Three years ago, Ontario’s Succession Law Reform Act (SLRA) was amended so that separated spouses are treated as divorced at the time of death. As of Jan. 1, the change is in full effect, potentially simplifying estate administration in some instances and also serving as a reminder that clients should keep their estate plans current.

The amendment to the SLRA, from Jan. 1, 2022, means that if a person dies without a will and they were separated at the time, the person’s spouse won’t be entitled to a preferential share in their property, Latoya Brown, an associate with Fasken Martineau DuMoulin LLP in Toronto, wrote in a recent blog post.

A couple is considered separated if they lived apart, due to marriage breakdown, at the time of the death for three years or more; they had a valid separation agreement; they had a court-ordered settlement agreement; or a family arbitration award had been made.

The amendment requires that the couple lived apart for three years beginning the day the amendment came into force, Brown wrote, and those three years have passed as of New Year’s Day.

As such, “administering a separated spouse’s estate may become one step simpler, as separated spouses living apart for three years as of Jan. 1 may not need a separation agreement, court order or arbitration order to obtain a separated spouse status,” Brown wrote.

Corina Weigl, a partner with Fasken Martineau DuMoulin LLP in Toronto, said that when clients separate, updating their wills, along with powers of attorney, should still be at the top of their checklists.

“If you separate from your married spouse or your common-law spouse, you want to change your will immediately; you don’t want to wait for the three-year window to kick in,” Weigl said in an interview. “You want to change your will to remove benefits you’ve originally provided to your now separated spouse, or if you’ve appointed him or her as an executor or trustee under your will.”

More generally, Weigl noted that contracts, such as marriage agreements, can be an important planning consideration in certain situations.

“Couples who come into a relationship where they’ve got equal earning capacity — it may not warrant a contract,” Weigl said. However, contracts are advised in the case of second marriages and marriages of children from wealthy families.

Regarding the latter, a contract makes sense, Weigl said, because they may be walking into the marriage or common-law relationship with property or financial benefits provided by their parents.

Michelle Schriver

Michelle is a senior reporter for Advisor.ca and sister publication Investment Executive. She has worked with the team since 2015 and been recognized by the National Magazine Awards and SABEW for her reporting. Email her at michelle@newcom.ca.

Many Canadians use inter vivos family trusts to hold assets such as private corporation shares, investments and real property for purposes of family and estate planning, and to access certain tax-planning opportunities. These trusts are generally created by a settlor during their lifetime for the benefit of beneficiaries or classes of beneficiaries.

While these trusts may have fixed entitlements, family trusts are typically discretionary in nature, allowing the trustee to exercise discretion depending on the beneficiaries and the goals of the trust. In some cases, a family trust is used to move certain assets outside of an estate, bypassing probate taxes. In these cases, family trusts may also be structured to trigger entitlements or distribute assets upon the death of a beneficiary in a way that will tie in with the testamentary wishes of that beneficiary.

Recent federal tax legislation has been introduced that may create a chilling effect on trust planning and affect whether these structures are still the appropriate choice for some clients. These changes include:

Capital gains inclusion rate increase

Budget 2024 proposes to increase the capital gains inclusion rate from one-half (50%) to two-thirds (66.7%) for corporations and most trusts, and on the portion of capital gains realized that exceed $250,000 for individuals, graduated rate estates, and qualified disability trusts. This change is intended to be effective for capital gains realized for the year on or after June 25, 2024.

For the average family trust, this means that not only is all income retained in the trust taxed at the highest marginal rate but also all capital gains realized by the trust are taxed at the highest capital gains inclusion rate. This works out to roughly a 10% increase in the rate of tax, and roughly 30% in relative increase in taxation of capital gains, depending on the province or territory. For example, Alberta’s capital gains tax rate increased from 24% to 32%, which is an increase of approximately  33.3%.

One notable exception is cases in which it is possible for the trust property to be transferred out of the trust on a tax-deferred basis to a Canadian resident beneficiary, who then realizes the capital gain. Depending on the property, the terms of the trust deed and the status of the beneficiaries, this may not always be possible. 

Increase in alternative minimum tax

The alternative minimum tax (AMT) is a parallel tax calculation that applies where normal calculations would result in little or no tax payable. AMT applies a minimum flat-rate tax after an exempted amount and allows limited access to various credits and deductions.

If the parallel AMT calculation for a tax year exceeds the income taxes otherwise payable under the Income Tax Act (ITA), an individual or certain trusts (including most family trusts considered in this article) would be required to pay the difference. The amount of additional AMT paid in a year under these rules can generally be deducted from tax payable in the following seven taxation years, to the extent the tax otherwise payable in those years exceeds the applicable AMT. AMT becomes permanent if not recovered within this period.

Budget 2023 raised the AMT rate to 20.5% from 15%, and raised the “safe-harbour” exemption (taxable income that is exempt from AMT) for individuals to $173,000 from $40,000. Budget 2024 provided some additional legislative guidance and relief.

Trusts subject to AMT do not benefit from a safe-harbour amount. So, trusts with taxable income would generally have greater exposure to AMT compared with individuals.

For the average family trust, this can be of particular concern, as only 50% of interest expenses can be deducted (which may affect prescribed-rate loan arrangements) and 80% of donation credits can be used for AMT calculation purposes. Having cash on hand to pay the AMT may result in more income being taxed in the trust at the highest marginal rate. Unlike individuals, most trusts are not taxed at graduated rates depending on income. As a result, less income is distributed from the trust to its beneficiaries.

Trust reporting rules

Beginning in the 2023 taxation year, most trusts and trust arrangements with taxation years ending after December 30, 2023, are required to complete a reporting schedule (Schedule 15).

These reporting rules seek information — including name, address, date of birth and taxpayer identification number — identifying the settlors, trustees, beneficiaries and others who can “exert influence” on the trust.

Trusts may be subject to penalties for non-compliance if they provide incomplete schedules or inaccurate information. In certain instances where “gross negligence” is claimed, these penalties can be as high as 5% of the highest fair market value of the trust’s assets in the year. Notably, these penalties can be assessed to both trustees and tax return preparers.

Most family trusts are subject to these rules, unless they meet one of the narrow exceptions found in the ITA.

Information-gathering may be difficult in cases in which beneficiaries are unknown, uncooperative or difficult to ascertain (such as a poorly defined class of beneficiaries).

For the average family trust, this requirement means an increase in annual compliance costs, increased risks to trustees and tax preparers, and a decrease in privacy.  

This is the first article in a two-part series on family trusts.

Next: Pros and cons of family trusts

Matt Trotta

Tax & Estate

Matt Trotta is vice-president, Tax, Retirement and Estate Planning with CI Global Asset Management.

Many online activities create digital assets that have become an essential part of our lives. Yet, when creating an estate plan, clients tend to overlook these often valuable assets, which can pose a challenge for an executor when administering the estate. Many clients don’t realize just how many digital assets they have until they start accounting for them.

What are digital assets?

A digital asset is anything in digital form that can create value. These assets can include:

• accounts with social media platforms, such as Facebook, Instagram, YouTube, Reddit, Pinterest, TikTok and LinkedIn, as well as email and cloud storage accounts;
• financial accounts, such as online banking accounts, payment platforms such as Paypal, investment accounts and cryptocurrencies;
• accounts with subscription services, such as Netflix, Crave, Amazon Prime Video, Spotify and Apple Music;
• loyalty rewards, such as Air Miles, PC Optimum points and hotel points;
• digital media content, such as purchased e-books, music, videos and photos stored online;
• intellectual property, such as digital patents, trademarks and copyrights;
• other properties, such as web domains, blogs, online shopping accounts, online dating accounts and gaming accounts.

Why should clients include digital assets in their estate plans?

A client’s digital assets may exist in many forms and in many locations online, so they can be difficult to locate. Even if family members are aware of the assets, gaining access and obtaining them can be difficult.

Overcoming barriers to access

Most digital assets require a password to access information or log in to the account. Without the proper credentials, getting access to the digital asset can be impossible. A digital asset that cannot be accessed — for example, a large cryptocurrency account — essentially no longer exists. So, recording and storing all login and password information securely is of utmost importance.

Clients also should be aware of laws that may restrict access to anyone other than the owner of the account. Certain social media platforms, for example, prohibit anyone from having access to the accounts unless the original owner provided permission. Family members could be prevented from accessing photos, videos and other stored information.

Assets with monetary value

Some assets have financial value. They include cryptocurrencies such as bitcoin and ether, non-fungible tokens (NFTs), digital artwork and domain names.

Other assets that can have significant value include digital books published by the client and blogs that generate revenue through subscriptions or sales. Further examples include social media accounts with large followings, such as a YouTube channel, and accounts with TikTok and Instagram that generate revenue.

Loyalty rewards can hold significant monetary value, as well. Many people accumulate points for many years, which can result in accounts holding considerable value. Most clients would want these assets to be passed on to their heirs.

Loyalty programs each have terms and conditions regarding the transfer of these assets, so it is important for clients to be aware of the ways these assets should be dealt with. For example, some programs’ rewards expire upon death, although a transfer during the lifetime of the member may be allowed.

Without proper planning, there could be legal issues in accessing and administering these assets. Clients must be proactive to ensure they have included their intention concerning these assets in their estate planning documents in order to minimize the risk of losing access to these valuable assets.

Assets with sentimental value

Some assets, such as family photographs and videos, hold personal and emotional value to clients and family members. They may be stored on computers, mobile devices, social media accounts or cloud accounts. Other sentimental assets can include emails and messages that capture meaningful moments.

These memories may be permanently lost without usernames and passwords. Some better-known service providers have legacy programs to assist heirs with accessing accounts that may hold sentimental assets.

Creating a digital asset inventory

Clients should create a comprehensive document that lists of all their digital assets along with information on how to access those assets, including logins and passwords.

They must note all credentials, including security questions and answers, and details of two-factor authentication. Include encryption keys or recovery phrases for crypto wallets.

Password managers, which are becoming a common way to store all credentials, can often be shared with a trusted person. Clients may choose to keep physical copies of the document in safe places such as an at-home safe, a safety deposit box at a bank, with the client’s estate lawyer or in a safe spot in the home. Another option is to store the inventory securely in a cloud account.

This is not a one-time effort. This digital asset inventory should be updated as the client creates accounts, changes passwords and acquires new digital assets, or if any information changes. The inventory should be reviewed annually to ensure the information is up to date.

Digital assets and the will

Your client’s executor is responsible for managing and administering the digital assets after their death. The will should have a clause or additional language that specifically addresses the client’s digital assets and gives the executor directions and powers to administer the assets. However, the actual digital asset inventory should be a separate document, both to protect the client’s privacy and enable them to update the inventory informally as the need arises.  

Given the digital age we are in, clients must take these assets into consideration and make them a part of their estate plan. The role of the executor is already difficult, and they can face further hardships when they are unaware of what assets exist and how to access them. Clients must stay proactive in updating their digital inventory and keeping up with the terms of service for various service providers.

Alyssa Mitha

Estate Planning

Alyssa Mitha is director, Tax and Estate Planning with Mackenzie Investments. She can be reached at alyssa.mitha@mackenzieinvestments.com.

The federal government’s decision to double the Canada Pension Plan’s death benefit for a small group of contributors has put a spotlight on the adequacy of the amount itself.

The standard benefit is $2,500 for people with a long enough history of CPP contributions. Following the passage of budget implementation Bill C-69, a $5,000 death benefit will be payable to certain contributors.

To qualify for the top-up, no other CPP benefits — except the orphan’s benefit — can have been paid out in connection with the deceased’s contributions.

That rules out any contributor leaving behind a spouse or common-law partner who could claim survivor benefits, as well as anyone who dies after receiving CPP payments of their own, said pension specialist Lea Koiv, president of Lea Koiv & Associates Inc. in Toronto.

“We’re talking essentially about the estates of people without spouses. Big deal,” Koiv said. “When you look at what we now pay in, $5,000 is like tossing them a bone.”

“I’m still puzzled by why the death benefit is so small,” she added, noting that the peak of the CPP death benefit came in 1997, when the maximum payment was $3,580, or one-tenth of the year’s maximum pensionable earnings (YMPE).

For 2024, with the YMPE at $68,500, a comparable death benefit would be $6,850. The figure rises if you account for the year’s additional maximum pensionable earnings of $73,200, which applies for the first time this year to those whose earnings exceed the first ceiling.

The death benefit was one of the casualties of the 1997 CPP reforms, when the maximum payment was cut to $2,500 as part of an effort to tame the pension’s finances.

As an alternative to a wide-ranging death-benefit bump, Koiv suggested the federal government exempt the payments from tax, regardless of whether the recipient gets the regular $2,500 or the enhanced $5,000 benefit.

“In most cases, the estate will pay the tax,” she said. “Where no estate return is filed, CRA allows the beneficiaries to pay the tax on the amount.”

Thuy Lam, a certified financial planner with Objective Financial Partners in Markham, Ont., called the new top-up a “good first step” on the road to a broader death-benefit enhancement.

“These people contributed, and it’s only fair that their estate, if there are no survivors, will still have access to a dignified service,” she said.

The death benefit has been stuck at $2,500 for almost three decades, Lam said, so some form of indexation is needed for the remainder of CPP contributors who qualify for the standard death benefit.

“Just being able to keep pace with inflation is a very important change that I would like to see,” she said.

Bill C-69 included several other amendments to the CPP:

• Creation of a new child’s benefit for dependent children aged 18 to 24 who attend school part time, as long as their deceased or disabled parents contributed to CPP for the minimum qualifying period. The flat rate benefit is worth $147.06 per month for 2024, or half of the $294.12 benefit payable to dependent children in the same age range in full-time education.
• Maintaining eligibility for the disabled contributor’s child’s benefit in cases where the disabled contributor reaches age 65. Previously, a dependent child’s entitlement was tied to their parent’s receipt of disability benefits, and disabled contributors are automatically switched from disability benefits to a CPP pension at age 65.
• Extending the CPP’s incapacity provisions to protect the date of application for the disabled contributor’s child’s benefit. The CPP already allowed applications for disability benefits to be backdated on behalf of an incapacitated person who could have applied earlier, but there was previously no such allowance for a related application for the child’s benefit.
• Precluding entitlement to the survivor’s pension in cases where a person has received a division of unadjusted pensionable earnings in respect of their deceased separated spouse.
• Clarifying the determination of the payee of the disabled contributor’s child’s benefit. The CPP previously directed payments to be made to the person or agency with “custody and control of the child.” The updated version provides for payments to be made to the person or agency with “decision-making responsibility” for the child, reflecting recent changes to terminology in the federal Divorce Act.

Lam said a common thread runs through all the CPP changes included in the budget.

“They don’t necessarily impact a large proportion of the population,” she said. “But they do make a big impact on those who are affected.”

Matthew Ardrey, portfolio manager and senior financial planner with TriDelta Private Wealth in Toronto, agreed, saying relatively few financial planners will be dealing with affected clients on a day-to-day basis.   

“These are targeted for the most part at a group of people who are probably more vulnerable than the average Canadian,” he said.

Ardrey welcomed the changes extending eligibility for the child’s benefit, noting that his own book includes parents in their 60s with dependent children.

“I think it makes sense to expand that out,” Ardrey said. “People are having kids at all sorts of different ages.”

Koiv said the effect of the amendments barring entitlement to a survivor’s pension to some separated spouses will vary across the country, since some provinces adopt a different approach to the splitting of CPP credits on separation. In most provinces and territories, credit splitting is mandatory, but in B.C., Alberta, Saskatchewan and Quebec, separated couples can waive their rights.

Still, even in jurisdictions where credit splitting is optional, many separated couples will have applied to do so, precluding them from claiming a survivor’s pension when their ex dies. 

“They will benefit from having their own retirement pension increased on account of having split the pension credits,” Koiv said.

Ben Margles, who provides wealth advisory support at Wealth Stewards in Toronto, said many Canadians’ knowledge of the CPP is confined to its core retirement benefits, meaning the recent amendments deal with coverage they may not be aware of. Despite the eligibility extensions and benefit improvements laid out in the budget, he encourages his firm’s clients to look beyond the CPP when planning.  

“The CPP is supposed to provide a base level of coverage, so it’s not something you can quite rely on to cover all of your expenses,” he said. “Families who haven’t planned ahead are left to shoulder that financial burden, while also dealing with the emotional and mental challenges that come with death or disability.”  

All CPP changes passed in C-69 will come into force once seven provinces, representing at least two-thirds of the population, have provided their formal consent.

Michael McKiernan

Michael is a freelance legal affairs reporter who has been covering law and business since 2010.

A pour-over trust clause in a will is used when a testator created a trust during their lifetime and at death wants to capture assets that did not — whether intentionally or unintentionally — form part of the trust. The will names the trust as a beneficiary and the clause essentially stipulates that the assets go through the trust and are distributed in accordance with the terms of the trust deed. With this planning, estate administration is simplified, and the testator’s privacy is maintained, because a trust deed, unlike a will, is not a public record.

These types of wills are commonly used in the U.S., but in many Canadian jurisdictions, they are problematic when the trust is a revocable trust. Essentially, a will with a pour-over trust clause allows the will to be altered by altering the trust deed. The signing process for a will or an amendment to a will has formal requirements including the presence of two witnesses. A pour-over trust could potentially create an opportunity for an individual to change their will without meeting the formal requirements for a valid will.  

Relevant case law

The B.C. Court of Appeal in the 2019 decision from Quinn Estate v. Rydland held that the pour-over clause in the will was invalid because, as of the will date, the trust was amendable and revocable and consequently not a “presently existing document.” Therefore, the testator could not use his will to dispose of property not executed as a will.

The case involves the famed Canadian hockey player, head coach and executive Pat Quinn.  Quinn’s will was prepared by a U.S. attorney and executed in B.C., where Quinn passed away in 2014. A clause in his will granted the residue of his estate to a revocable inter vivos trust established by Quinn and his spouse prior to the will execution.

The trust deed had been amended after Quinn and witnesses signed his will. Since the trust deed could be amended, the beneficiaries could be changed without the execution requirements laid out in Section 37 of B.C.’s Wills, Estates and Succession Act (WESA).

Further, the clause could not be cured — that is, saved — with the application of Section 58 of the WESA, which permits the court to cure a non-compliant will, declaring that any “record, document or writing or marking on a will or document” has testamentary effect if satisfied that the “record, document or writing” embodies the testamentary intention of the deceased. The court declined to apply Section 58. It was fact that the trust was amendable, causing it to be unsavable under Section 58, as it contradicted the final and fixed intention that is the very nature of a testamentary document.

Further, the court held that the clause in question was part of a will that complied with the formalities, but the clause sought to get around the formalities entirely.

The result in this decision was Quinn’s estate would be distributed on an intestacy.

A more recent decision came out of the Ontario Superior Court in 2022 in Vilenski v. Weinrib-Wolfman. In this case, the court held that if there was any chance the referenced trust could be amended or revoked, the pour-over clause in the will referring to the trust would be deemed invalid.

In some Canadian jurisdictions, such as Alberta, the courts have not yet had to make an ultimate decision regarding the validity of pour-over clauses in a will. But practitioners should be cautious, as the different jurisdictions have contrasting authority. For example, the Nova Scotia Supreme Court in MacCallum Estate, another 2022 decision, upheld the pour-over clause and distinguished it from Quinn Estate based on the fact that there was no amendment to the trust.  

These cases highlight the importance of obtaining the appropriate tax and legal advice on both sides of the border. It is essential that advisors, lawyers and accountants are aware that estate planning that is valid in the U.S. may ultimately be deemed invalid in Canada. At the very least, contingent testamentary trust language, or alternate beneficiaries, should be used to avoid an intestacy if the court deems the clause to be invalid.

The testator could also create a testamentary trust in the will with similar language to the inter vivos trust with the same beneficiaries. The trustee of the testamentary trust may be given the power to transfer the assets of the testamentary trust to other trusts with the same beneficiaries.

When incorporating pour-over trust clauses in your estate planning, wills should be reviewed to ensure they remain valid in Canada and, in particular, in the jurisdiction in which the client resides.

Alyssa Mitha

Estate Planning

Alyssa Mitha is director, Tax and Estate Planning with Mackenzie Investments. She can be reached at alyssa.mitha@mackenzieinvestments.com.

A trust holding a GIC must file an annual trust return under expanded reporting rules, confirmed a CRA official at the STEP Canada national conference in Toronto on Tuesday.

Trusts that hold assets with a combined fair market value of less than $50,000 throughout a year are generally exempt from annual filing requirements under new requirements for trusts in 2023 and beyond.

However, the filing exemption is restricted to trusts holding only certain assets, including money; listed securities; debt obligations that pay interest on a debt issued or guaranteed (other than by CDIC insurance) by the federal government; and interest-paying debt issued by a provincial or municipal government.

A debt obligation issued by a Canadian bank or trust company is not included in the exemption, said Marina Panourgias, a manager in the income tax rulings directorate of the CRA, in response to a question posed during the STEP conference.

Further, the CRA does not view a GIC as “money,” a term that is otherwise undefined in the Income Tax Act (ITA).

“Overall, we’ve concluded that a GIC issued by a Canadian bank or trust company does not meet the description of any of the assets listed” under the ITA’s exemption provision, Panourgias said.  “So, if a trust holds such a GIC, then it would not be a trust described in that [relieving] provision.”

At last year’s STEP Canada conference, Panourgias said the CRA would not consider collectible gold or silver coins or bars, which are sometimes used to settle a trust when it’s established, to be “money” for the purposes of qualifying for the trust reporting exemption.

“These assets would generally not serve as a medium of exchange in a financial transaction in the same way that Canadian dollars would, for example,” Panourgias said.

Panourgias also confirmed at the 2023 conference that if a trust held a dividend receivable, it would not be eligible for the reporting exception either.

In 2022, the federal government passed expanded trust reporting rules as part of its broader effort to combat “aggressive tax avoidance, tax evasion, money laundering and other criminal activities.” The new rules are effective for trusts with year-ends on Dec. 31, 2023, and after.

Trustees affected by the new rules must file a T3 trust return along with a new Schedule 15 beneficial information return by the filing deadline, which is 90 days after the trust’s year-end. Trustees must also report information such as the names, addresses and social insurance numbers of beneficiaries and other parties connected to a trust.

The expanded reporting rules extend to bare trusts, which are trusts in which a trustee’s only duty is to transfer property to a beneficiary on demand.

On March 28, the CRA announced that trustees of bare trusts would not have to file a trust return or Schedule 15 for 2023 unless the CRA makes a direct request. The announcement came days before the April 2 deadline for the filing of 2023 trust returns.

Rudy Mezzetta

Rudy is a former senior reporter for Advisor.ca and its sister publication, Investment Executive.

Animal lovers may treat pets as part of the family, but that’s not the way Ontario law sees it.

In a case that caught the public imagination, an Ontario Superior Court judge ruled that a woman must turn over her deceased partner’s dog to his executor after finding the pet formed part of his estate.

The case had nothing to do with who loved bull terrier Rocco Jr. more or who would make the best owner, the judge wrote, noting that dogs are “personal property much like other chattels (albeit indivisible).”

Aliesha Verma, the partner of the deceased, has raised almost $30,000 in a GoFundMe campaign to cover her legal costs. But she was always fighting an uphill battle, said Timothy Sullivan, principal at SullivanLaw in Ottawa.

“A pet is personal property under the law, as crass as that might sound when you’re talking about a living, breathing, emotional being,” Sullivan said. “They are not persons, so they are property and they get distributed as such.”

In the 2021 case Coates v. Dickson, the judge endorsed a “broader, more contemporary approach” to pet ownership that considers factors such as each party’s relationship with the animal, Sullivan said, as opposed to simply who paid for the pet and its care.

Rebeka Breder, principal at animal law firm Breder Law in Vancouver, said Verma may have obtained a different result in B.C., where a series of court rulings have recognized the need to consider the animal’s best interest in disputes over pet ownership.

“My heart goes out more than anyone to Rocco, because Rocco will now be ripped apart from the only family he knows and put in another setting that is completely foreign to him,” Breder said. “I’m not completely surprised, but I am very disappointed, because it flies in the face of the way the law is evolving on this issue.”

Recent amendments to B.C.’s Family Law Act have codified the shift in the jurisprudence regarding disputes over pet custody in matters of separation and divorce.  

The changes, which came into force on Jan. 15, reclassify pets under a category of property known as “companion animals.” In addition, B.C. judges making decisions over their ownership or rights of possession must now consider factors regarding the best interests of the animal itself, including the extent to which each spouse cared for the pet, any history of cruelty, and the animal’s relationship with any children in the family.

The updated law does not cover guide dogs, service dogs and animals kept for working or agricultural purposes.

Kim Gale, principal at Toronto estate-litigation firm Gale Law, said cases like Rocco Jr.’s are more the exception than the rule.

“My experience is the opposite. In my world, people usually that people don’t want the dog or pet,” Gale said. “Estate trustees are happy if they can find someone who wants to take on the responsibility.”

Gale explained the law’s traditional view of pets as property stems from the value historically attached to livestock and working animals.

“That kind of animal ownership can be very profitable,” she said. “Domesticated pets cost money.”

Kathy McMillan, associate portfolio manager with Richardson Wealth in Calgary, said it’s heartbreaking when she hears stories about animals left stranded after their owner dies.  As a result, she encourages her clients to include provisions for pets in their estate plans.

“They’ve been faithful all these years. You need to think about taking care of them,” McMillan said.

McMillan has followed her own advice, recently recruiting friends to act as guardians to Spookie and Gracie — the cats McMillan added to her family at the height of the Covid-19 pandemic — if she dies before the cats.

She has also allocated funds from her estate to pay for the cats’ expenses, joking that the amount will need to be “more than substantial” to keep them in the style they’re accustomed to.

“Toss some money at it. They need kitty litter and gourmet cat food,” McMillan said. Most importantly, “I know if something happens to me, Spookie and Gracie will be in super good hands with people that love them.”

Sullivan said one of the practical difficulties when providing for pets in a will is the discrepancy between human and animal life expectancies. Many years typically elapse between the execution of a will and the death of the testator, by which time they may have already outlived their cherished pet, he explained.

Sullivan overcomes this challenge by including a “pet clause” without being specific about the animal’s identity.

“It could say that any pet alive at the time of death is given to whichever person, and there might be an allowance provided to them for some of the initial care,” he said. “That person could always refuse, but presumably you would make that arrangement with them, so that it’s not being sprung on them.”

Michael McKiernan

Michael is a freelance legal affairs reporter who has been covering law and business since 2010.

There are many reasons that a beneficiary, co-executor or other interested party might want to remove an executor, including hostile relations, failure to act or possible misconduct. However, courts have generally been reluctant to do so, preferring not to interfere with the deceased’s choice of who should administer the estate.

“The threshold for evidence to be submitted in these kinds of cases is very high,” said Shruthi Raman, an estate and trust lawyer with Synergys Law LLP in Toronto. “The conduct has to be so egregious and so harmful to the administration of the estate or to the interests of the beneficiaries that the court must seriously consider removal.”

The court will prioritize the welfare of the beneficiaries, said Matthew Urback, partner with Shibley Righton LLP in Toronto: “If there’s any risk to [estate] funds — risk of loss, risk to the trust, a risk that there could be further impropriety — that’s when this turns into something a little bit more contentious, and an executor may be removed.”

An individual named as an executor in a will does not have to accept the role. However, once they begin administering an estate, they must continue to do so unless they are removed by the court, either after  applying to step down or after someone else has applied to remove them.

Anyone with an interest in an estate can apply to court to have an executor removed if they think the executor is not fulfilling their fiduciary duties to the beneficiaries or not acting in the best interests of the estate.

The most common reason is breach of fiduciary duty, Raman said: “They could have come across information or [identified] assets that they have failed to disclose to the beneficiaries, or they are refusing or failing to provide an accounting for work to date, or they just simply failed to keep a balanced and even hand between the beneficiaries.”  

Urback said misconduct, acting in bad faith, personally benefiting from the estate, acting to the detriment of the beneficiaries, and an inability or an unwillingness to do their job are all relevant considerations for the court.

Where multiple executors are administering an estate, friction between executors can jeopardize the timely administration of an estate and lead to executors asking the court to remove another executor, Raman said.

Someone might also look to remove an executor who has become incapable due to illness, has declared personal bankruptcy, or is facing a criminal conviction, Raman said: “Anything that would affect the trustworthiness, or the creditworthiness, of the executor could create grounds for proceeding with an application to have them removed.”

Courts will look for evidence that the executor’s continued administration presents a risk, Urback said.  “If, say, there was a single incident that the beneficiary may not have agreed with, that may not necessarily establish that there is an ongoing risk to the administration of the estate.”

Where interested parties are seeking to remove a sole executor, the court will look to see whether another person is willing to step in as a replacement with the beneficiaries’ support.

“When a beneficiary tries to remove an executor, or even an executor wants [to step down], they are best served by proposing a replacement who has already agreed to take on the role,” Urback said.

Where an estate is being administered by more than one executor, the court generally doesn’t need to name a replacement when ordering an executor’s removal.

An executor who has been removed by court order may seek and be entitled to partial compensation in certain circumstances: “It would be highly dependent on the reason for their removal and the work done to that point,” Urback said.

With small estates, beneficiaries and other interested parties may decide the cost of litigation isn’t worth the trouble of trying to remove an executor they don’t like, he said.

Both Urback and Raman said that an executor’s best strategy to prevent a contentious administration, or the most effective defense against attempts to remove them, is to keep good records and to regularly communicate with beneficiaries.

“If they have gotten advice from a professional — say, an accountant, or another lawyer — [it is] important to keep documentation about that. It’s important to set out who they’ve been relying on in some of their decision making, and why,” Urback said.

Executors should set out what they’ve done, as well as the reasons, so they have a paper record if their actions are challenged, he added.

Said Raman: “I always advise [executor] clients: keep your lines of communication open. That is the keystone of any relationship that hinges on trust — transparency and clarity.”

Rudy Mezzetta

Rudy is a former senior reporter for Advisor.ca and its sister publication, Investment Executive.

Given our proximity to the United States, many Canadians have financial dealings on both sides of the border. This means some clients may be the beneficiaries on an individual retirement account (IRA).

While an IRA is the U.S. equivalent of an RRSP, the tax treatment at death can trip up many Canadian-resident beneficiaries.

U.S. taxation of IRAs at death

IRAs and RRSPs are similar but not identical. One difference is who is taxed on the proceeds at death. In the U.S., when an IRA holder dies, the named beneficiary — not the deceased — is taxed on the lump sum amount received. In Canada, the RRSP holder is taxed at death unless the beneficiary named is a qualifying survivor (spouse/common-law partner or a financially dependent child or grandchild). A qualifying survivor can defer tax on the amount received by, for example, transferring it to their RRSP or purchasing an annuity. The tax deferral options differ by qualifying survivor.

The Canada-U.S. tax treaty establishes how each country taxes their residents on income received from the other country. Generally speaking, when U.S. income would otherwise be taxable to a U.S. taxpayer, it’s taxable in Canada when received by a Canadian resident. So Canadian residents who receive amounts as an IRA beneficiary must report this as taxable income on their Canadian tax return and pay tax in Canada. If there is any non-resident withholding tax on the IRA payment (which could be up to 30% on lump sum payments), it can be used as a tax credit to reduce Canadian tax. (The early withdrawal tax of 10% that would normally apply to IRA withdrawals prior to age 59-and-a-half doesn’t apply on withdrawals due to the IRA account holder’s death.)

While there may be U.S. tax-deferral options available for U.S.-resident beneficiaries, these options may not be available to Canadian residents. This would need to be confirmed directly with the U.S. financial institution. One option that could be available to Canadian residents is to receive a lump-sum payment from the deceased’s IRA.

IRA beneficiaries fall into one of two categories: non-spouses and spouses (including common-law partners). While the Canadian tax treatment of the lump-sum withdrawal is the same for both, the option for deferring Canadian tax is different.

Non-spouse beneficiary

When an IRA beneficiary is not the spouse of the deceased, the amount received as a lump sum is fully taxable in Canada. It may also be subject to non-resident withholding tax at source in the U.S.

What if the beneficiary wants to reduce the Canadian tax owing on the amount received from the IRA? The answer is simple: contribute an amount up to the pre-tax IRA lump sum payment in Canadian dollars to their RRSP. The contribution must be made no later than 60 days after the end of the calendar year in which the IRA amount was received (the same timing as with a normal RRSP contribution). Since this would be considered a new contribution, the beneficiary needs to have enough RRSP contribution room available.

Spouse beneficiary

Like a non-spouse beneficiary, a spouse can deposit the lump-sum received from an inherited IRA to an RRSP (not a spousal RRSP or RRIF) to defer tax. Again, non-resident withholding tax may apply at source in the U.S. However, unlike a non-spouse beneficiary, this can be done as a transfer and doesn’t require RRSP contribution room.

This is possible because the Income Tax Act allows for U.S. IRAs to be transferred to RRSPs. Generally, this transfer option is considered when the IRA holder is alive. However, it can also be used by a surviving spouse to transfer a lump sum from their deceased spouse’s IRA to their own RRSP. This effectively makes the tax treatment of the inherited IRA the same as when a surviving spouse transfers the amount received from the deceased spouse’s RRSP to their own. To qualify, the following conditions must be met:

1. The amount received from the IRA is included on the recipient spouse’s Canadian tax return as taxable income.
2. The amount received was funded by contributions made to the IRA by either the recipient or the recipient’s spouse. This is known as an eligible amount.

To complete the transfer, the RRSP deposit must be made no later than 60 days after the end of the calendar year during which the lump sum IRA payment is received.

The basic steps for the transfer are:

1. Request and receive a lump-sum payment from the deceased’s IRA.
2. Deposit the amount, converted to Canadian dollars, into an RRSP no later than 60 days after the end of the year the payment was received. This is different from transfers between RRSPs, which must be done directly between the accounts.
3. Report the IRA income on the recipient’s Canadian tax return.
4. Spouse beneficiaries would report the RRSP deposit as a transfer on Schedule 7. Non-spouse beneficiaries would report the RRSP deposit as a new contribution on Schedule 7.

These steps allow the RRSP deposit to be deducted from the lump-sum payment that was reported as income. If the two amounts are equal, there is no Canadian tax. Any withholding tax paid in the U.S. can be used as a tax credit to reduce Canadian tax paid in that same year via the foreign tax credit. Unfortunately, if the foreign tax credit isn’t fully utilized, the unused amount can’t be carried forward or back and is lost.

Finally, the RRSP deposit doesn’t impact the spouse beneficiary’s RRSP contribution limit.

Many Canadian-resident beneficiaries of IRAs are surprised to learn that the amount they received is taxable to them. The good news is there’s a simple way to reduce or eliminate tax — their RRSP. Whether the RRSP deposit is a transfer (spouse beneficiary) or a new contribution (non-spouse beneficiary), the result is the same — Canadian tax is deferred.

Curtis Davis

Tax & Estate

Curtis Davis, FCSI, CFP, TEP, is director for tax, retirement and estate planning services, retail markets at Manulife Investment Management.

With the federal government’s expanded trust reporting regime taking effect later this month, the Canada Revenue Agency (CRA) has granted temporary relief to bare trusts, which will be subject to filing requirements for the first time.

Bare trusts that file late for the 2023 tax year will not incur late-filing penalties, the agency announced Friday.

The new trust reporting rules — effective for trusts with year ends of Dec. 31, 2023, and after — apply to more types of trusts, including bare trusts. Trustees also are required to report information such as the names, addresses and social insurance numbers of beneficiaries and other parties connected to a trust.

Trustees affected by the new rules must file a T3 trust return along with a new Schedule 15 beneficial information return by the filing deadline of March 30 (April 2 in 2024).

“You don’t want to be waiting until the last minute [to collect the data],” said John Oakey, vice-president of taxation with CPA Canada in Dartmouth, N.S. Trustees may find that beneficiaries of the trust are unreachable, unresponsive or unwilling to provide the information. If a beneficiary’s data is unavailable, “you want to document that you made a reasonable attempt.”

“Most bare trusts are not formally documented — there’s no trust indenture that goes along with them in the same way that, say, a family trust might have,” said Stephen Latimer, tax partner with Grant Thornton LLP in Halifax. “The big risk here is that a lot of clients may not recall putting these bare trusts in place.”

In guidance released Dec. 1, the CRA indicated there will be no penalties for filing a trust return and a Schedule 15 for bare trusts after the deadline for the 2023 tax year. However, the filing requirement remains in effect. If the failure to file is made knowingly or due to gross negligence, penalties may apply, the CRA stated.

“CRA recognizes that the 2023 tax year will be the first time that bare trusts will have a requirement to file a T3 return including the new Schedule 15,” the agency stated. “As some bare trusts may be uncertain about the new requirements, the CRA is adopting an education-first approach to compliance and providing proactive relief.”

The new reporting rules also include a new penalty for failing to file: $2,500 or 5% of the property’s value, whichever is greater, in addition to existing penalties for failure to file a trust return.

Advisors should be “asking [clients] questions about [whether they have] any trusts that have been settled in the past that we’re not aware of — making sure we’re flushing that information out — to protect them from those non-compliance penalties,” Latimer said.

In December 2022, Ottawa passed legislation to expand the trust reporting rules to include express trusts (created with a settlor’s express intent) and bare trusts (in which a trustee’s only duty is to transfer property to a beneficiary on demand). Previously, only trusts with taxes payable for the year or those that disposed of capital property had to file an annual trust return.

Many clients will have a reporting obligation and not know it, Oakey said.

For example, a parent co-signing a mortgage with an adult child might constitute a bare trust, with the parent being the legal owner of the property and the child the beneficial owner.

Common trusts set up for estate planning purposes, such as alter ego, joint partner and spousal trusts also now have a reporting requirement.

Rudy Mezzetta

Rudy is a former senior reporter for Advisor.ca and its sister publication, Investment Executive.