cash when you pass away (See Mark's blog post on Family Vacations. Meaningful gifts to mark milestones like graduation often get remembered much longer than cash inheritances. See Mark's blog post on Family Vacations for how meaningful and fulfilling a family vacation can be.

Even modest gifts to charity can have a big impact on the intended charity. Gifts to charity teach your values to your family. Also, a gift to a charity can create a legacy that is shared among your survivors giving them a common bond and remembrance of you that the same amount of cash, divided among them as inheritance, can never have. Lastly, there are tax benefits for gifts to charity.

Estate law is complex because life is complex. There are often many options, and choosing the options that are best for you and your family depends on your unique circumstances. We strongly recommend that you get advice from an expert in the field who can help you weigh the options, choose a desired outcome, and get there efficiently.

Neil Milton is an experienced estates lawyer who advises estate trustees (executors) and beneficiaries on all aspects of probate, guardianship, and estate administration, and helps resolve estate-related disputes. Miltons Estates Law has offices serves clients across Ontario from offices in Ottawa and Toronto, and provides a wealth of free information and eBooks on its website www.ontario-probate.ca. Feel free to contact Neil directly at nmilton@miltonsip.com or 1.866-297-1179 ext 224

Please note that this post is based on Ontario law. If you live outside of Ontario, it is strongly recommended that you consult with an estates lawyer licensed to practice in your province.

The above blog post is for general information purposes only and does not constitute legal or other professional advice or an opinion of any kind. Readers are advised to seek specific legal advice regarding any specific legal issues.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation.

Estate Planning and the Black Sheep Child

In November, Adam Mayers of The Toronto Star reviewed my book, Let’s Get Blunt About Your Financial Affairs. In his article, he discussed some of the comments I made in my book on inheritances.

123 REF-Tomas Marek

My observations elicited some very interesting emails to my inbox. Some of the emails provided tragic and sad details of children being left out of their parents' lives and consequently their wills for various reasons. One reader, who is gay, asked me if he could be left out of a will solely for that reason.

This question is far outside my area of expertise. I thus enlisted my wills, trusts and estates expert Katy Basi, to answer his question and discuss in general, the consequences from both the parents and child's perspective, of leaving a black sheep child out of the will.

Please note: Katy and I use the term "black sheep" colloquially and the term is not meant to be demeaning in any manner.

Estate Planning and the Black Sheep Child

By Katy Basi

Many families have one (or more) black sheep children, and estates lawyers commonly deal with two categories of questions regarding these shunned family members. In this blog post I will refer to our sample unfortunate as Cain (though most black sheep are not guilty of fratricide!). The two situations are as follows:

1. If the client is not Cain - can I cut Cain out of my will? If I do, will he be able to challenge my will? 
2. If the client is Cain – can my family members cut me out of their wills?

The Parent is the Client

If you plan to cut Cain out of your estate plan, I typically have three pieces of advice for my clients:

(1) Explain in the will why Cain is being treated differently than other family members of the same degree of family connection. For example, if a child is being cut out of a will because they have chosen not to have contact with their parents for two decades, the will should state that very relevant fact. Otherwise, Cain could argue that the lawyer made a drafting error by leaving him out, or this omission could be used as evidence of the parents’ lack of capacity to make the will(s) in question (i.e. the argument then goes “Clearly the fact that they “forgot about me” indicates that they had lost their marbles!”).

(2) Consider leaving a set dollar value legacy to Cain, and then having a clause that takes the legacy away if Cain challenges the will for a reason other than a valid interpretation issue. This is known as an “in terrorem” clause and needs to be very carefully drafted by an estates lawyer in order to be legally effective.

(3) Arrange for a capacity assessor to interview the testator before the will is signed (though not too far in advance of signing). The capacity assessor should then write a letter or report of some kind confirming that the testator has the capacity to make the will in question (presuming that this is the case, of course). This is particularly helpful if the testator is elderly or ill, or if there are any other factors which could lend strength to a “lack of capacity” argument by a disappointed beneficiary. I have seen a capacity assessment stop estate litigation in its tracks.

Cain is the Client

When I am advising Cain, my first piece of advice is to consult an estates litigator (I am an estates solicitor, and therefore a major part of my job, in my view, is to help clients plan their estates in such a way as to discourage litigation). After that disclaimer, my counsel generally flows along these lines:

(a) We are lucky (in my view) to have testamentary freedom in Ontario, subject to certain limitations (other provinces such as British Columbia have enacted laws limiting testamentary freedom to some extent).

(b) One exception to testamentary freedom is the ability of certain family members (e.g. minor and adult children, parents and siblings) to make a support claim against the estate. For example, if Cain is an adult child who was financially supported by his parents, and was not left a sufficient inheritance by them (as determined by a court) Cain may make a support claim against the estate. Support can include providing accommodation at lower than fair market value rent.

(c) Where no financial support has been provided, Cain’s usual recourse is to try to have the will that cuts him/her out declared invalid, usually on the basis of a lack of testamentary capacity (as alluded to above) or undue influence (e.g. “my sister pressured my mom into cutting me out of her will”).

(d) Either of these claims will require solid evidence to be successful in court.

(e) A successful will challenge is not helpful if the prior will also cuts out the challenger, presuming that the prior will is valid.

(f) While in the old days most of the costs associated with estate litigation were borne by the estate in question, the courts have shifted their approach in recent years. These days, courts do not hesitate to order an unsuccessful will challenger to pay, not only their own costs, but also the costs of the estate relating to the challenge. Litigation is very, very expensive and time-consuming, so launching a will challenge due to feeling left out, without a good evidentiary case, is just not a good idea.

(g) However, if the will challenger has been cut out of the will for a reason that is against public policy, then litigation may be successful even if the testator had capacity and was not unduly influenced. If Cain can prove in court that he/she was cut out of an estate plan due to discrimination on a basis not permitted under the Charter of Rights and Freedoms, for example due to their sexuality, or because they married outside of his/her race/religion etc., then Cain may have a valid claim. The evidentiary mountain here can be steep to climb, but in a recent case the claimant was successful in overturning her father’s will on the basis that her father had cut her out as she had a mixed-race child. She was successful despite the fact that there was no reference to this discrimination under the terms of the will. There was, however, substantial external evidence as to the discriminatory reason behind her father’s estate plan.[Note: Just prior to the publication of this blog post, the decision of the lower court was overturned by the Ontario Court of Appeal, reinstating the father's original estate plan. It would be very helpful to have guidance from the Supreme Court of Canada regarding this issue if the daughter decides to ask for leave to appeal].

My discussions with clients about cutting out, or being, the black sheep tend to be fraught with sadness, anger and frustration. My experience is that clients do not cut out a black sheep lightly, and in many cases would usually be overjoyed to reconcile, knowing that there will need to be apologies and compromise on both sides. By the time I am counselling a black sheep about being cut out, it’s clear that no amount of litigation will heal the hurt feelings.

Bloggers Note: Katy has written numerous guest posts for this blog. Many of her articles have proven to be very popular with readers. If you want to read more from Katy, the best way to review her previous blog posts is: go to the search function on the top right hand side of the blog and type in her name.

Katy Basi is a barrister and solicitor with her own practice, focusing on wills, trusts, estates, and income tax law (including incorporation's and corporate restructurings). Katy practiced income tax law for many years with a large Toronto law firm, and therefore considers the income tax and probate tax implications of her clients' decisions. Please feel free to contact her directly at (905) 237-9299, or by email at katy@basilaw.com. More articles by Katy can be found at her website, basilaw.com.

The above blog post is for general information purposes only and does not constitute legal or other professional advice or an opinion of any kind. Readers are advised to seek specific legal advice regarding any specific legal issues.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation. Please note the blog post is time sensitive and subject to changes in legislation or law.

Recent Changes in Legislation Make Reviewing Your Will A Must

Tax changes that will become effective January 1, 2016, may have a harsh and surprising effect on your will and estate planning. To explain these new changes, I have a guest poster, Howard Kazdan, a tax expert with BDO Canada LLP.

Below, Howard highlights some of the more significant changes in the legislation.

Recent Changes in Legislation Make Reviewing Your Will A Must

By Howard Kazdan

 

The interaction of life’s two certainties – death and taxes – is about to get more complicated effective January 1, 2016, due to legislative changes to the taxation of trusts and estates that have been enacted. You may wish to review your will after considering the information discussed in today's post.

Change in tax rates for estates and testamentary trusts, except for Graduated Rate Estates ("GRE")

 

Currently, estates and testamentary trusts (i.e. trusts that are created by will upon death) are subject to tax at graduated tax rates. Under these old rules, you could set-up multiple trusts (generally for each child to control their inheritances) to be taxed at the lower graduated income tax rates.

Effective January 1, 2016 only a GRE will be eligible for graduated tax rates. The lower tax rates may only be available during the first thirty-six months of the estate if that period is required to settle the estate. All of the income in other estates and testamentary trusts will be taxed at the highest personal tax rate. Under the new rules, if you had set-up say 3 separate trusts for each of your children, all of them will be subject to the highest tax rate, as they will not be considered GRE’s (however, there may be non-tax reason for still creating multiple trusts, such as to protect against spendthrift children, protect assets for family law purposes and asset protection).

The administration of these new rules may also become challenging where you have multiple wills (some provinces allow for two wills, one for personal assets and one for assets that are not required to be probated) and have different executors, since all of the wills may make up one estate. If one component of the estate no longer qualifies as a GRE, the entire estate may no longer qualify, and therefore all income will be taxed at the highest marginal tax rate.

Finally, the availability of tax elections for income to be taxed in a trust at graduated rates, even if such income was paid or payable to a beneficiary will now be extremely limited.

To qualify as a GRE certain conditions must be met, which include: 

 

• The estate must arise as a consequence of death

• The determination time is within the first thirty-six months of the estate

• The executor must designate the estate as a GRE

• No other estate can be designated as a GRE

Other benefits that will only be available to a GRE also include:

• ability to maintain an off-calendar year end

• ability to avoid capital gains on taxation of donated securities

• no requirement to make tax installments

• ability to carry losses back to terminal return

• more flexibility for claiming tax credits in respect of donations made by will/bequests

Due to the significant benefits of qualifying as a GRE, it will be necessary to plan accordingly.

Change in taxation of Life Interest Trusts

 

These trusts are often used to provide an income stream to a surviving spouse during their lifetime with the residual assets being distributed to other beneficiaries after that individual dies.

For example, spousal trusts are common in a blended family where husband and wife were previously married and each has children from a previous marriage. The husband may have established a spousal trust in his will whereby his wife was to receive income during her lifetime, but his children from previous marriage will receive the capital of the trust after she dies, and her children from a previous marriage are the beneficiaries of her estate after she dies.

Currently, when the wife dies, there will be a deemed disposition of the assets of the trust at fair market value and any income arising from the deemed disposition will be taxed in the trust.

The new rules will shift the reporting of income arising in the final year before death of the wife, including income on the deemed disposition of the assets, to her final income tax return. Since the beneficiaries of her estate and the spousal trust are different, this will lead to inequitable results (estate beneficiaries will owe tax, but the trust beneficiaries will own the assets). If the Canada Revenue Agency is unable to collect this tax from the estate, then it will have the ability to demand payment of the tax from the trust beneficiaries.

Planning for Disabled Persons

 

The new rules provide for a Qualified Disability Trust (“QDT”) which can be established for a beneficiary that qualifies for the disability tax credit. A QDT will allow for the taxation of income at marginal tax rates during that beneficiary’s lifetime, provided all of the required conditions are met.

As the conditions are very complicated and potentially require elections, it is imperative to review any wills that have provisions for a disabled person in context of the new rules with your lawyer and accountant.

Charitable Bequests On Death

Currently, on death, donations in the will are included in the final tax return of the individual or in the prior year, not in the estate return. Under the new rules, the donation will be deemed to be made from the estate which may result in additional flexibility in claiming the donation tax credit if the estate qualifies as a GRE.

The new rules are very complex and it would be prudent for your accountant and/or lawyer to review your will and any current estates, testamentary trusts or other life interest trusts that you may be connected with as a trustee, executor or beneficiary because planning strategies previously anticipated may no longer be effective. Where it is possible to amend such documents, it may be advisable to do so. Where it is no longer possible to amend such documents then additional planning may be required to determine next steps.

Here is a link to an excellent BDO tax memo which you may also wish to read if you want more detail.

Howard Kazdan is a Senior Tax Manager with BDO Canada LLP. He can be reached at 905-946-5459 or by email at hkazdan@bdo.ca

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation.

Financial & Tax Planning for the Terminally Ill - Part 2

Last week I wrote about organizing your affairs should you unfortunately be diagnosed as terminally ill. Today I will discuss some financial and tax planning considerations if you have been given a finite period to live.

Probate Fees & Income Taxes

Upon death, your estate will be subject to probate fees (more properly called estate administration fees in Ontario) and income taxes.

In order to minimize your probate fees and/or income taxes, I recommend you obtain tax and/or legal advice.

Probate Planning

This type of planning is complex and if not properly executed, can lead to income tax and legal issues. I have set out below some of the considerations in respect of probate planning. Again, get advice before considering any of the following planning strategies:

Joint Tenancy

In order to avoid probate fees, many people transfer their assets into joint tenancy, with the right of survivorship. This means that upon the death of one of the joint tenants, the property passes to the other tenant automatically. The risk with this type of transfer is if the property is capital property (such as stocks or certain real estate) that has appreciated in value, the transfer (if to anyone other than your spouse) will create a deemed capital gain and income tax liability.

So for example: if you transfer 100 shares of Bell Canada that cost you $2,000, either directly or into joint tenancy with your son and those shares are worth $5,000 today, you will have to report a capital of $3,000 if transferred directly, or $1,500 if transferred into joint tenancy; even though you just transferred the shares and did not sell them on the open market.

Where you are terminally ill, the deemed disposition may not be as large an issue as for a healthy person since you may only be accelerating the income tax liability a few months or years. This deemed gain upon death is discussed in greater detail below.

If you transfer a bank account or stock into joint ownership with one of your children to help you manage your money while you are alive, that child becomes the sole owner of that account when you pass away. That child may consider the account is theirs even if that was not your intention and decide not to share it with the other siblings. This can lead to estate litigation, especially where your intention is not documented.

Gifting

Similar to the issue above with joint tenancy, when you gift property to someone other than a spouse there may be a deemed capital gain where the property has appreciated in value. Thus, if you wish to make a gift, you should consider gifting cash instead of property to avoid any income tax issues (be careful to ensure any gifts are consistent with your wishes in your will- i.e. if you split your estate equally with your three children in your will, the gift should be 1/3, 1/3,1/3, or you may need to amend your will). However, care must be taken to ensure you will not need that money to live on or pay medical bills during your illness. I suggest you only gift money you are absolutely sure you will not need to live on.

Consolidation of Accounts

Many of us have multiple bank accounts, investment accounts, RRSPs etc. If you are terminally ill it may make sense to consolidate these accounts into one or two accounts to simplify your executor’s life. You may also want to consider liquidating certain investments so your executor does not have to deal with these decisions. However, you need to consider the investment merits of liquidation versus the “ease of administration” issue.

Estate/Income Tax Planning

As a courtesy to your executor, gather up you prior tax returns and put them in a box or file cabinet and ensure you advise your executor where they are located. If you made a 1994 capital gains election (a special election for that year only, that allowed you to “bump” up the cost of certain capital property), provide a copy of that return.

Income Tax Smoothing

If you are terminally ill and have a finite period of time to live, from an income tax perspective, you will want to minimize your tax bill over the remainder or your life by smoothing your income as best as possible. Smoothing your income involves utilizing the lower marginal rates, rather than just the high rate on death. Typically this would be done by drawing on your RRSP or RRIF. This may have the secondary advantage of providing funds to live on.

Capital Gains

Upon death, if you do not leave your assets to your spouse or you are the last spouse to pass away, you have a deemed disposition of your assets at fair market value. See my blog on death and taxes for more details. You can utilize any capital losses against capital gains in the year of death and can carryback any excess capital losses for three years. In addition, where you cannot use all your capital losses on your terminal return, the losses are deductible against all income on your terminal return or the year proceeding death.

Purify capital gains exemption

The same deemed disposition rule holds true for shares in any private corporations you may own. As discussed in my blog “Corporate Small Business Owners: Beware; the Capital Gains Exemption is not a Gimme” shares you hold in a small business corporation may be offside the rules to claim the $800,000 Capital Gains Exemption (indexed to $813,600 in 2015) where you have significant cash and/or investments in your corporation. In order to meet the criteria to qualify for the capital gains exemption, it is often advisable to pay a dividend from the corporation to reduce the corporation’s cash and near cash assets. Where you have a terminal illness, it is imperative you review the status of your corporation with your accountant to ensure your company is onside the rules or is “purified” to qualify for the exemption.

Charitable Giving

Consideration should be given to any charitable contributions you wish to make upon death or while alive. Any donations made in the year of death are not subject to any limitations and are 100% deductible. The tax savings are worth approximately one-half of the actual contribution. The rules for donations made in your will were made more flexible in the 2014 budget.

Medical Expenses

Medical expenses qualify as a non-refundable tax credit. In the year of death, medical expenses may be claimed for any 24 month period including the date of the person's death, which were not claimed in a prior year. Sometimes you may wish to amend a prior year’s medical expense claim to utilize the 24 month period option. However, as you would typically have significant medical expenses if you are terminally ill, there is often not much to be gained by using the 24 month option as you would receive a full tax credit.

This topic is unpleasant and dealing with financial and tax planning may be the last thing on your mind if you are terminally ill. However, engaging in financial planning for your own demise is prudent and your final act of kindness for your family and/or executors.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation. Please note the blog post is time sensitive and subject to changes in legislation or law.

Financial & Tax Planning for the Terminally Ill - Part 1 - Getting Organized

Many of us do not consider our own mortality. Yet, if you or someone you know has been diagnosed as terminally ill, you are forced to face the reality of your/their impending passing. While the emotional and health issues are first and foremost, to lessen the burden for your family, friends and/or executor(s), it is very important to undertake both financial and tax planning.

A diagnosis of a terminal illness quite bluntly means that you are probably going to pass away in the near term. The near term for a terminal illness is defined by different medical practitioners and medical organizations as anywhere from 6 months to two years. Most likely you will not be able to work full-time (or you will want to stop working at some point) and may incur additional medical or nursing care related expenses that are not covered by the Canadian health care system.

Consequently, you may need to liquidate investments, retirement assets or draw on insurance policies to fund your day to day living and medical expenses. For the purposes of this post, I am going to assume you are lucky enough to have sufficient liquid resources to live comfortably until that fateful day.

If you have stress tested your death, as I have suggested in prior blog posts, the anxiety related to getting your financial house in order will at least be minimized. However, for today’s blog, I am going to assume you have done little to plan for your demise, and I’ll provide a comprehensive list of things you need to organize and consider.

Legal Documents to Prepare, Update, Review or Gather

1. Will(s) – Have an updated one in place

Hopefully you already have a will(s). If not, ensure you immediately have a one drafted. If you live in a province that allows you a second will (i.e.: In some provinces you are allowed to have a second will for the shares of your private company in order to minimize probate taxes; although the new rules for inter vivos trusts must be reviewed) consider whether a second will is applicable to your situation.

Where you have a will in place, ensure you review your will one final time to determine if it is up to date and reflects your current wishes. If you have not designated personal property such as jewelry and art in your will, you may now want to specify how that property is allocated; rather than leaving it to your family to sort out, possibly creating issues for your executor.

Although most terminal illnesses do not affect your mental capacity, I have seen circumstances where lawyers are concerned about the mental capacity of their clients and your lawyer may request a capacity test prior to allowing you to change your will.

2. Personal documents – Organize and store

Once you pass away, many financial institutions and government bodies will request legal documents (passports, birth certificates, drivers licence, etc.). You will therefore want to store all these documents in one place (safety deposit box) and make your executor or family aware of the location of these documents.

3. Powers of Attorney (“POA”) – Get your financial and personal care wishes down on paper

If you do not already have POA’s in place for both financial and health decisions, you will want to have both documents drafted as soon as possible. Whether you are just drafting a POA or reviewing a previously granted POA, ensure you are comfortable with your attorney (the person you have appointed) selection.

You will want to make your attorney for personal care (health) aware of your wishes for medical purposes.

4. Funeral Arrangements – Inform your executor or family about your preferences

You may have already prepaid your funeral or have specific wishes. You need to ensure any outstanding payments are made on prepaid plans and discuss your funeral wishes with your family or executor so they are aware of any specific wishes. Banks will typically allow your estate to pay for your funeral from your bank account; however, you may wish to give the money while alive to your executor so they do not have to deal with the bank.

If you were undecided about organ donations, this would be a time to make a final determination.

5. Insurance – Create a folder and summary with all your documents together with contact information

You may have life, disability, critical illness or any number and types of insurance in place. In order to assist your family and/or executor, you should create a file with all your policies, the amount of insurance and the contact information of your insurance agent where applicable.

In some cases your beneficiary designations under your insurance policies may be outdated (for example, many people still have their ex-spouse as a beneficiary) and need to be reviewed and changed. Many people also do not have updated beneficiaries for their RRSPs and RRIFs.

6. Real Estate – Organize all your deeds in a single file for easy reference

To assist your executor(s), you will want to create a file of title and purchase documents relating to your home, cottage and/or rental properties you own.

7. Information Check List – provide a list of helpful contacts

To help alleviate additional stress for your loved ones, I strongly suggest putting together an information checklist of:

•  your key contacts (lawyer, accountant, insurance agent, investment advisor, banker etc.)
•  location of assets (your bank accounts, investment accounts, and retirement account), credit cards
•  location of safety deposit box etc.

If you do not have something in place, this would be the time to prepare your list, as a courtesy to your executor(s), so they are not playing a game of hide and seek with your assets.

You will also want to summarize and provide documentation regarding any liabilities you have, such as mortgages, bank loans and lines of credit.

Finally, it’s a good idea to introduce your key contacts to your executor and/or spouse so they have familiarity with them.

8. Digital Information – provide a protected list of your passwords

As discussed in my blog Alzheimers and Death in the Digital World you will want to consider how you deal with the issue of passwords in respect of your online financial accounts and Internet/social sites.

I am going to stop here today. Next week I will discuss financial and tax planning issues you will want to consider if you or anyone you know is terminally ill.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation. Please note the blog post is time sensitive and subject to changes in legislation or law.

An Estates Fairy Tale

Once upon a time, in a kingdom not so far away, there lived three brothers.

Liam was the eldest. Being a natural military strategist, he was eventually granted leadership of the kingdom.

Roger, the middle son, was a gifted artist.

Earl, the youngest, was a studious sort, and became a lawyer.

The brothers grew older, prospered, and started to consider their own mortality.

King Liam, a widower, had three daughters and was unsure how to plan for the future.

(a) Which of his daughters should inherit the kingdom?

(b) Who should run the kingdom if he lost his marbles?

(c) Who should take care of his physical needs during his old age?

King Liam devised elaborate tests of his daughters’ love, fidelity, intelligence and ability to manage people and finances. He kept his advisors busy changing his plans from one day to the next, until no one, including the king, was sure which end was up. King Liam’s habit of ripping up documents carefully drafted by his advisors, making handwritten changes to those documents, and hiding the documents in various folders, cabinets, freezers, holes in the ground and other “safe” locations did not help matters.

Roger, the artist, could not be bothered to address such mundane issues. His wife had left in a huff a few years back (something to do with a very pretty apprentice of Roger’s). Roger had two sons. One son moved to a far distant kingdom. Roger lived with his other son, who cooked and cleaned for

Roger, sold his art, and generally took care of the household. Roger was very grateful to his son and felt very close to him.

Earl, the lawyer, wanted to make sure that his wife and 15 year old daughter were provided for if anything were to happen to him. He drafted the following documents for himself and his wife:

(a) Wills providing for the spouse and their daughter, carefully drafted to minimize liability for the taxes that King Liam kept instituting;

(b) An agreement between Earl and his partner addressing what would happen to Earl’s legal practice upon his death;

(c) Documents indicating who would manage Earl’s legal practice and their other assets upon the mentally incapacity of Earl and/or his wife; and

(d) Documents indicating who would make personal care and health care decisions for them if they could not do so for themselves.

Earl made sure that all of the documents were properly signed and stored in a safe place.

He communicated the location of the documents to his wife and to all of the other parties who had been given responsibilities under the documents.

The kingdom was invaded by a neighbouring king a few years later. King Liam had not been paying attention to the protection of his realm, having been distracted by the manipulative challenges he enjoying setting for his daughters. King Liam was captured and killed. Roger and Earl were also seized and executed in order to forestall the possibility of either of them making a claim to the throne or mounting a counter-invasion.

King Liam’s daughters were distraught at having lost the rulership of the kingdom. At least King Liam had the foresight, before his death, to hide away mountains of coin and to personally acquire a number of estates. The daughters’ first order of business was to acquire these assets. They formed a search party and found countless documents purporting to be wills containing different distributions of these assets. Each daughter seized the version of the will most advantageous to her and tried to claim the assets. The holders of the assets refused to deal with any of the daughters, as they were not sure which document was the last, true and valid will of King Liam. The daughters became destitute and had to throw themselves on the mercy of the new king to resolve the matter. The new king agreed to safeguard King Liam’s assets pending his resolution of their dispute, but warned them that he had other priorities at that time. While the daughters eventually obtained a hearing with the new king, the result lead to a challenge by one of the daughters and a counter-hearing, which lead to a second counter-hearing, and so on and so forth. The daughters eventually gave up, no resolution was obtained and the new king continued to retain the assets. The daughters were penniless and hated each other. They did not live happily ever after.

Roger’s “away” son came back for the funeral and to collect “his half” of his father’s property.Roger’s wife also returned, stating that she was in fact entitled to at least part, or maybe all, of Roger’s estate, as they were still technically married upon Roger’s death. The son who had lived with Roger disagreed with both of them. The “home” son stated that, before his death, Roger had given the house and all of the art to him and that Roger had declared that he was “the only true family left to me now”. In addition, the home son claimed the remainder of Roger’s assets as compensation for his caregiving services over the years, indicating that Roger’s intent was for him to inherit everything. There were, of course, no documents available to prove or deny any of the family’s claims and the three of them fought over these issues for the remainder of their lives. Like King Liam’s daughters, they submitted petitions to the new king for help in resolving their dispute. Unfortunately, all of Rogers’s assets were depleted in the process of petitioning and counter-petitioning the king. Roger’s family did not live happily ever after.

Upon Earl’s death his will ensured that his wife inherited all of his assets. An agreement required his law practice to be purchased by his partner for a sum large enough to allow his wife to maintain her standard of living. His wife, however, was heartbroken by Earl’s death and died a year later. Earl had ensured that his wife’s will was as solidly drafted as his own. As a result of this planning, a family to whom they were very close took in Earl’s daughter and cared for her until adulthood. All of the property inherited by the daughter from Earl and his wife was carefully managed by his trusted advisor, who also educated the daughter in how to manage the property herself. When the daughter was old enough and wise enough, she took over the management of her inheritance. While Earl’s daughter was understandably upset about losing both of her parents at such a young age, she never had to worry about who would take care of her and whether she would have enough money to educate herself and become self-sufficient. She did live happily ever after, with a loving family and a fulfilling career as a financial advisor.

Are you most similar to Liam, Roger or Earl? (Did any literary minds out there catch the allusions to King Lear?) Which result would you choose for you and your family? For once, a lawyer is the hero of our fairy tale….and a good estates lawyer can help you be a hero to your family as well.

This fairy tale was written by Katy Basi a frequent contributor to this blog. 

Katy Basi is a barrister and solicitor with her own practice, focusing on wills, trusts, estates, and income tax law (including incorporations and corporate restructurings). Katy practiced income tax law for many years with a large Toronto law firm, and therefore considers the income tax and probate tax implications of her clients' decisions. Please feel free to contact her directly at (905) 237-9299, or by email at katy@basilaw.com. More articles by Katy can be found at her website, basilaw.com.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation.

Do It Yourself Accountants and Lawyers

In October, I provided RateHub.ca (an excellent mortgage site) with the following literacy tip for their Facebook page: “Don’t confuse financial literacy with the ability to execute financial, monetary and income tax transactions.” I admit, this tip was a little harsh in tone, but I continue to see more and more misguided souls who think they are tax, legal and financial experts because they have read an article or two, in a blog or book. This issue has arisen in part, because DIY (“Do it Yourself”) investors have become emboldened as some (definitely not all) have been able to successfully manage their own investment portfolios using index funds and “Couch Potato” strategies.

The DIY movement which preaches self-sufficiency for your financial affairs is in my opinion causing many people to consider themselves multi-disciplinary experts when they only have an understanding of a small part of the issue, which can result in costly legal, tax or financial miscues.

I see two distinct issues here.

1. Too many people believe everything they read (especially what they read on this blog :).

2. Most tax and legal related information is general in nature. The writers often do not provide the technical details that can make or break a tax or estate plan because of space constraints and because they need to keep the articles "readable". I have noted significant tax planning errors in the popular “Financial Makeover” that many newspapers publish on the weekend. These errors reflect that even financial planners over-step their expertise and think they are also tax planners and lawyers.

DIY Tax Experts

 

Below, I have some common tax related issues that arise with DIYers.

Personal Tax Returns

 

If you have a simple tax return with a few T4, T5 and RRSP slips, I have no issue with you doing your own return; although you can still easily be caught by elections and one-time events you may not be aware of. However, if you have self-employment income or rental income, in many cases, being a DIY tax expert can be penny-wise and pound foolish. 

With respect to business and self-employment income, people tend to make some outrageous claims for their home office (that could impair their principal residence exemption) and auto usage that are red flags for the CRA. In addition, they often claim non-deductible expenses such as clothing and life insurance.

For those people with rental properties, I’ve seen people make a mess in the structuring of the initial ownership, their reporting of the personal use of the property (if any) and how they report large repairs (they claim capital expenses as repairs and repairs as capital expenses).

Probate and Estate Planning

I have written extensively about probate and property transfer landmines, that DIYers set-off when undertaking their own estate planning.

If you transfer property to anyone other than your spouse, you have a deemed sale for tax. I have seen people transfer cottages, stocks, principal residences (not typically an issue upon transfer, but an issue after transfer in that the tax-free status of your home is lost on the portion transferred). You should never be a DIY tax planner when you transfer property of any kind, the tax traps are extensive.

Cocktail parties tend to breed DIY estate planning experts who inform anyone within shouting distance to transfer property to their family members to avoid probate fees. I call this double martini/double trouble advice. The problem is that the CRA does not recognize these transfers where you don’t also transfer the beneficial ownership (real ownership) and thus, a property transfer “for show” does not legally reduce your probate fees on death (at least in the CRA's eyes. Some estate planners are less concerned as they say the provinces do not look into the history of ownership). Even if you feel the transfer is effective for probate purposes, these transfers are not effective for income tax purposes. More importantly, from an estate perspective, these transfers often become catalysts for family litigation. Children litigate over whom mom and dad actually left the property to; where their parents only transferred the property to one of their children for the sake of simplicity, such as putting a child's name on a joint bank account. 

Elections and One-Time Events

In 1994, the government eliminated the $100,000 capital gains exemption, but allowed an election to “bump-up” the value of property you owned at that time up to $100,000. Although this was widely reported in the press, you would not believe how many clients I have picked-up since 1994 that did not make the election on property that had appreciated significantly, typically their cottage or other real estate investments. This omission has cost many people approximately $25,000 in tax that need not have been paid.

Another election that is commonly missed by DIYers is the 45(2) election where you change the use of your home to a rental property. Without this election, you are deemed to sell your home at the time you change its use. While typically this does not result in any income tax at the time (as your principal residence is tax-free), by not making the election, you may owe income tax on the future sale of your home that may have been avoided by making the election.

DIY Legal Experts

DIY legal errors are often errors of omission as much as errors of commission. I discuss two of those areas below.

Incorporation

DIYers love to incorporate their own companies. It is cheap and fairly easy to do. The problem is that they almost always limit the share attributes which often requires articles of amendment in the future and may also create problems on the sale of the corporation. In addition, many "DIY lawyers" issue common shares to themselves and their spouses, but almost always never consider discretionary shares that provide for the payment of all or a portion of the dividends to a lower income spouse for income splitting purposes (I will have a future blog on this topic). In the rare circumstance that they do consider discretionary shares, they often do not create the distinction in classes necessary for discretionary shares.

Wills

There are many do it yourself will kits. While these kits may ensure you have a legal will, they are simple in nature and in many cases, your life is not as simple as ticking a few basic boxes. I truly cannot comprehend

why anyone with any assets of a substantial nature would not pay for a proper will and power of attorneys for both your competency and financial affairs. This does not even account for the fact in certain provinces you can have a second will to avoid probate on the value of your private corporation, amongst other items.

My advice; do not be seduced by your own financial literacy and overreach your expertise. Just accept that professional advice is often a necessary evil.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.