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Too little attention is paid to cross-border tax traps. Even when advice is sought, the response is often incomplete or simply wrong because it is restricted to the jurisdiction—and residents of that jurisdiction—in which the particular tax advisor happens to practise. As a result, many step blindly into that space where jurisdictions intersect, specialized domestic rules apply, and treaties govern.

A situation commonly encountered by Canadians in their personal lives is the application of U.S. estate tax. While it is generally known that this tax applies to Florida vacation properties, it is not so well known that: (i) this tax applies to many other assets besides; and, (ii) a treaty exemption is often available. As a result, U.S. estate tax issues are too often missed, and time and money is wasted on unnecessary or ineffective trusts.

What Canadians should understand about U.S. estate tax is this: U.S. taxpayers are subject upon death to an estate tax on the total value of their worldwide assets. This tax applies at graduated rates ranging from 18 to 40% currently subject to an exemption for the first $5,340,000 of asset value. Non-U.S. taxpayers are also subject to this tax in respect of U.S. real estate, U.S. securities, certain U.S. debt obligations, U.S. business assets (unless held through a corporation), U.S. mutual funds, and interests in certain trusts such as RRSPs, RRIFs, RESPs, and TFSAs that hold U.S. assets. Unlike U.S. taxpayers, Canadians are entitled under U.S. law to an exemption of only $60,000 of asset value. U.S. estate tax therefore extends well beyond the Florida condo. But does this mean that all U.S. assets should be thrown into a trust?

In many cases, the Canada-U.S. tax treaty provides Canadians with a full exemption from U.S. estate tax. Specifically, the treaty provides that Canadian taxpayers are entitled to the same $5.34 million exemption as U.S. taxpayers in proportion to the percentage of worldwide assets located in the U.S. In other words, if 50% of your estate value is attributable to assets otherwise subject to U.S. estate tax then you are entitled to 50% of the $5.34 million exemption.

Since the application of U.S. estate tax is determined by both the estate value and the percentage allocation to the U.S., one cannot make generalized assumptions. These rules must be understood and the analysis performed in each case. If, having done the analysis, one concludes that U.S. estate tax does apply, then and only then should one consider placing ownership in a trust. And, here again, one must be wary since the trust must be drafted to accommodate both Canadian and U.S. tax and legal considerations. Any old trust will not do. Only a trust prepared by Canadian and U.S. lawyers in collaboration will avoid U.S. estate tax without triggering unexpected legal or tax consequences on either side of the border. There is no such thing as a one-size-fits-all trust.

When, therefore, you seek advice on any matter involving more than one jurisdiction, ensure that your advisor is well-versed in the legal and tax issues on both sides of the border as well as in the possible application of treaties. If necessary, consult counsel in the other jurisdiction—because the world is not as small as it was and the cost of ignorance will always exceed the cost of proper planning.

Article written by: Patrick Westaway
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Estate Administration – Lisa Toner

Common issues that arise in families upon the death of a parent (or parents) are questions as to the parents’ choice of Executor, the distribution of personal items with sentimental value, the treatment of the family cottage or vacation property, and any unequal division of the Estate among beneficiaries, whether actual or perceived.

Clear, effective and open communication as to one’s Estate plan can go a long way to reducing conflict and resentment in a family after death. One way of achieving this is through the family meeting. The family meeting is an opportunity to communicate to your family the reasons for the decisions you have made in these and other areas.

Experts suggest that a family meeting should have a formal agenda so that the participants realize that it is not a social function. Parents who plan to hold a family meeting with their adult children should consider and communicate their goals for the meeting ahead of time. They will also want to consider whether to include their children’s spouses in the meeting. If spouses are not invited, explain why. During the meeting, it is important for parents not to simply “talk at” their children, but to invite and actively listen to feedback. (Whether that feedback ultimately results in changes to the Estate plan, is of course, up to you).

Many people consider the appointment of Executor to be an honour, and are hurt when they learn they were not chosen. Explain to your children the reasons for choosing one (or more) of your children over the other or others. It could be something as simple as geography: while certainly not impossible, there is no question that having an out-of-province Executor is more difficult. Perhaps one of your children is single while the other has a full-time job and three children under the age of five. Therefore, the single child is simply more available to devote the time required. Having several Executors can be unwieldy which is why you only selected one or two. Having this discussion can reassure your children that your choice does not mean you favour one child over the other, or that you believe one child to be less capable.

Resentment can also arise when the named Executor proposes to take compensation for administering the Estate. If you expect your Executor to take compensation (and I believe you should), explain why. Many children do not understand the role and responsibilities and the time commitment that is required of an Executor. Executors also risk personal liability for any mistakes that are made. These are all good reasons for the Executor to be fairly compensated for the work performed.

If you are leaving a particular item that may have sentimental value to one child, discuss that. You may be surprised to find that child is not particularly interested in it and is happy for it to go to another child who has always desired it. If, on the other hand, you have simply given the Executor full discretion to distribute your personal and household items, explain why.

As indicated in a prior article in LegalEase, the family cottage or vacation property is rife with opportunity for conflict. A thorough discussion about the different options for dealing with the property is recommended. Is it your intention that one or more of the children receive the cottage, and that you will equalize this gift with other assets going to the other child(ren)? Why? One child may feel the cottage should go to her as she uses it the most and has put time, effort and money into its upkeep. The other children may feel that is unfair as they would use the cottage more if they didn’t live so far away; and they would be happy to help with the maintenance and financial upkeep of the property but are unable to do so for economic reasons. Or perhaps you have decided the cottage should be sold (with or without the children having right of first refusal). Either way, chances are there will be capital gains tax payable on the cottage. Is that to be paid by the child or children who receive the cottage or by the Estate? It may even be preferable to transfer the property before death. These are all points for discussion.

There is really no limit to the items that can be reviewed at the family meeting. It may even be necessary or desirable to have a further meeting or meetings. It is advisable to have notes taken or minutes kept. Of course, it is always recommended to ensure that the Estate plan, once conceived, is properly documented through a well-drafted Will, or perhaps even the use of Trusts.

For more information about Estate planning, please contact Lisa Toner.

Article written by
Lisa Toner
, B. Soc. Sci., LL.B., has been with SorbaraLaw since September 2007, practicing in the areas of wills, estate planning and estate administration.

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Wills, Estates, Trusts, and Elder Law – Lisa Toner

Often, minor children are designated as beneficiaries of the proceeds of life insurance policies, or of investment accounts such as RRSPs and RRIFs.  Minor children, however, are considered parties under a disability and as such are not entitled to receive funds directly.  Therefore, the funds must be received by a Trustee on behalf of the child, and kept invested for his or her benefit until the age of majority (age eighteen in Ontario).

Unfortunately, in many cases, beneficiary designations are made without a great deal of consideration and without any professional advice.  Often, Trustees for minor beneficiaries are not named.  This often occurs when group life insurance and/or group RRSPs are offered by an employer, and a new employee is required to sign a number of forms at once for his or her employer.  Often these forms are standardized, and some do not include space for naming a Trustee.  If the form does contain information regarding naming a Trustee, it is typically in fine print and easily missed.  Often, the forms do not include powers for the Trustee, but if they do, they are restricted to a short, standard paragraph, which cannot be amended to reflect the employee’s specific circumstances or wishes.

Where no powers for the Trustee are specified, then a “bare trust” is created, meaning the funds must be held until the minor is eighteen, and in the meantime, there is no ability to access the funds for the child’s needs (for example, for sports, camps, orthodontics, music lessons, counseling, education, etc.).  In addition, these standard Trustee clauses never permit the holding of funds beyond age eighteen.

A child’s parent, while automatically the guardian of the child’s person, is not automatically the guardian of the child’s property.  Thus, if a Trustee has not been named, the child’s parent or guardian must apply to Court to be appointed to manage the child’s property.  The Office of the Children’s Lawyer (OCL) must be served with the Application, and responds to it on behalf of the child.  It is by no means automatic that the Application will succeed.  In many cases, the OCL will not consent to the guardianship Application, particularly if the person applying has little in the way of income and/or assets, has no experience managing money, or has a history of financial mismanagement.  As well, if a child’s parent or guardian applies, he or she may be considered to have a conflict of interest if he or she wishes to access the funds to help defray his or her own obligation to support the child.  In addition, the OCL is often of the view that payment of the legal fees for the Application ought not to be made from the minor’s funds, especially if the Application has little chance of success, and as such, the proposed guardian is required to pay personally for what may well be an unsuccessful Application.

If no Trustee is named, and no guardian appointed by the Court, the funds will be paid into Court to be managed by the Accountant of the Superior Court of Justice (ASCJ).  This is not necessarily an undesirable outcome, as over time, some Trustees and guardians of property find the role to be time-consuming and complex; but it is in all likelihood, not the outcome the deceased would have wanted.  Clearly, it is important to have the appropriate beneficiary designations in place in advance, in order to avoid this situation completely.  Added benefits of doing so are the ability to specify Trustees’ powers, and to have the funds held until later than age eighteen if desired.  Beneficiary designations do not have to be made on the insurance policy or on the investment account forms.  They can be done separately as a stand-alone document, or in a Will.  Advice should be obtained from a lawyer competent in Wills and estate planning, and from your financial advisor.

 

* * This article is intended only to inform and educate.  It is not legal advice.  Be sure to contact a lawyer to obtain legal advice on any specific matter.

Author: Lisa Toner is a lawyer at Sorbara, Schumacher, McCann LLP, one of the largest and most respected regional law firms in Ontario. Lisa may be reached at (519) 741-8010 or <ltoner@sorbaralaw.com>

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Wills, Estates, Trusts, and Elder Law – Lisa Toner

Few assets generate the kind of emotion associated with the family vacation property.  Whether it is a cottage, farm, ski chalet, or a condominium in a warm locale, estate planning for this asset can be a significant challenge, and the lack of proper planning can result in costly tax consequences, as well as hurt feelings among family members.

In Canada, a portion of the increase in value of certain assets from the date of acquisition to the date of disposition is subject to capital gains tax.  The principal residence is one exception.  Since Canadians are entitled to only one “principal residence”, however, the capital gains tax will usually apply to the vacation property.  When the property is left to a spouse, the capital gains tax is deferred until the death of the second spouse.  When the vacation property has been in the family for many years, this tax, which is triggered by death or by the sale of the property to a third party, can be significant.

If there is not enough liquidity in the estate after death to pay the capital gains tax, the property may have to be sold.  This is usually contrary to the vacation property owner’s desire to have the property remain in the family to be enjoyed by future generations.  One way of addressing this issue is to purchase life insurance, assuming the vacation property owner is in good health and insurance can be obtained at a reasonable cost.  The estate will receive the proceeds of the life insurance tax-free and can use those funds to cover any capital gains tax liability.

A second option is to transfer the property to the next generation during the lifetime of the owner, either outright or as joint tenants, or to transfer the property into a family trust.  Although this will trigger a capital gain in the name of the owner at the time of the transfer, any future gains will accrue in the names of the next generation property owners.  This may make sense if the next generation is the primary users of the property in any event.

Where the property is transferred to more than one owner, whether before death or after, a co-ownership agreement is highly recommended.  The agreement should address such issues as the payment of ongoing repairs and maintenance, the payment of large capital expenditures such as a new roof or new windows, and what to do if an owner fails to fulfill his or her obligations in this regard.  The agreement should speak to what happens if one of the owners dies or becomes incapacitated, the division of responsibilities among owners for tasks such as paying bills and performing routine property maintenance, and could also include a schedule for use of the property (or a method for determining the schedule) in each year.

Aside from possible tax consequences, there can be other complicating factors in dealing with vacation properties.  What if only one child uses the property but does not have the financial ability to maintain it himself, and/or buy out his siblings?  Since there may be family members who are not interested or cannot afford to co-own the vacation property, a discussion as to the best method of dealing with this asset on death would be wise.  If the property is dealt with in the Will rather than transferred prior to death, granting each child, in a pre-determined order, a first right of refusal to purchase the property, as well as establishing a method for valuing the property, should be considered.

 

* * This article is intended only to inform and educate.  It is not legal advice.  Be sure to contact a lawyer to obtain legal advice on any specific matter.

Author: Lisa Toner is a lawyer at Sorbara, Schumacher, McCann LLP, one of the largest and most respected regional law firms in Ontario. Lisa may be reached at (519) 741-8010 or <ltoner@sorbaralaw.com>

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