death andtaxes the two...

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DEATH AND TAXES THE TWO CERTAINTIES '

Greg SwansonPedersen,.Norman, McLeod &, Todd

500 Bank,ofC,!nada Building,2220-12th Ave.,P.O.Box 1087

Regina,Sask• S4P 8S2Ph: 5654100 Fax: .757-4856

BIOGRAPHICAL INFORMATION,

Greg.swartson. . ,- -, '," - .. -'. . ,', -.< -'. ".

Greg received a RAdmin.,degreefrorp the '. University ofRegina ini197aia6d nisLL.Ei. from theUniversityof $aSkatchewanir .1977.·•.. H~was.calledtotbeSl:lskatchewan .Barill ,197~. His.area~()fpractiqeinc;ludeTa><atipr,Corporate/Commerci~1 La\V,andwnh;&E~tates.• Gr~g.ha~lecture~l:ltth~B~rA9lTlis~ionCpurseon'Taxationin Fainilr4~w,sillce1.99?, and has been a pr~sent~r~t~everaIGolltinuiIl9.'Legal'Education>semillars'speakingonvarioustopicsn~ll:lted.totaxation .•.Heisi~ast-Chairofthe9.B;A'.Tax~lld""illsSection(s()uth.i Sask.), andJ:)a.st-PreSidf:)ntoftheVictoriaDOrderoff'Jurse~ •• (Regina Branch). 'Greg has be,enac;tive in sc;outingJorthepast.9years.and is District Commissioner for Knowles· District(ScoutsC~nada).He prac;tise~withthe firmPed~rsen, Norman, McL~od,& Todd.

TABLE OF CONTEN'l'S

DO'l'H AND TAXES - '.l'HE TWO CERTAINTIES

1. Introduction . . • · · · · · · • • · · · · · · 1

2. Terminology . . . . · · · · · · • · • · · · • · · · 1

3. Deemed Disposition on Death • • · • · · · · · · · · 3

4. RollOver to Spouse · · · · • • · • · • · · • · · · 3

5. Roll over to Spousal Trust • • · • · · · • · · · · 4

6. Roll Over Optional · • · • • • · · • · • · • • · · 6

7. Roll Over of Farm Assets to Children • • · • • · · 88. Roll Over of Farm Assets to Children Optional · · · 10

9. Shares of Non-Farm Businesses · · · · · · · · · 10

10. RollOver of Farm Assets to a Parent · · · · · 11

11. Retirement Savings Plans · · · · · · · 11

12. Rollover of N.I.S.A. · · · · · · · · · · · · · · 14

13. Transfer of Assets and GST · · · · · · 14

14. Charitable Bequests in Wills · · · · · · · · · 15

15. Transfer of Property into Joint Names · · · · · · · 16

APPENDIX "A"

1

DEATH AND TAXES - THE TWO CERTAINTIES

1. Introduction

It is often said that there are only two things in life which are

certain, death and taxes. Though a properly drafted Will can not

change the impact of death it can reduce or eliminate the impact of

taxation.

In drafting a person's Will, it is important to identify the types

of property which the testator has an interest in and, based on

those testamentary wishes, advise the testator generally of the

income tax consequences of those testamentary wishes. With this

knowledge in hand the testator can either:

1. accept those tax consequence and make provisions for them,

e.g. savings or life insurance, or

2. re-think those testamentary wishes to take advantage of the

income tax provisions which can reduce those income tax

consequences.

2. Terminology

"The Act" refers to the Income Tax Act R.S.C. 1985 c. 1 (5th

Supp. ).

"Adj usted Cost Base" is the cost of a property for income tax

purposes. It includes the original cost of the property plus the

cost of capital improvements thereto. There can also be reductions

as part of this calculation. e.g. where part of the property is

sold or destroyed. Its common abbreviation is "A.C.B."

"Capital Cost Allowance" is the income tax term for depreciation.

2

"Recapture of Capital Cost Allowance" arises on the disposition a

of a property (actual or deemed) and is the difference between:

1. the lesser of the adjusted cost base of the property and the

proceeds of disposition, and

2. the undepreciated capital cost of the property at the time of

disposition.

"RollOver" is a tax deferred transfer of property from one person

to another. No income tax is generally paid by the original owner

on the disposition of the property. As a result, the new owner will

likely have a larger income tax liability on a future disposal of

the property.

For example, a person owns an apartment building with a fair market

value of $100,000, an adjusted cost base of $75,000 and an

undepreciated capital cost of $40,000. On a sale of that property

for $100,000 that person would realize recapture of capital cost

allowance of $35,000 (adjusted cost base minus undepreciated

capital cost) and a capital gain of $25,000 (fair market value

minus adjusted cost base). If the property was rolled over from the

first person to a second person, the original owner would be deemed

to disposes of the property for its undepreciated capital cost of

$40,000. The new owner would be deemed to acquire the property at

its adjusted cost base of $75,000. However, for capital cost

allowance purposes, the new owner will be deemed to have taken

$35,000 of capital cost allowance and will begin depreciating the

building at $40,000 and not $75,000. On a sale of the building by

the new owner, the capital gain or loss will be based on the

difference between the selling price and the adjusted cost base of

$75,000. Any recapture of capital cost allowance will be based on

the difference between:

3

1. the lesser of the adjusted cost base of $75,000 and the sale

price, and

2. the undepreciated capital cost of the property at the time of

sale.

"Undepreciated Capital Cost" is the depreciated value of a property

for income tax purposes. Its common abbreviation is "U.C.C."

3. Deemed Disposition on Death

Generally, on death, the deceased is deemed to dispose of all of

his capital property, immediately before death, and to receive

proceeds therefrom equal to their fair market value1• As a result

of this the deceased may be taxable on both capital gains and

recapture of capital cost allowance.

As with any general rule there are always exceptions. The Act is no

exception. There are a number of the exceptions to the deemed

disposition rule aforementioned. These will be discussed in context

to the types of property to which they apply.

4. RollOver to Spouse

Where the deceased's property passes to the surviving spouse, the

property can be rolled over to the spouse. 2 As such, the taxation

of capital gains or recapture of capital cost allowance will be

deferred until the spouse disposes of the property. To be eligible

for this rollover:

1. both the deceased and his spouse must have been resident in

Canada immediately prior to the death, and

4

2. the property must vest in the spouse indefeasibly within 36

months of the death "or where written application therefor has

been made to the Minister by the taxpayer's legal

representative within that period" such longer period as the

Minister considers reasonable.

The section formerly referred to vesting indefeasibly within 15

months after death or such longer period as is reasonable in the

circumstances. In cases where the estate was contested, title to

property often did not vest in the spouse indefeasibly for much

longer than 15 months. In those situations there was no rollover

and capital gains and recapture of capital cost allowance were

taxable in the deceased's hands in his last year of life.

In light of this, where an estate is being contested and it is

likely that the dispute will not be resolved within 3 years from

the date of death, it is imperative that a written application be

made to the Minister for an extension of the time limit for

vesting.

One example of when a rollover to a spouse will not be available

is when the deceased owned shares of a corporation which are

subject to a buy-sell agreement which provides for a mandatory buy

out on death. Because of this agreement, the shares of the

deceased will never vest indefeasibly in his surviving spouse. 3

5. Rollover to Spousal Trust

Where the deceased's property passes to a spousal trust, the

property can be rolled over to that trust. The same residency and

vesting requirements that applied to a transfer to the spouse apply

to a spousal trust.·

A spousal trust is defined as a trust where:

5

a) the trust is created by the deceased's Will;

b) the trust was resident in Canada immediately after thetime the property vested indefensibly in trust;

c) the spouse is entitled to receive all of the i~come ofthe trust that arises before the spouse's death; and

d) no person except the spouse may before the spouse's deathreceive or otherwise obtain the use of any of the income

or capital of the trust.

Section 70(6.1) of the Act provides that the trust is considered to

be created by the decease's Will if it is created;

a) under the terms of the Will, or

b) by Court Order under Provincial laws providing for reliefand support of dependants.

Regarding residence of the trust, generally, the trust is resident

where the trustees or majority of them reside. As such if you havenon-resident trustees the trust may not be eligible for spousaltrust treatment.

If the terms of the Will or the result of an intestacy are that

property does not pass to the spouse or spouse trust, the rollover

treatment can still apply if as a result of a disclaimer, release

or surrender by other beneficiaries or through a Court Order theproperty passes to the spouse or trust. This must be accomplished

within the 36 month time period.

There are numerous situations where a trust for a spouse will not

meet the income and capital requirements. One example is where the

6

Will provides that the spouse is to receive a fixed amount of

income per year during her lifetime and that amount is less than

the income of the trust.

Where you have a spousal trust, and one of the assets in that trust

is farm property, the farm property is transferred to the trust on

a tax deferred basis regardless of who is farming the property at

the time of the death of the first spouse. This is because of the

rollover rules between spouses. As long as the farm property is

used in the business of farming on the death of the surviving

spouse, the farm property can be transferred from the spousal trust

to the deceased's children on a tax deferred basis, again

regardless of who is farming the property at the time of the death

of the surviving spouse.

For farm property to be transferred on death, directly from a

parent to a child, on a rollover basis, the farm property must be

used in the business of farming at the time of the of the parent's

death by: the parent, his spouse, child or grandchild. If this is

not possible, it may be appropriate to draw the parent's Will on

the basis that the farm property will be held in a spousal trust

during the lifetime of the surviving spouse and then to the

children.

Where shares of a family farm corporation or partnership are to be

transferred via a spousal trust to children, the requirement that

family be involved in the farm business is only relevant on the

death of the original owner. While the shares of the corporation or

partnership are held in the spousal trust, the only requirement is

the asset use test discussed hereinafter.

6. RollOver Optional

Use of the rollover provisions as they relate to transfers to a

7

spouse or a spousal trusts are optiona15 • The personal

representative may elect, regarding any specific property, that the

transfer take place at fair market value and not as a rollover.

When this election is made, the resulting capital gains, capital

loss or recapture of capital cost allowance will be reported in the

deceased's last year of life income tax return. 6

The February 22, 1994 federal budget cancelled the $100,000 capital

gains deduction. In his February 27, 1995 budget speech, the

Minister of Finance stated:

Last year, we announced that we would

lifetime capital gains exemption for

businesses.

review the $500,000

farmers and small

As a result of the review, we have concluded that the

exemption remains a valuable measure. Today we are announcing

that no ~hanges to it are being made.

Despite the Minister's comments, many people believe that the

$500,000 capital gains deduction is not permanent. As such, it is

advisable for executors to examine the option of reporting eligible

capital gains on the last year of life return and utilizing the

capital gains deduction rather than rolling those properties over

to the surviving spouse or children. As minimum tax does not apply

in the year of death', the only "tax" which would be payable would

be:

1. the Province of Saskatchewan flat tax of 2% of the taxable

capital gain;

2. the claw back of old age security pension as a result of the

increased net income over $53,215 or unemploYment insurance

benefits as a result of increased net inco~e over $60,840.

8

3. any increased taxes payable as a result of the increased net

income over $25,921 and corresponding loss of the seniors tax

credit ($3,462 for 1994).

The benefit of the bump up in the adjusted cost base for the land

or shares and the future income tax savings, if the capital gains

exemption is repealed, will usually more than exceed the "taxes"

paid on reporting the capital gain in the last year of life return.

7. RollOver of Farm Asse~s ~o Children

Subject to certain conditions, the deceased's farm property and

shares of a family farm corporation or partnership can be pass to

the deceased 's children as a rollover. For this purpose "children"

includes the children and grandchildren of the deceased and:

a person who, at any time before the person attained the age

of 19, was wholly dependent on the deceased for support and of

whom the deceased had at that time, in law or in fact, the

custody and contro18

Farm property, to be eligible must be used in the business of

farming, at the time of death, by the deceased, his spouse, child

or grandchild. Farm property leased to someone other than the

spouse, child or grandchild is not used in the business of farming

by one of the appropriate people and is therefore not eligib1e for

a direct rollover from parent to child. Where this causes a

potential problem it may be appropriate to consider either having

the farm property custom worked rather than leased or utilizing a

spousal trust aforementioned.

For the shares of a corporation to be shares of a family farm

corporation, all or substantially all of the fair market va1ue of

the corporation's property must be used in the business of farming

9

by any of the corporation, the deceased, his spouse, child,

grandchild, parent or a family farm partnership of one of the

aforementioned people. As well, the deceased, his spouse, child,

grandchild or parent must be actively engaged in that business on

a regular and continuous basis.

The "all or substantially all" test refers to at least 90% 'of the

corporations assets. It looks only at the fair market value of the

assets. The cost of the assets or the liabilities of the

corporation are irrelevant. The time to determine whether this test

has been met is immediately before the shareholder's death.

If the assets of the corporation are such that it can not be

classified as a family farm corporation, steps should be taken

during the taxpayer's lifetime to reorganize the corporation so

that it does qualify. There are ways to split off the ineligible

assets into another corporation which should result in little or no

tax payable at the time.

A partnership is considered to be a family farm partnership if all

or substantially all of the fair market value of the partnership's

property is used in th~ business of farming by any of the

partnership, the deceased, his spouse, child, grandchild, parent or

a family farm corporation of one of the aforementioned people. The

"all or substantially all" test aforementioned is also applicable

to family farm partnerships.

The farm assets must vest indefeasibly in the beneficiary (child or

grandchild, etc.) within 36 months of death or such later time

period as the Minister may on application allow.

The child must be resident in Canada immediately before the death

of the taxpayer.

10

The property must "on or after the death of the taxpayer and as a

consequence thereof been transferred or distributed to a child of

the taxpayer ••• ". Wills that contain options allowing a child to

buy land cheap or Wills that direct the Executor to sell the land

to the child will not be eligible for this roll over. 9 If money is

to flow from the child for the land, the Will should provide for a

conditional gift ie.: "If my son John pays the sum of $5,000 to

each of Sam, Ruth and Beth within six months of my death, I direct

my trustee to transfer all my right title and interest in and to my

farmland unto my son John".

8. RollOver of Farm Assets to Children Optional

As was the case with the rollover to the spouse, the rollover of

farm property to children and grandchildren is permissive. The

executor can elect to have the property disposed of for proceeds

anywhere between A. C. B. and F. M. V. for non-depreciable property and

u. C. C. and F. M. V• for depreciable property. Because of this,

consideration should be given to use of the deceased's capital

gains exemption.

At the time of death all or substantially all of the fair market

value of the corporation's assets must be used in an active

business carried on primarily in Canada. As well, during the 24

months prior to death at least 50% of the fair market value of the

corporations assets must be used in an active business carried on

primarily in Canada. Also, the deceased must have owned the shares

for 24 months (If the corporation issued the shares from treasury

rather than a sale or transfer there is no minimum ownership

period) •

9. Shares of Non-Farm Businesses

There is no rollover to children as regards shares of any other

)

11

type of corporation or partnership. There is, however, the capital

gains exemption for use with shares of qualified small business

corporations. As with farm corporations there is an asset test.

10. RollOver of Farm Assets to a Parent

Where ·farm assets have been rolled over from a parent to a child

(either inter-vivos or on the death of the parent), on the death ofthat child, the property can be rolled back to either of thechild's surviving parents. 10 This provision allows, for example,

farm land previously rolled-over from the father, on his death toa daughter, to be rolled back to the mother, on the daughter'sdeath, without taxation. For this to apply the Executor must elect

this treatment in the deceased's last year of life tax return.

11. Retirement Savings Plans

On death, the Act provides that an individual is deemed to receivethe proceeds of his registered retirement savings plan (R.R.S.p.)llor his registered retirement income plan (R. R. I •F • )12 and is taxablethereon in the last year of life. However, where the proceeds are

received by the individual's spouse13 or, subject to certainconditions, dependant children or grandchildren, the proceeds aretaxable in the hands of the recipient and not the deceased. 14

In the case of the surviving spouse being the beneficiary of theR.R.S.P. or R.R.I.F., she may deposit any lump sum paYment from the

plan or any portion thereof into her R.R.S.P. or R.R.I.F. and thus

defer taxation thereon. 15 If monthly paYments out of the plan

commenced prior to death, the surviving spouse can be designated as

the annuitant and receive the monthly paYments from the R. R. S. P. or

R.R.I.F. Such monthly paYments will be taxable as received.

Where the beneficiaries of the R.R.S.P. are the children or

12

grandchildren, the proceeds will only be taxable in their hands,

rather than the deceased's, if there is no surviving spouse and thechildren or . grandchildren were financially dependent on the

deceased for support at the time of his death. 16 In determining

financial dependency, there is a rebuttable presumption that thedependant is not financially dependant on the deceased for support

if the dependant's income in the taxation year immediately prior to

death was greater than the basic personal tax credit ($6,546 in

1994). If financial dependency is established, the children orgrandchildren may deposit any lump sum paYments from the plan orany portion thereof into their R.R.S.P. or R.R.I.F. and thus defertaxation thereon17

• (Prior to 1989, the dependant child orgrandchild could only transfer a limited amount into their R.R.S.P.The amount was $5,000 for each year that the dependant was under

the age of 26.) If monthly paYments out of the plan commenced priorto death, the financially dependant children or grandchildren can

be designated as the annuitant and receive the monthly paYmentsfrom the R.R.S.P. or R.R.I.F. Such monthly paYments will be taxable

as received.

The owner of an R.R.S.P. or R.R.I.F. is entitled to designate a

beneficiary to receive the proceeds of the plan on death. Whetherthe plan is with a life insurance company, a trust company, a bank

or a credit union18 the beneficiary may be designated in the plan.Alternatively, the beneficiary may be designated in the ownersWill. In this latter case, the proceeds of the plan will form partof the owner's estate and attract probate and legal fees.

If no beneficiary designation was made, either in the deceased'sWill or in his plan, there is still an opportunity to pass the

funds to the spouse or dependant child~en and grandchildren and

thus avoid taxation in the deceased's hands. If the spouse,dependant children or grandchildren are the sole beneficiaries of

the estate it can clearly be said that they received the proceeds

)

13

from the plan. In addition, the Executor and the beneficiary can

jointly elect, using Revenue Canada form T2019, to have the

proceeds from the R.R.S.P. deemed to be received by the particular

beneficiary. 19 The joint election by the executor and the

beneficiary is optional. As such, depending on the income, taxable

in the last year of life, the joint election may be for an amount

less than the full amount of the proceeds of the plan passing to

the beneficiary.

If for example, the deceased died on January 2 and only had $6,000

of income .to report on the last year of life return, and the person

to.whom the executor will pay the R.R.S.P. or R.R.I.F. proceeds

already earns $50,000 per year; it is likely that the executor and

the beneficiary would file the election so that the first $23,590

of the proceeds from the plan was taxable in the hands of the

deceased. In this way, that amount of the proceeds would be taxed

at the lowest rate of income tax, in the hands of the deceased,

rather than at the middle or highest income tax rate. in the hands

of the beneficiary. 20

Where the deceased's estate is the beneficiary of the plan, either

as the designated beneficiary or because there is no beneficiary

named in the plan, on paying of the procee~s, the plan holder will

deduct and remit to Revenue Canada the statutory withholdi~g

amount. 21 However, where a third party (spouse, child, other person,

etc) is the designated beneficiary, generally no such withholding

and remittance of income tax takes place.

One important caveat on designating a beneficiary of an R.R.S.P. or

R.R.I.F. in the plan itself is where the beneficiary is not the

spouse, or dependant children or grandchildren of the deceased. In

this case, the deceased is still taxable on the full value of the

plan on death but none of the funds from the plan are available to

the estate to pay this income tax as they passed directly to the

14

beneficiary. 22 In these situations depending on the size of the

estate, it may be more appropriate to designate the beneficiary in

the Will. As well, the Will should refer to the net proceeds from

the R.R.S.P. or R.R.I.F. or the after tax proceeds.

12. Rollover of H.X.S.A.

Net Income Stabilization Accounts can be rolled over to a surviving

spouse or spousal trust and taxed in her hands. 23 This rollover is

also optional. 24

13. Transfer of Assets and GST

Almost everything that is bought, sold or transferred in Canada is

subject to GST. The transfer of business25 properties owned by a

deceased to his beneficiaries is no exception.

Where an executor or administrator of an estate distributes the

business use assets (as opposed to personal use assets) of the

deceased to the beneficiaries of the estate, GST will generally be

applicable. No GST will be payable if the asset is zero rated or

exempt for GST purposes. However GST will be payable on the

remainder of the business assets unless:

1. the deceased's "business use" real property is being

transferred to a beneficiary who is a registrant for GST

purposes and said beneficiary files a GST form 60 regarding

the acquisition of the real property, or

2. the beneficiary is a registrant for GST purposes and

executor/administrator makes an election pursuant to section

167(2) of the Excise Tax Act.

15

A section 167(2) election need not be filed with the GST office. It

may be utilized where the beneficiary who receives the "business

use" asset will use the asset in a commercial activity.

Assume, for example, that the deceased owned farm land which on

death passed to his spouse. If that spouse is not a registrant for

GST purposes, the deceased's estate will be liable to collect and

remit GST on the value of that farm land. If the spouse is a

registrant for GST purposes, one of the aforementioned options will

be available.

14. Charitable Bequests in Wills

Generally, the motivation behind a charitable bequest contained in

a Will is not income tax p~anning. However, such a bequest will

have income tax consequences once paid.

Where a Will contains a charitable bequest, once paid, the Act

deems that bequest to have been made in the last year of"life26 • The

total amount of charitable gifts or bequests which will be deducted

in the last year or life is limited to twepty percent of the

deceased's net income for that year. Where the value of the

charitable gifts and bequests contained in the Will exceeds twenty

percent of the deceased's income in the last year of life, any

surplus can be carried back to the year prior to death for

deduction27• However the s~e twenty percent rule will apply.

This twenty percent limitation does not apply to bequests to Her

Majesty the Queen in right of Canada or a province or bequests of

~ultural property as defined in the Cultural Property Export and

Import Act.

Depending on the income of the deceased and the size of the

bequests, the deceased may not receive a full deduction for all of

16

the charitable bequests contained in the will. In light of this,individuals might consider giving more to charity in their life

time and less on death.

15. Transfer of Proper~y in~o Join~ Names

In recent years, many people have decided to register title to the

property which they own in j oint names. This is the case with real

property, bank accounts, investments, etc. For most, their

motivation is to simplify the, handling of their estate and to

reduce the cost of administering their estate by avoiding some orall probate and legal fees. In some cases the new joint owner will

be the owner's spouse. In others it is the ultimate beneficiary.

For income tax purposes, when ownership of property is transferredinto joint tenancy, one must look at the original owners intentbehind the transfer to determine whether a disposition has

occurred. If joint ownership is merely for estate planning

purposes, Revenue Canada, Taxation does not treat the transfer of

ownership as a disposition. Evidence of this intent would be where

income generated from the property continues to be received and

reported by the original owner. Where the intent behind the

transfer is that the new joint tenant will co-own the property andreceive a portion of any income generated therefrom, a disposition

will have occurred. (In this case attention should be paid to the

attribution rules.) The original owner must report this dispositionof an interest in the property (usually a 1/2 interest) and sufferthe income tax consequences which flow therefrom.

For income generating property, (e.g. rental properties) income taxproblems can arise regarding property which was originally

registered in joint tenancy merely for estate planning purposes. If

at some time in the future the new joint owner begins receiving

some or all of the income earned by the property the original owner

17

will be deemed to have disposed, at that time, of an interest inthe property to the new joint owner. Where the new joint owner is

the spouse, the rollover rules will apply. However if the new

joint owner is a child or some third party, there could be adverseincome tax consequences to the original owner.

Revenue Canada, Excise does not have the same approach to these

transactions. Excise has developed a policy on the transfer of farmproperty into j oint tenancy whereby it acknowledges that the

transfer is merely for estate planning purposes and does not assess

GST thereon or require the new owner to be registered for GST

purposes. (A copy of this policy statement is attached hereto asappendix "A". ) However, for other types or property and other

situations, care must be taken to ensure that no GST is payable asa result of the transfer of property into joint names.

From a matrimonial property perspective, provided that the spous~s

have been married for a number of years, transferring title to theproperty into j oint names is doing the same thing as the law wouldrequire on a break up of that marriage. However, if the people have

only been married for a few years, a court might not order an equaldivision of the property.

There are a number of factors to consider when transferringproperty into joint tenancy.

1. How does joint ownership fit in with the individual's Wi~l

planning. If the Will provides that part of the estate is to

pass to the surviving spouse with a small portion going to the

children, if all of the assets are owned jointly by the two

spouses, on death of one spouse there will be nothing in the

deceased's estate to pay to the children.

2. Once the property is registered in j oint names, all the

18

registered owners must agree on the use to which that property

or its income is put. For example, assume that farm land is

registered in j oint names with the two parents and the farming

child. Should the parents decide that any portion of theproperty must be sold either out of necessity or otherwise,the farming child must consent. That child may not approve of

the use to which the sale proceeds will be put to. That child

may believe that the sale of this parcel of land jeopardizesthe viability of the entire farming operation. That child may

believe that the farm land belongs to him and refuse to give

it back to his parents.

3. If the property is registered in joint names with the ultimate

beneficiary, the property could be put in jeopardy if that

beneficiary gets into financial or marital difficulty.

1. Section 70(5) of the Act.


3. Parkes v. M.N.R. 86 OTC 1214 (T.C.C.) and Greenwood et al v. The Queen 90 DTC 6690(F.e.T.O.). For the contrary position see Van Son Estate v. The Queen 90 DTC 6183(F.C.T.O.) where the court found that the agreement created no enforceable obligation onthe estate to sell the shares and was therefore no bar to the vesting of the shares.


5. Section 70(6.2) of the Act.

6. Revenue Canada has allowed land and building to be treated as separate properties forthis purpose. The building with its ·undepreciated capital cost· tax liability was rolled overto the spouse while the land was deemed to be disposed of for fair market value and acapital gains exemption was utilized thereon. .

7. Section 127.55(c) of the Act.


9. Penner v. M.N.R. 84 OTC 1444 (T.C.C.).

19

Section 70(9.6) of the Act.

Section 146(8.8) of the Act.

Section 146.3(6) of the Act.

Sections 146(8.1), (8.8)and (8.9) of the Act - R.R.S.P. and sections 146.3(6.1) and (6.2)of the Act - R.R.I.F.

Section 6O(1)(v) of the Act.

Section 146(1) of the Act - definition of ·Refund of Premiums and sections 146.3(6.1) and(6.2) of the Act.

Section 60(1) (v) of the Act.

The Queen's Bench Act R.S.S. 1985 Q.1 sections 45 - 23 and 45 - 26.

Effective for taxation years after 1992, ·spouse· Includes ·common-Iaw spouse·.

Section 146(8.1) of the Act - R.R.S.P. and section 146.3(1) of the Act - R.R.I.F.

In Saskatchewan, the Income tax rate applicable to the first $29,590 of taxable incomeearned by an Individual is 29.1% On taxable Income between $29,590 and $59,180 theIncome tax rate Is 45.5%. On taxable Income between $59,180 and $62,195 the Incometax rate Is 50.5% On taxable Income over $62,195 the Income tax rate Is 52%.

21. 10% on the first $5,000. 20% on the next $10,000. 30% on withdrawals over $15,000.

22. By section 160.2 of the Act both the estate and the beneficiary are jointly and severallyliable for the Income tax payable on the proceeds of the plan.



)10.

11.

12.

13.

14.

15.

16.

17.

18.

19.

20.

25. The Excise Tax Act defines business to Include ••.•a profession, calling, trade,manufacture or undertaking of any klnd whatever, whether the activity or undertaking Isengaged in for profit, and any activity engaged In on a regular or continuous basis thatInvolves the supply of property by way of lease, license or similar arrangement, but doesnot Include an office or employment·.

26. Section 118.1 (5) of the Act.

27. Section 118.1 (4) of the Act.

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APPENDIX nAnRevenue Canada ~venu CanadaCustoms and Excise Douanes et Accise

Pedersen Norman McLeod & ToddBarristers and Solicitors500 Bank of Canada Building2220 - 12th AvenueP. O. Box 1037Regina, SaskatchewanS4:!? 3B2

ATTE~ION: Gregory A. Swanson

~ Nc!mIaA McLeod .!& To,' ,I

RECINA. SASK.YOfJ' .. • , enc:e

File t:R11845-2:Rl1950-1

CN-3G0560Reg t121614572

District E::tcise Office5th Floor, Avord Tower2002 Victoria AvenueP.O. Box 557Regina, Saskatchewan541' 3A4

March 16~ 1993

Dear Mr. Swanson: (Your File-E16805GAS)

Re: Tax Treatment of Joint Tenancv in Farmland

Thank you for your letter, dated February 19, 1993, requestingclarification of the application of the Goods and Services Tax(GST) on the transfer of farm property by Mr. Laverne Snell to ajoint tenancy interest with Mrs. Snell.

It is the administrative policy of Revenue Canada-Excise/G5T thatthe transfer of an interest in farm property from individuals whooperate a farm into a joint tenancy with themselves and one or morerelated persons (such as a spouse, children or siblings) will nothave any immediate GST consequences if all the conditions outlinedbelow are met.

1. The related person(s) are not involved in the farming businessindependently on their own account or as members of a partnership(herein referred to as the ·non-farming joint tenants").

2. The non-farming joint tenants do not independently receive anyproceeds from the farming business which is treated as income ontheir own account.

3. ~he non-farming joint tenants are not currently registered forGST or required to register as a result of being involved in afarming operation. They may be registered for reasons unrelated tothe farming business.

Canada Oecan.-'!f'llot "'lateral R"'~e\C.511:.-' NlQ So.CUI

Moml...~ Aevenu nallonal,0-" 01 Ac:>ul

-2-

4. The consideration paid by the non-farming joint tenants fortheir joint tenancy interest is nil or a nominal amount such as adollar.

If all these conditions are met, the non-farming joint tenants willnot be required to pay tax on the supply of the joint tenancy orto register for the GST.

Based on the fac~s presented during our telephone conversation onFebruary 15, 1993, and the information provided in your letter, itaooears that the transfer of the farm property into joint tenancyf=om Mr. Snell to Mr. & M=s. Snell would satisfy the requirementsnoted above. Accordingly, the transfer of the property would notbe subject to GST.

These interpretations are based on our current interpretation ofthe Excise Tax p..c~ and regulations thereunder in their present forma~d do not take into account the effec~s of any proposed or futureamendments thereto or future changes in interpretation.

Further, while we trust that our comments are of assistance to you,we would advise that they do not constitute a GST ruling and are,therefore, not binding upon the Department in respect of anyparticular factual situation.

Additional information regarding the GST may be obtained bycontacting your nearest District or Regional Excise Office at780-7279.

Yours truly,

~')-:.'- J1W-z[J;~e LachambreEnquiries Of~icer

Excise/GST780-7889

death andtaxes the two...

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