Most Canadians are good, honest people who don’t break the rules. But what if they don’t know or understand their role? Acting as an executor or power of attorney (POA) doesn’t come with a handbook, so it can be easy for a well-intentioned person to cross the line, neglect a key responsibility or fail to provide something they were unaware they had to deliver.

The fiduciary responsibilities of executors, POAs, guardians and trustees fall within provincial and territorial jurisdictions. Banking and taxation are mostly federal. Financial literacy and other financial regulations fall into both camps. Ethics can be confusing.

Financial abuse is far too common and must be avoided at all costs. Canadians who act as fiduciaries need guidance, so that they understand their responsibilities and treat those they work on behalf of fairly.

Our industry has a moral duty of care to provide people what they need to stay onside.

It’s important for beneficiaries, to manage their expectations and inform them of their rights. It’s important for financial advisors and financial institutions, to minimize errors and malfeasance and avoid regulatory censure and penalties.

Frank discussion of this topic is long overdue.

A basic knowledge requirement

The people that personal fiduciaries act for — disabled or incapacitated, minors, the deceased or beneficiaries — all have a reasonable expectation that those appointed will act in their best interest and follow their mandate.

But how is this possible if there are no guardrails and the only option is to litigate after someone makes a mistake or acts incorrectly? When someone is appointed, particularly when they are being compensated to look after the affairs of another, they should be required to meet a basic knowledge requirement.

Canadians need a short, easy-to-understand self-study program covering ethics, personal fiduciary responsibilities and the general duty of care required when acting as a POA or executor in a position of trust. It should review responsibilities and expectations regarding communication, fairness, protection and distribution of assets, reporting and more.

Will makers and POA grantors should be able to specify that they want their appointees to take such a course. To satisfy financial institutions and give confidence to those relying on the fiduciary, evidence of completion should be available — a certificate that can be presented upon request.

This would reduce the early demands on advisors’ time when a POA is exercised, or a client is a first-time executor.

Later, it would provide a defence for professionals involved in POA or estate cases who become subject to litigation when a beneficiary or other person believes that the financial gatekeepers could have stopped fiduciary misbehaviour but didn’t.

In Canada, the end of the calendar year is often referred to as “charitable giving season,” as taxpayers tend to focus on their giving plans at that time and — provided eligible donations are made by Dec. 31 — look to claim related tax credits for the year. For 2024, however, the Department of Finance has proposed an extension to the eligible donation period to Feb. 28, 2025, citing concerns with the four-week Canada Post mail stoppage, which began in November 2024.  

While the proposal has not yet become law, the Canada Revenue Agency’s (CRA) confirmation that they will administer the measure as though it has passed has inspired many Canadians to take a closer look at their charitable giving strategies to maximize benefits. For some Canadians, this means incorporating a spouse or common-law partner into their plans. 

The tax rules permit donations by a spouse or common-law partner to be claimed on the tax return of either spouse, generally for a total claim of up to 75% of net income for the year. Amounts not claimed in the current year can be carried forward for use in any of the next five years. This provides flexibility for couples. Where one spouse makes an eligible donation to a registered Canadian charity, that donation can be claimed by the spouse who made the donation, or the spouse —  or common-law partner — of that person, in the current year or in any of the following five calendar years. It often makes sense to claim all donations on the tax return of one spouse to maximize tax savings for the family.  

This creates some interesting scenarios, one of which was recently addressed by the CRA in technical interpretation 2024-1022711E5.

Here’s an example: 

John and Rebecca have been married for 10 years. In 2019, John made a donation to an eligible charity. John claimed tax credits for portions of the donation on his tax returns for the 2019 through 2024 tax years, but an unclaimed portion remained after the 2024 year. No other individual, including Rebecca, claimed donation tax credits for any portion of John’s 2019 charitable gift.

Following the end of the 2024 tax year, because the five-year carry-forward period had expired, neither John nor Rebecca could claim the unclaimed portion of John’s 2019 donation for 2025 or beyond. However, Rebecca wondered if she could amend her tax returns for the 2019-to-2024 tax years to include John’s unclaimed 2019 amounts. 

Generally, within a 10-year time limit, the tax rules allow an individual to make a written request to allow the individual to claim a refund, or reduce taxes payable, for a past year if the individual was not aware of, or missed claiming, a deduction or credit for that year. This provision, combined with the ability to claim a spouse’s donation on a tax return, would normally allow Rebecca to claim John’s unused donations from the 2019-to-2024 period on her tax return for those years.  

Taking this a step further, how would the above scenario change if John and Rebecca were recently married? If we assume that John and Rebecca were married in 2022, would Rebecca still be able to claim John’s unclaimed donations for the period 2019 to 2024? 

In the above technical interpretation, the CRA confirms the ability to claim spousal donations even for the period prior to marriage or common-law partnership, provided the couple’s status is married or common-law for the year the claim is made. The claim must also be made for a year that is within five calendar years of the donation being made.  

In other words, in the revised scenario, even if John and Rebecca were not married or living common-law in 2019 when John made his donation, subject to net income limitations, either John or Rebecca can claim John’s unused donation amount from 2019 in tax years 2022 (the year of marriage), 2023 or 2024 because their status was married in those years. This could be helpful for newly married or common-law couples that are looking to maximize donation credit claims for the family. 

Flexibility when claiming donations 

The tax rules offer flexibility when it comes to claiming charitable donations. This flexibility is enhanced for couples who are married or living common-law. For the 2024 tax year, subject to the passing of enabling legislation, donations made in January and February of 2025 will be claimable on 2024 tax returns.  

In the case of spouses and common-law partners, combining the donations and claiming them on one spouse’s tax return can maximize tax savings. And, for unused donations, taking advantage of the five-year carry forward period, including where spouses are recently married or living common-law, can ensure that available tax credit claims are realized. 

Wilmot George

Tax & Estate

Wilmot George, CFP, TEP, CLU, CHS, is managing director, tax and estate planning at Canada Life, Wealth Distribution. Wilmot can be contacted at wilmot.george@canadalife.com.

A British Columbia court has ruled against a woman who sought to revise her mother’s will to have her $1.8-million inheritance placed into a discretionary trust, in an effort to preserve her disability benefits.

The Supreme Court of B.C. denied an application from Kathryn Elizabeth Damgaard that sought to vary her mother’s will, which shared her estate equally between her three children, with each to receive at least $1.8 million.

According to the court’s decision posted Tuesday, Damgaard — who is unable to work, lives in social housing, and relies on disability benefits to fund her living expenses — asked the court to vary her mother’s will to put her share of the estate into a fully discretionary trust, known as a Henson trust, in order to preserve her access to disability benefits and social housing.

“If I receive a direct distribution from my mother’s estate, it will jeopardize my disability benefits and my eligibility for social housing,” court filings on her behalf noted.

By putting those assets into a trust — which would give trustees absolute discretion over the distribution of the trust’s assets, meaning that her interest in those assets is considered to be zero — she sought to preserve her eligibility for benefits.

The court said that to grant an application to vary a will, it must be satisfied that the will didn’t “make adequate provision for the maintenance or support” of the beneficiary.

In this case, Damgaard argued that, “by failing to put her interest into a Henson trust to preserve her benefits, the deceased did not make adequate provision for her maintenance and support.”

The court said that, while there’s no question that the deceased could have required that her disabled daughter’s inheritance be placed into a Henson trust, “the question is whether she breached her moral obligation by not doing so.”

Ultimately, the court concluded that failing to put the inheritance into a trust didn’t amount to a moral failure.

Among other things, it found that this is not a case where a child has been unfairly disinherited, and it said that the size of the estate argues against the claim that the will didn’t make adequate provision for Damgaard.

“I recognize that circumstances would undoubtedly be very different if the estate were modest, such that a direct distribution would disentitle her from receiving benefits and supports in the short term, only to return to needing those supports in relatively short order once the modest distribution had been exhausted,” the court said.

However, in this case, it said that, “If [Damgaard’s] share of the estate provides her with sufficient funds to meet all of her needs and a great many of her wants, without resort to publicly funded disability benefits, the provisions of the will may be entirely appropriate.”

It also noted that there was no evidence about “whether the concerns of receiving the inheritance directly could be ameliorated” with the help of a professional money manager.

As a result, it rejected the application to vary the will to require that the inheritance be put into a Henson trust.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.

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.

Roughly two in five Canadians report having an up-to-date will, meaning three in five don’t. And the affirmative responses were likely based on the respondents’ wills reflecting their wishes, rather than being up-to-date with tax, estate and family law.

Testators should review their wills on a regular or annual basis, ensuring that named executors, beneficiaries, guardians and bequests of property remain appropriate for their successful estate planning and administration. In addition, below are a few common yet less apparent considerations that may necessitate a trip to an estate planning lawyer’s office sooner rather than later. If left unchecked, these can significantly increase estate administration costs and difficulty.

Testamentary trust provisions

Testamentary trusts in wills are common as a way to hold gifts for beneficiaries until certain conditions are satisfied. Further, testamentary trusts are largely considered essential for holding gifts for minor beneficiaries until they reach the age of majority in their respective provinces in order to comply with provincial property rules and legislation related to minors.

Testamentary trusts have also been used to hold property for adult beneficiaries (or the beneficiary and certain family members) until they reach a certain age, a key event occurs, or the trustees elect to wind up the trust (if given such discretion).

Historically, these trusts were subject to graduated rates of tax, as well as other beneficial tax attributes. The general strategy for these trusts for tax purposes was primarily to retain income in the trust to use graduated income tax rates, maintain wealth (income and capital) for minor children, and provide beneficiaries some protection from creditors.

As a result of the testamentary trust rule changes in 2016 making testamentary trusts taxed at the highest marginal rate (other than graduated rate estates and qualified disability trusts), as well as the loss of certain tax attributes, combined with the subsequent changes to taxation and compliance requirements recently, many testamentary trusts no longer function as originally intended. Specifically, these trusts may become more costly to maintain than anticipated and create administrative issues that were not apparent when created. This is particularly the case for trusts with no ability to encroach on capital or to wind up early upon certain terms.

It is important to note that, while the beneficiaries named in these trusts may indeed be the intended beneficiaries of the trust and may therefore appear to be up-to-date, the mechanics and duration of these trusts may result in issues that necessitate a review and update by an experienced lawyer.

Generally, every year a trust exists, significant cost arises, whether for taxes, compliance or administration. One key factor to determine is whether the cost has a reasonable basis and whether the trust as drafted satisfies that basis.

Properly structured and considered testamentary trusts, including discretionary testamentary family trusts, still have significant utility from both tax and non-tax perspectives, such as maintaining wealth for adults and minors, allocating income to lower-tax-bracket beneficiaries, and providing creditor protection.

No-contest clauses

No-contest clauses, or “in terrorem” clauses, are often used in wills to attempt to create consequences for challenging the estate. Generally, no-contest clauses intend to direct that if a beneficiary challenges a will, the bequest is forfeited and is either gifted to other beneficiaries or forms part of the residue of the estate. These clauses, particularly in older wills, are often incomplete or do not reflect current law. 

The goal of these clauses is not to outright prohibit litigation but to prompt a beneficiary to re-consider commencing action against the estate, since that may result in some or all of their bequest being forfeited, depending on the wording of the clause. In many instances, these clauses are effective for that reason alone.

Generally, a valid no-contest clause must also provide for an express gift if the beneficiary in question contests the will.

In most Canadian jurisdictions, a no-contest clause may not override statutory rights and benefits (such as maintenance and support under applicable dependants relief legislation) or deprive the court of its jurisdiction to deal with requests for help interpreting the will, provided such interpretation clauses do not dispute the will.

When no-contest clauses are used, they may simply be part of the lawyer’s standard practice, or there may be one or more underlying issues that justify the clause’s usage. In any event, it is often more effective to directly address perceived contentious issues in planning documents rather than hope the beneficiary will not commence action due to a no-contest clause. A discussion with an experienced estate planning lawyer can be highly valuable, both to create a more robust estate plan and to assess the viability of a no-contest clause based on the facts and laws of the province where the testator resides.

Beneficiary designations

A beneficiary designation and a registered product designation are generally considered to be “testamentary dispositions” and can be made either in the contract or will, provided the plan is described “generally or specifically” in the will. Generally, the last designation made will apply. When done properly, designations may allow certain assets to move outside the estate in an expedient manner, as well as allow more comprehensive planning for assets intended to enter the estate and a reduction in probate taxes where applicable.

Significant administrative issues can arise if intentions no longer match the applicable designations, such as in the following three scenarios.

Scenario 1. A poorly worded revocation clause in a will inadvertently revokes all beneficiary designations by generally referring to the plan, as well as revokes all prior wills and codicils as intended.

This scenario will complicate and add expense to estate administration, as it will need to be determined if the designations in the contract were truly revoked by the erroneous wording. If the designations were revoked, the estate generally becomes the beneficiary, which may be contrary to intentions and may result in increased probate fees. It can be particularly problematic where the beneficiaries named in the will and the revoked plan are different.    

Scenario 2. The majority of the estate consists of registered plans designated outside the estate, after the will is drafted, as a way to “simplify” the estate and reduce fees.

Should this scenario occur, the estate may not have enough assets remaining to pay taxes, satisfy debts and cover administration costs, and may be insolvent as a result. This can result in tax liability being shared (to the extent of the value of the net proceeds) by the beneficiary of the plans[1], or by the executor if other creditors or beneficiaries are paid in advance of the Canada Revenue Agency.[2]

As well, should the executor attempt to remedy a shortfall in cash or assets by taking out a loan, it is important to note that loans between non-arm’s-length parties (except certain short-term loans) are typically seen as a contribution to the estate. This can taint the estate’s graduated rate estate status and prevent it from accessing certain tax benefits if not done carefully and with appropriate advice.

Scenario 3. There is a plan designation in a will with a testamentary trust created to hold the proceeds designated to the estate. A subsequent designation revokes the designation in the will; however, the plan designation names the executor of the estate — an adult child of the deceased — as beneficiary.

Because the will and designation are misaligned, uncertainty arises that may ultimately result in a costly and delayed administration. This scenario may also result in applications for judicial advice and direction, or even litigation. The risk of costly delays and disputes can be greatly exacerbated if there are any conflicts or acrimony among the beneficiaries, or between the executor and beneficiaries.

For instance, depending on the wording of the testamentary trust, there may be a question as to whether the trust is still valid or void.

From there, it is now a question of whether the designation was meant as a gift to the executor/child, or whether a form of trust arrangement exists whereby the proceeds are intended to be administered by the executor under the terms in the will.

If a trust arrangement, additional questions may arise as to whether the proceeds bypassed probate tax (as the proceeds may indeed pass to the personal representative at the date of death), and whether a financial institution will require proof of probate, negating any perceived savings intended by the change of designation.

Therefore, when reviewing a will, it is important to go beyond the will and review the designations in plans and policies and make sure they match. If a designation in the will and contract do not match, professional advice is required to determine why that may be the case and whether a change is needed.

[1] Income Tax Act, RSC 1985, c-1 (5^th Supp.), ss. 160.2(1) or 160.2(2)

[2] Income Tax Act, RSC 1985, c-1 (5^th Supp.), ss. 159(2)

Matt Trotta

Tax & Estate

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

Consider the following scenario: an aging parent gives one of three adult children a significant amount of money prior to passing away. Can the two children who were left out insist the money be repaid to the parent’s estate after the parent dies? What if the child receiving the funds insists it was a gift?

And what about jointly held property with right of survivorship? For a variety of reasons, including avoiding probate, a parent may hold property, such as a principal residence or bank account, jointly with their child. After the parent passes away, the issue of ownership could arise. The surviving child and joint owner may claim the property is now theirs; however, other children in the family might not agree, especially if a will provides for equal distribution of the parent’s other assets.

The 2007 Supreme Court of Canada case Pecore vs. Pecore affirmed that a gratuitous transfer of an asset or property into joint ownership from a parent to their adult child is presumed to be held by the child in what is called a resulting trust. When the parent passes away, the asset must be given back to the parent’s estate, unless the child can provide evidence the parent intended to gift the asset to them at the time of transfer.

The determination of ownership of assets in these situations continues to be litigated in families. Let’s consider the cases below.  

Banking documents for joint accounts deemed insufficient as evidence of intent

The 2023 Ontario case Renwick Estate and Miller vs. Stanberry involves a mother who, for many years prior to passing away in 2018, held several bank accounts jointly with one of two daughters. The total value of the accounts was $128,241.41.  

The daughter claimed the mother intended that she receive the proceeds of the accounts, and as the surviving account holder, the accounts should belong to her. The other daughter’s position was that the accounts were assets of the mother’s estate.

The primary evidence put forward to establish that the mother intended to gift the accounts was the signature cards created when the accounts were set up. The cards showed the mother had checked off a survivorship option.   

However, the court noted that more than a signature card is required, and indicated that checking off a box, or other language in banking documents explaining survivorship, was insufficient evidence to establish that the individual creating the joint account truly turned their mind to gifting the account to the joint account holder.

The court determined there was little evidence of the mother’s true intentions regarding the accounts. It determined that all the joint accounts were estate assets and should be treated as such.

Actions establishing joint ownership of property helped support intent

The 2024 British Columbia case Chung vs. Chung involves a father who died in 2018, leaving four surviving adult children. His will provided that his estate was to be divided equally among them. However, in 2008, the father added his son as a joint owner of his condominium, valued at $688,000. It had been owned with his spouse, the son’s mother, who died in 2012.

The son testified his parents promised he would receive their condo and other accounts when they died, in exchange for him moving back to Canada from China to care for them. However, his siblings disagreed and claimed he was holding the assets in a resulting trust for their father’s estate.

The court noted that on the day the parents signed wills in 2008, they also signed a property transfer document that added the son as a joint owner of the condo. The court determined that the property transfer document, in itself, is consistent with a specific intention that the property be dealt with outside the will. The court also reviewed an affidavit by the lawyer who drafted the parents’ wills and found it was likely the lawyer explained the nature and effect of joint tenancy to them, including that the condo would become the son’s sole property after their deaths.

The court determined the parents signed the property transfer document knowing it would give the son full ownership of the condo upon their deaths and with the intention of gifting it to him.

Signed gift letter, advisor testimony helped support intent to gift a specific cash advance

The 2024 Ontario case Playford vs. McRae involves a father with cancer who gave his son several cash amounts over about 20 months. The father passed away in 2017. Prior to the father’s death, the son received a cheque for $98,000, $500,000 from an investment account, and 89 separate e-transfers from the father’s bank account totalling $178,000.

The father’s daughter claimed the funds received by her brother were void and subject to a resulting trust. The brother’s position was that the father intended to gift the funds to him and that there was evidence to corroborate this. The primary issue the court considered was whether the father had the intention to gift the cash amounts to the son.

The court found that only the $500,000 was a valid gift. It reviewed a gift letter signed by the father, as well as testimony from the father’s investment advisor that on the day of the transfer, the father was “quite intent” on transferring the funds and provided direct and clear instructions to the advisor.

The court noted that the brother’s testimony was often the only direct evidence provided of the father’s intentions. It determined that the evidence he provided to corroborate his claim of a gift for the other cash amounts was either not credible or insufficient.

Takeaway

Instead of resorting to court action, families can reduce the likelihood of conflict in such situations. Help clients consider doing the following:

• Clearly document the intention to gift a specific asset/ownership interest to a specific child.
• Communicate with all children who are beneficiaries, not just the one receiving the asset, about the intention to make a gift.
• Communicate to you, the financial advisor, the intention to make a gift, as well as to the estate planning lawyer, and request associated documentation.

Akua Carmichael

Tax & Estate

Akua Carmichael, LL.B, J.D., TEP, is vice-president, Estate Planning and Services, with Estate Stewards. She can be reached at acarmichael@estatestewards.com.

Small and medium-sized businesses are the backbone of the Canadian economy, and wealth management plays an important role in their success.

Working with accountants and legal professionals, financial advisors can help business owners understand key tax, retirement and estate planning concepts to maximize and protect wealth. Advisors with expertise in serving business owners would normally:

• understand the pros and cons of different business structures (e.g., sole proprietorship, partnership, corporation);
• be familiar with how income from a business is taxed (e.g., active business income versus passive or investment income);
• recommend investment solutions tailored to the business and owner’s unique circumstances;
• be aware of options for extracting cash flow from a corporation;
• understand concepts for succession planning for both retirement and at death (e.g., lifetime capital gains exemption, asset versus share sales, post-mortem planning to avoid double taxation at death); and
• ask thought-provoking questions to pique interest and promote planning conversations.

By asking thought-provoking questions, financial advisors can inspire business owners to think deeply about the financial planning aspects of their businesses. Through this process, business owners tend to share more as they look to improve their planning and wealth. This creates the opportunity for advisors to further demonstrate their value, deepen client relationships and grow their businesses.

The following questions are designed to pique interest and promote dialogue around tax, retirement and estate planning for business owners. By asking these questions, tax, legal and financial advisors can work with business-owner clients to identify planning opportunities and address points or concerns.

Do you understand the potential value of incorporation?

Depending on the circumstances, incorporation can provide creditor protection and create tax-deferral opportunities. It can also create tax savings upon sale or at death via the lifetime capital gains exemption if the business qualifies.

Do you know the difference between active and passive income for tax purposes?

Different tax rates apply to active business income versus passive income and depend on the type of passive income earned. Also, for corporate investors, the amount of passive income earned each year can affect the tax rate that applies to business income.

Have you thought about how changes to the taxation of capital gains might affect your business?

Capital gains tax rates have increased for certain taxpayers, including corporations. This might affect investment and retirement planning strategies for business owners who rely on their businesses to fund their retirements. It might also affect shorter-term events, particularly when investments will be sold to fund current cash flow needs.

Are you aware of the options for extracting cash flow from your corporation?

Salary and dividend payments are common. There might also be capital dividend, return of capital and shareholder loan payment options. The best option(s) will depend on the circumstances, and understanding the options can lead to the best fit.

Do you understand the difference between a share sale and an asset sale when exiting a business?

When exiting a business via a sale, the structure of the sale can affect price, and tax implications often play a role. Sellers typically prefer a share sale (especially where the business qualifies for the lifetime capital gains exemption), while buyers often prefer an asset sale (to allow for choice of assets). Quite often, the eventual sale price is determined based on these factors.

Have you thought about a succession plan for your business at death?

Estate planning can be complex when it involves a business. Who should inherit the business? Should family members continue with the business, or should they be bought out? How will taxes be paid? What role might insurance play? A well-thought-out estate plan can minimize taxes, simplify estate settlements and reduce the potential for conflicts after death.

The above questions (which are not exhaustive) do not need to be asked in order, nor do all questions need to be asked. Advisors should focus on those questions that speak to their strengths and are of the greatest interest to their clients.

Wilmot George

Tax & Estate

Wilmot George, CFP, TEP, CLU, CHS, is managing director, tax and estate planning at Canada Life, Wealth Distribution. Wilmot can be contacted at wilmot.george@canadalife.com.

While recent changes in federal tax policy may affect whether trusts represent the best planning strategy for some families, the vehicles still have benefits. Many Canadians settle trusts for their families for privacy purposes as well as to provide trustees the ability to gift to beneficiaries in accordance with the trust’s (and family’s) goals.

Potential downside

With the new reporting rules, trustees must disclose, in good faith, all possible known beneficiaries, trustees, settlors (including subsequent contributors) and persons who can “exert influence” on a trust. Compliance with these rules would include contacting all beneficiaries, even those who may never receive any benefit from the trust, and people who have become estranged, which can be a cumbersome and costly administrative burden.

Significant uncertainty remains about what may constitute the ability to “exert influence.” All of this adds new compliance costs and, along with increased taxes, may tip the cost/benefit analysis against trusts for some families.

Family trusts still can allocate income (and capital) to Canadian resident beneficiaries so they can access their graduated tax rates and capital gains inclusion rates. However, such a strategy may increase the vulnerability of the trust assets to a family creditor claim upon dissolution of marriage or common-law relationship.

As many families create trusts to offer asset protection for their family-member beneficiaries, they should discuss with trusted advisors the family situation and the impact of distributions.

Benefits of family trusts

While family trusts appear to enjoy fewer tax benefits than in years past, one significant benefit can be found when family trusts own private corporation shares. In some cases, a trust has the ability to “multiply” the lifetime capital gains exemption (LCGE) on qualified small-business corporation (QSBC) shares without having to pay regular income tax on the resulting capital gain up to the LCGE amount. As of June 25, 2024, this exemption amount is $1,250,000, a significant increase from the $1,016,836 amount pre-Budget 2024.

Qualified small-business corporation shares. A family trust itself cannot claim the LCGE. But, when there are multiple beneficiaries and the criteria can be met, the trust can allocate a portion of a capital gain realized by the trust on a disposition of QSBC shares to multiple beneficiaries in a way that maximizes the use of each beneficiary’s available LCGE. This can occur only if it is permitted in the trust deed and the required designations are made by the family trust under the Income Tax Act. Generally, the result is a significant overall reduction in taxes on the sale of the QSBC shares compared with an individual realizing the disposition alone (subject to, among other things, the updated alternative minimum tax). 

Even when a share sale is not imminent, the potential long-term savings for a family on the eventual disposition of QSBC shares that are expected to appreciate in value can be significant and can far exceed the increased costs and taxes paid in the interim.

Amending terms. With regard to trusts that encounter challenges in adjusting to the recent legislative changes due to poorly defined trust terms or vague descriptions of beneficiaries, it may be possible to amend or vary terms and definitions. In some cases, this may include clarifying who is, and who is not, a beneficiary, in line with the original intent of the trust.

Not all trusts can be varied easily, even with the assistance of the court, and this step should be undertaken only with the advice and guidance of an experienced trusts lawyer. Significant amendments to the terms of a trust can result in a deemed re-settlement of the trust, with significant tax ramifications.

Non-tax benefits. Further, there remain many non-tax reasons to set up a family trust, and for families to keep an existing family trust. These include protecting and safeguarding funds for minor, disabled and spendthrift beneficiaries, the ability to use the family trust as voting shareholder for related corporations, and general planning flexibility for family members. These benefits have value that, for many families, may exceed the costs of compliance and additional taxes arising from recent legislation.

Family trusts also remain effective asset protection tools when set up correctly. Even in the case of spousal or family creditors, the trust interests may potentially be excluded in many instances where properly executed prenuptial or cohabitation agreements are in place.

Be prepared for more changes

While the selected legislation changes appear to represent a continued erosion of positive tax treatment for trusts, family trusts do remain valuable and effective planning vehicles. These changes can be burdensome and costly in many instances, but they alone may not be the deciding factor in determining whether to settle or maintain an existing trust.

Changes in estate, trust and tax legislation will continue to occur frequently. Remaining prepared for change requires a balanced and moderate approach with the assistance of qualified professionals, not only at the planning and implementation phases but also in the ongoing administration phase.

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

Previous article: How tax changes affect family trusts

Matt Trotta

Tax & Estate

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

Part 1 of this series of articles focused on how attribution rules play a role in decisions regarding gifts while living versus at death. This article focuses on common gifting strategies for clients as they consider their family dynamics and suitable wealth transfer options.

Common strategies for gifting while living

There are a number of strategies families can consider for inter vivos transfers.

Gifts to minors. While the attribution rules apply to income from gifts to related minors, they do not apply to capital gains. This creates an income-splitting opportunity for gifts to minors when the gift will be used to earn capital gains from capital appreciating assets. Non-dividend-paying stocks or corporate class mutual funds that generate primarily capital gains or capital gains dividends can be a solution. Contributions to RESPs can also be a way to share wealth tax-efficiently with minors.

Gifts to adults. Gift to adults (including children and grandchildren) are not subject to the attribution rules and, depending on the tax brackets of all involved, are a tax-efficient way to share wealth. This form of gifting can provide children with access to certain markets (e.g., housing) and can allow for their contribution to registered plans including RRSPs, TFSAs and first home savings accounts.

Giftors should be cautious with gifts of appreciated assets; when appreciated capital assets are gifted, capital gains tax can arise at that time, accelerating a tax bill for the parent or grandparent.

When parents or grandparents wish for pre-death gifts to be considered in the distribution of estate assets at death — perhaps to equalize gifts for all children — they can speak with their lawyers about including a “hotchpot” clause in their wills. A hotchpot clause adds the value of pre-death gifts to the value of the parent’s or grandparent’s estate for the purpose of determining amounts to which estate beneficiaries are entitled.

Gifts via inter vivos trusts. There may be cases when a parent or grandparent does not want to gift assets directly to a child. The child may have disabilities that make it challenging to manage assets, have spendthrift behaviours or creditors, or be part of an unstable marital relationship. In these cases, the parent or grandparent might wish to gift the assets indirectly via an inter vivos (or living) trust.

When a beneficiary has no control over when or how trust assets are paid, it allows for greater control of the assets managed and distributed by the trustee as defined by the trust’s settlor. For example, if specified by the trust terms, a trustee can pay assets from the trust over time as opposed to granting full access via a lump sum to a beneficiary child or grandchild.

When the trust is settled during the settlor’s lifetime, it allows the assets to bypass the settlor’s estate, avoiding complex estate settlements and, where applicable, estate administration fees upon death.

However, with the exception of certain spousal, self-benefit, alter ego and joint partner trusts, appreciated assets transferred to the trust would normally trigger capital gains tax on transfer. Parents and grandparents can speak with their lawyers about the pros, cons and options related to the setup of an inter vivos trust and should be mindful of new trust reporting rules that can add to the cost of running a trust. Also, depending on the parties involved, settlors should keep in mind that the attribution rules normally apply even if assets are to be transferred via a trust.

Fair market value exchanges. Parents and grandparents may choose to sell assets to their children or grandchildren instead of making an outright gift. Benefits of this strategy include the receipt of assets that can be used to fund retirement or any tax liability resulting from the sale of the assets. Fair market value (FMV) sales avoid the attribution rules and allow for future income splitting. When children do not have sufficient assets to pay full FMV up front, parents can claim a capital gains reserve allowing for the realization of capital gains — and capital gains taxes — over a period of up to five years.^[1]

Parents and grandparents should be careful about arranging for sales at less than FMV. Doing so can result in double taxation as the parent would be deemed to sell the asset at FMV, while the child would establish an adjusted cost base based on the price paid.

Alternatively, families may consider a FMV sale with the proceeds payable over time, with the option to forgive an outstanding balance on death of the parent or grandparent. If the sold assets will be used mainly to earn income, attribution may apply to the income, but interest charged on the unpaid amount at the prescribed interest rate could avoid the attribution rules.

Loans. Loans can be an effective way to transfer assets to children or grandchildren to allow them to manage cost-of-living challenges. Attribution can apply if it can reasonably be considered that one of the main reasons for making the loan was to reduce or avoid tax.

To avoid attribution of future income, interest should be charged on the loan at the prescribed interest rate. If the loan will not be used to earn income, interest on the loan is not required. A loan with a parent or grandparent as a secured creditor can be an effective way to provide help while also achieving a level of creditor protection when the parent or grandparent ranks ahead of other creditors. Loans can be forgiven at death, and the outstanding balance of the loan at that time can be included in a hotchpot clause to allow for equalization among estate beneficiaries.

Common strategies for gifting at death

Via will. A will allows a testator to define how their assets should be distributed at death. When an individual dies without a will (i.e., intestate), the jurisdiction where the testator lived at the time of death normally defines how the deceased’s estate will be distributed (through intestacy legislation). While in many cases, those closest to the deceased would benefit through intestacy, dying without a will can present challenges, including:

• future legislation changes may not align with the person’s wishes;
• property may be transferred to beneficiaries who are unable to effectively manage assets (e.g., beneficiaries with certain disabilities, beneficiaries who demonstrate spendthrift behaviour, minors); and
• conflict between a spouse and children may arise, as children may be directly entitled to estate assets under intestacy rules.

Outlining wishes in a will helps avoid these challenges.

Via testamentary trusts. Similar to inter vivos trusts, testamentary trusts allow a settlor to transfer assets to a trustee for the benefit of a beneficiary. This may be an appropriate solution when management or control of assets is important post-death. Unlike an inter vivos trust, which is established before death, a testamentary trust is established upon the settlor’s death, which makes the assets subject to potentially complex estate settlements, creditors of the estate, and estate administration fees. However, gifting in this manner allows the assets to be available to the giftor throughout retirement, which can be important in periods of increasing health-care costs.

Generally, assets can be transferred to the trust through the deceased’s estate per instructions in a will, or by way of a contract-level designation on registered plans (outside Quebec) or insurance contracts. As with inter vivos trusts, parents and grandparents should be mindful of new trust reporting rules, which can add to the cost of running the trust.

Named beneficiaries on registered plans and insurance contracts. When permitted in the jurisdiction where the contract holder resides, naming a child or grandchild beneficiary on a registered plan or insurance contract can expedite the transfer of assets at death and bypass the deceased’s estate for purposes of estate administration fees. When a parent or grandparent would like to achieve these benefits but not gift the assets directly to a beneficiary, it is possible to direct the assets to a testamentary trust to allow for control and managed distributions over time. An estate planning lawyer can help with the drafting of trust terms for such a trust.

Tax-deferred rollovers. With limited exceptions,^[2] the transfer of assets to children and grandchildren normally occurs at FMV without the opportunity to defer taxes at that time. This is generally true for both registered (e.g., RRSPs and RRIFs) and non-registered assets and includes transfers at the time of death.^[3]

With RRSPs and RRIFs, tax-deferred rollovers to financially dependent children and grandchildren are possible when the child/grandchild has a mental or physical disability and transfers the assets to their own RRSP, RRIF, registered disability savings plan or registered annuity.

Also, should the child/grandchild be financially dependent but not have a disability, the date of death value of the parent’s RRSP or RRIF can be taxed to the child in the current year (as opposed to the deceased parent or grandparent). While not tax-deferred in this situation (unless the child is a minor and a qualified annuity is purchased), when the child or grandchild has a lower income than the deceased, tax savings can be achieved.

Joint ownership. Adding children or grandchildren as joint owners for non-registered assets is commonly used (outside Quebec) as an estate planning strategy to ease administration on death and/or avoid estate administration fees. Depending on the circumstances, while the strategy may produce intended results, risks include signing authority requirements before death, creditor concerns and the potential for conflict after death if distribution instructions are not made clear. Where joint ownership is being considered as an estate planning strategy, guidance from an estate planning lawyer is strongly suggested.

Importance of knowledge transfers

“Give a fish and feed for a day. Teach to fish and feed for a lifetime.”

This often quoted saying demonstrates the power of knowledge transfers. While wealth transfer conversations often focus on asset transfers, consideration should also be given to knowledge transfers, which can extend across generations.

Knowledge transfers promote dialogue, allow for shared learning and create opportunities to connect resources (including trusted advisors), which can go a long way toward maximizing and transitioning wealth across generations.

[1] A 10-year period is available for certain farming and fishing properties and qualified small business corporation shares.

[2] Certain farming and fishing properties can be transferred on a tax-deferred basis to children and grandchildren.

[3] The value of TFSAs on the date of death normally transfers tax-free.

Wilmot George

Tax & Estate

Wilmot George, CFP, TEP, CLU, CHS, is managing director, tax and estate planning at Canada Life, Wealth Distribution. Wilmot can be contacted at wilmot.george@canadalife.com.

As baby boomers transition to retirement, many are thinking about their retirement and estate plans, and options to transfer wealth across generations. This great wealth transfer will see approximately $1 trillion passed to gen Xers and millennials by 2026 — the largest intergenerational wealth transfer in Canada’s history.

The current economic climate has also inspired “gifting while living,” as many gen Xers and millennials struggle to make ends meet given high inflation and soaring borrowing costs.

This two-part series of articles focuses on intergenerational wealth transfers, with considerations for both gifting while living and transfers at death. It also considers attribution tax rules that can play a role in certain gifting strategies.

Attribution rules

When thinking about in-family gifts, consideration should be given to attribution rules designed to prevent certain income-splitting transactions. The Income Tax Act (ITA) has a number of attribution rules aimed at individuals, corporations and trusts. For the purpose of this article, we will focus on transfers involving individuals and trusts and how the rules might impact certain gifting arrangements.

When assets are gifted to a related minor (e.g., child, grandchild, niece or nephew), future income from the gift is generally taxed in the hands of the gifting parent or grandparent until the year the child or grandchild reaches age 18. Capital gains earned post-transfer are normally taxed to the child or grandchild regardless of age. Subject to certain exceptions, these rules also apply to gifts via a trust. The table below details the rules for both gifts and low or no interest loans to children and grandchildren (including nieces and nephews).

The attribution rules cease at death, so are generally a concern only for certain gifts and loans while living.

Summary of attribution rules for gifts and loans

Gifts while living versus at death

As previously noted, the current economic climate has caused many parents and grandparents to lean toward gifting while living instead of (or in addition to) gifts at death. While no one solution fits for all families, pros and cons of each option can help determine the best fit.

Circumstances and family dynamics often drive decisions about wealth transfer strategies for a family. Part 2 of this series will discuss common strategies while living and at death, including how knowledge transfers can play a role.

Wilmot George

Tax & Estate

Wilmot George, CFP, TEP, CLU, CHS, is managing director, tax and estate planning at Canada Life, Wealth Distribution. Wilmot can be contacted at wilmot.george@canadalife.com.