The information contained herein is of a general nature and is not intended

to address the circumstances of any particular individual or entity.

Although we endeavor to provide accurate and timely information, there

can be no guarantee that such information is accurate as of the date it is

received or that it will continue to be accurate in the future. No one

should act on such information without appropriate professional advice

after a thorough examination of the particular situation.

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Estate Planning Update

� What happens on death

� Treatment of RRSP’s and RRIF’s

� Principal residence and vacation properties

� US property

� Charitable gifts and effect on income taxes

� Issues affecting business owners

� Probate Fees and other issues (Additional considerations will apply to US Citizens)

Taxation on death – general rules

� Deemed disposition of all assets – capital

gains and losses realized

� Capital gains on private corporation shares

realized

� Balance of RRSP’s and RRIF’s are brought into

income

General rules - exceptions

� Assets transferred to spouse/spousal trust

� If transfer to spousal trust – assets must vest

indefeasibly

� RRSP’s RRIF’s transferred to financially

dependent child

Assets transferred to spouse

� RRSP’s and RRIF’s may be transferred to a

spousal RRSP/RRIF without tax

� Capital property may be transferred to a

spouse at cost therefore avoiding the

realization of capital gains

� May realize a portion of the capital gains if

this is beneficial

Dependent children

� RRSP/ RRIF

�For financially dependent children:

� May be taxed in child's hands; or

� Used to purchase annuity to age 18

�For child dependent because of mental or

physical impairment:

� May be transferred to RRSP/ RRIF

� May be used to purchase annuity

Dependent children

� Ensure all non tax implications have been

considered:

�Who will control funds

�What may funds be used for

�Effect of funds on income of mentally/ physically

impaired child

�Would it be better to hold funds in trust?

Principal Residence

� Includes, among other things, a house,

condominium, share in a co-operative

housing corporation

� Also includes land around house (but

normally only up to ½ hectare-approx. 1.2

acres)

�Land in excess of above included in limited cases

Principal Residence

� You, your spouse or child must have

“ordinarily inhabited” the residence

�For this reason it will include a cottage or

vacation property

� Since 1982 a family unit may only claim one

principal residence per year

�Special rules if owned multiple properties pre

1982

Principal Residence

� Generally, gain on principal residence not

subject to tax

� If multiple properties, don’t need to decide

until year of sale/death

� Can’t use exemption on property you rent

Vacation Property

� Vacation property may qualify as principal

residence

� Must decide which property to claim as

principal residence

� Only 1 property per family unit may be

claimed

� Exemption claimed on yearly basis

Vacation Property

� Generally claim principal residence

exemption on property with higher gain

� Be careful – you may have claimed principal

residence exemption in prior year

� Property not eligible as principal residence

will be subject to tax on death

Vacation Property

� What happens if the property will not be sold

on your death?

�Underlying capital gain still subject to tax

�Estate will be liable for tax

�Keep receipts for any renovations/ improvements

�Consider life insurance to fund tax liability

Vacation Property

� Will your estate be properly equalized?

�One child receives vacation property

�One child receives cash

�Estate responsible for tax liability so part of cash

will be used to pay tax liability

� Is this what you want?

US Property

� Same rules as Cdn. vacation property but

with additional complexities

� If you rent your US property you will have to file

US tax returns

� If returns are not filed, you or your estate may be

subject to taxes and penalties

�US Estate tax may be an issue (this is an area in

flux-professional advice should be sought)

US Property

� New US rules for 2010 – 2012� Generally no US Estate tax liability of total estate is <

$5 million US

� US property includes, among other things, US real

estate and shares of US corporations (even if in RRSP)

� The maximum US estate tax rate is currently 35% of

the value of property

US Property

� Sale of US property could result in capital

gain

� Gain may be on both increased value and

exchange gain

� Withholding tax of 10% on gross proceeds

� Must file US tax return

Vacation Property

� Non-tax issues affecting vacation property

�How will the property be maintained

�Will the vacation property be to big a financial burden

� Do your children have similar financial means to take

care of maintenance

� Should the property be transferred during your life

�Will the children be able to share the use and

management of the vacation property

Vacation Property

� Non-tax issues (cont’d)

�Consider the value of other assets

�Consider setting aside a trust fund for

maintenance

� Is a right of first refusal more appropriate?

�Discuss alternatives and choices with children –

make sure you know what they wish

Charitable Gifts

� General rules:� The first $200 of donations for the year earns a tax

credit at a rate of approx. 24%

� Gifts in excess of $200 earn a credit at a rate of 46%

� Maximum donations you can claim in a year – 75% of

your net income

� Annual limit in year of death & prior year – 100% of

net income

Charitable Gifts

� A charitable gift made in your will is treated

as if it were made in your final year before

your death

� Any donation not claimed in the year of

death can be carried back one year

� Administratively, any donation not claimed

above can be transferred to a spouse

Charitable Gifts

� Planning opportunities:

�Name a charity as beneficiary of RRSP/RRIF

� Value of RRSP/RRIF included in income but offset by

credit for donation

� Avoid probate on value of RRSP/RRIF

Charitable Gifts

� Gift of marketable securities

�Normally – capital gain included in income in

year of death

�Gift of publically traded securities will result in no

capital gain but you will still get benefit of

charitable credit

�Will save money vs. donating cash

�Can also do this during your lifetime

Charitable Gifts

� Special rules also available if you gift cultural

property or ecologically sensitive land

Charitable Gifts

� Have you thought about making gifts during

your lifetime?

� Enjoy the tax benefits now.

� Be in a position to see the benefit received

from your gifts

� Endowments can provide for an ongoing

benefit that you can remain involved with

Issues affecting business owners

� Deemed disposition of shares of private

corporations (resulting capital gain subject to

income tax)

� Shares to spouse must vest indefeasibly

� If shares not transferred to spouse, estate

could have significant tax liability but no cash

Issues affecting business owners

� Use of available capital gains exemption

� Use of available capital gains exemption by

spouse

� What shares qualify for capital gains

exemption?

Issues affecting business owners

� Capital gains exemption

�Shares of qualified small business corp.; family

farm corp. or partnership; qualified farm property

�90% of assets used in active business

�50% of assets used in active business throughout

prior two years

�Are you structured to claim exemption?

Issues affecting business owners

� If you have time to plan and know who will

succeed you in the business:

�Consider an estate freeze

�The value of your business id frozen at today’s

value

�Future growth is passed to the next generation/

existing management group

Estate Freeze (cont’d)

� Gain on death cannot exceed today’s value

� Draw down equity during your lifetime to

fund lifestyle/retirement and reduce ultimate

capital gain

� Must always ensure there is sufficient capital

to last your lifetime

Issues affecting business owners

� Life insurance alternative� Premiums paid by company at relatively low tax rate

(premiums are not deductible)

� Insurance proceeds flow into the company tax free

� Can be paid out of the company without tax to pay for

tax liability on capital gain

� Life insurance can also fund buy/sell agreement

Consider the use of trusts

� Are you going to leave education funds for

your grandchildren?� If you leave the funds to your children to invest for your

grandchildren – the income will be taxed at their

marginal rate of tax (up to 46%)

� If you leave it in trust for the grandchildren, the tax rate

will be much lower

� Parents can be given the ability to encroach on capital for

a variety of reasons

Consider the use of trusts

� You could set up a trust for each grandchild

� Tax returns would be required for each trust

on an annual basis

� Is the extra administration worth the tax

savings?

Probate Fees

� Probate fees are charged by the courts to

grant letters probate

� Confirm deceased’s will is valid and executor

has authority to administer estate

� Amount of fees vary by Province

� Ontario - $5 per $1,000 up to $50,000

- $15 per $1,000 above $50,000

Probate fees - continued

� If assets pass outside will or will not subject

to probate, probate fees can be avoided

� Examples:

�RRSP’s/ RRIF’s passing directly to beneficiary

under terms of plan

�Named beneficiary under insurance policy

Probate fees - continued

� Examples – continued

�Assets held in joint ownership

�Will not subject to probate – e.g. second will

dealing with private company shares

� Professional advice needed when planning

to reduce probate fees – unintended

problems may arise

Probate fees - problems

� Example 1

�Estate of $400,000 consists of principal residence

worth $200,000 and RRSP worth $200,000

�1 child wants to retain house

�Will leaves house to 1 child and other child

named direct beneficiary of RRSP

Probate fees

� Result of example 1

�RRSP goes directly to second child – value

$200,000

�Estate is taxed on value of RRSP – estimated tax -

$57,000

�Only asset of estate is house – house must be

sold to pay tax and child ends up receiving

$143,000 and no house.

Probate Fees

� Example 2

� Individual has two children. One child is more

financially responsible than the other child

� In order to avoid probate, assets are put into joint

ownership with the financially responsible child

(child 2)

Probate Fees

� Example 2 – result� On death of parent – assets automatically transfer to child 2 as

a result of joint ownership

� Child two decides not to share assets with child 1

� Child 1 forced to go to court to try to enforce claim on assets

� Won’t happen with your children? – Unfortunately, there are

many examples where this is not the case

� Probate fees do not represent a large amount – plan with

caution- the cost may well exceed the savings

Consider impact of choices

� Everyone needs to have a will

� Who is responsible for tax liability on death

� How are assets being allocated

� Are beneficiaries receiving appropriate portion of

assets after all debts and taxes are paid

� Does the Will minimize any contentious issues

among family members

Questions?

�

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