March 2011 - Steven Araki, CA

Estate Taxation Issues Presented by: Steven Araki, CA David Metzger, CA

Summary
Responsibilities of Legal Representative
Clearance Certificate
Death of a Taxpayer – the Basics
Benefits of Filing Separate Returns
Terminal/Final T1 Return
Estate Return
Testamentary Trusts
Spousal Testamentary Trusts
Other Issues
Ownership of CCPC shares
Which Strategy?
164(6) Strategies
88(1)(d) Bump Strategy
Pipeline Strategy
Planning For Death

Responsibilities of Legal Representative
Relevant section in the Income Tax Act
S. 159(1) – Person acting for another
Jointly and severally liable with taxpayer to pay the taxes to extent they control assets
S. 159(2) – Certificate before distribution (clearance certificate)
S. 159(3) – personal liability if clearance certificate not obtained

Responsibilities of Legal Representative (continued)
Notify Canada Revenue Agency (“CRA”) regarding the death of the taxpayer by sending:
Death certificate
Social insurance number of the deceased
Complete copy of the will or other legal document proving who the legal representative is
Appoint an Authorized Representative to deal with CRA for tax matters
File T1013 Authorizing or Cancelling a Representative (separate authorization for Estate)
File all required tax returns for the deceased (included any prior year returns that are outstanding)
Pay all taxes owed by the deceased [159(1)]
Communicate with the beneficiaries about the Estate
Obtain Clearance Certificate (optional) [ 159(2) & (3)]
Distribute the property (subject to holdbacks or security from beneficiaries)

Clearance Certificate
Certifies all amounts for which deceased is liable to CRA has been paid
If not obtained, legal representative is liable for any amounts owed by deceased
Covers all tax years to the date of death (but NOT amounts owned by Trust – separate clearance certificate required)
File Form TX19 Asking for a Clearance Certificate after Notices of Assessment for all returns received and all amounts owing paid
Obtain Clearance Certificate (Form TX21) before distribution of all property under control of legal representative

Death of a Taxpayer – the Basics
Tax returns for the deceased
Terminal / Final T1 return – S. 70(1)
Rights or Things (optional) – S. 70(2)
Business as Partner or Proprietor (optional) – S. 150(4)
Income from a Testamentary Trust (optional) – S. 104(23)(d)
Estate return – until property distributed to beneficiaries

Benefits of Filing Separate Returns
Reduction of income taxes
personal tax credits that can be claimed without proration more than once (basic personal credit, age credit, spousal/common-law partner credit, infirm dependants credit, child tax credit, caregiver tax credit) – not on Estate return

Terminal/Final T1 Return
Reports deceased accrued income for the period from January 1 of the year of death to the date of death
Deemed disposition of assets
tax cost if left for spouse and “vests indefeasibly” within 36 months
tax cost if qualified farm property left for child
FMV otherwise
Capital losses can be claimed against any source of income in the year of death and the previous year (watch CGE grind)
Medical expense tax credit can be claimed for any 24 month period that includes the date of death

Terminal/Final T1 Return (continued)
Charitable donation tax credit
Can claim donations made prior to death or through the will (can’t be carried forward to Estate T3)
Can claim up to 100% of net income in year of death
Donations can be carried back to the year prior to death if unused
Filing deadline – later of April 30 and 6 months after date of death

Terminal/Final T1 Return – Qualified Farm Property
Rollover provisions to children
Recipient must be resident of Canada immediately before death
Property must be used principally in farming business carried on in Canada by the deceased, their spouse, or a child “on a regular and continuous basis”
Includes quota, and shares of family farm corporation, but not inventory
Must vest indefeasibly within 36 months
Planning Opportunities
Consider electing for a disposition at greater than ACB to utilize the deceased capital gains exemption to get ACB bump to recipient
Need to consider CNIL balance, affects on OAS clawback and other net income based tests,
AMT doesn’t apply

Estate Return
Reports income of the Estate up to the point property distributed to beneficiaries
As a testamentary trust, it is subject to the marginal tax rates available to individuals
No personal credits available to offset taxes payable
Taxation year end can be any date, but no such taxation year can exceed 12 months
File T3 Trust return (due 90 days after Y/E)
Filing deadline could be before terminal return

Testamentary Trusts
Set up by Will (so assets are first subject to probate)
Can set up a separate trust for each beneficiary to utilized multiple marginal lower tax brackets (subject to 104(2))
Subject to 21 year deemed disposition rule
Can select a non-calendar taxation year
File T3 Trust return (due 90 days after Y/E)

Spousal Testamentary Trusts
Rollover of asset on death of taxpayer under 70(6) – but can elect out
Conditions:
Spouse must be entitled to receive all income during his/her lifetime
No person other than spouse can have access to trust capital or funds during lifetime of spouse
Spouse must be Canadian resident at taxpayer’s date of death
Must “vest indefeasibly” within 36 months
Not subject to 21 year deemed disposition rule
FMV disposition on death of spouse beneficiary under 104(4)
May reduce risk of wills variation occurring

Other issues
Non-resident beneficiary
Income doesn’t retain original characteristic
Withholding tax applies (additional liability, responsibilities and filing requirements)
Beneficiary has Canadian tax filing obligation to report disposition of capital interest in a trust
No rollover of capital property out of Estate to beneficiary (S. 116 certificate)
Potential planning opportunities
Continue holding capital property in trust (eg. if beneficiary intends to move/return to Canada)
Non-resident incorporates a Canadian company to receive capital property
Distribute property which has no accrued gains to the non-resident beneficiaries

Ownership of CCPC shares
Three potential layers of taxation
Deemed disposition of shares at FMV on death (if no spouse/farm rollover)
Deemed dividend on redemption of shares or wind up of company by the Estate
Corporate taxes on liquidation of company
Goal is to eliminate 1-2 of the 3 layers
Best to do pro-forma post mortem planning
before death to look at options

Ownership of CCPC shares (continued) 1 st Layer of Tax – On Death Capital Gain: $ 1,000,000 Personal Tax: $ 218,500 2 nd Layer of Tax – on Redemption Deemed Dividend: $ 1,000,000 Personal Tax: $ 337,100 Capital Loss: ?????? 3 rd Layer of Tax – on Liquidation Capital Gain: $ 500,000 Tax Integrated: $ 111,750 Total Taxes?? $ 667,350 Wealth Co. Mr. Wealthy FMV = $ 1,000,000 ACB = PUC = Nominal 100 % Shareholder FMV = $ 1,000,000 ACB = $ 500,000 Asset RDTOH = 0 CDA = 0 GRIP = 0

Ownership of CCPC shares (continued)
Potential planning opportunities
Roll shares to spouse or spousal trust
Avoids FMV disposition on death
Estate sells shares of company
Avoids liquidation of company of assets
164(6) strategy
Capital loss carryback to eliminate FMV disposition on death
88(1)(d) bump strategy
Avoids tax implications associated with liquidation of company assets
Pipeline strategy
Avoids deemed dividend on redemption/windup

Which Strategy?
Gather info on company balances (CDA, RDTOH, PUC, GRIP, CSOH, inside/outside ACB, life insurance)
Model options – before/after death
Conclusion depends on facts, including what is in company

164(6) Strategies
Shares held by Estate get redeemed or company gets wound up
Extracted cash out of company
Deemed dividend to Estate – S. 84(2) or (3)
Estate also realizes capital loss due to high ACB
Estate carries capital loss back to apply against gain reported on terminal T1
Effectively replaces capital gain with a taxable dividend
Must be completed within first taxation year of the Estate
Election must be filed with Estate T3
Issues
Taxable dividend taxed at higher rate than capital gain (34% vs 22%)
40(3.6) stop loss rule – Estate/executor can’t control company after redemption (N/A on windup), but 40(3.61) exemption would apply on amount carried back
V-Day value could reduce capital loss
Part VI.1 tax could apply on dividend paid on redemption

164(6) Strategies (continued)
Still effective when:
RDTOH exists in Company - Company will receive dividend refund roughly equal to the tax paid by Estate
CDA exists in Company – deemed dividend not taxable to Estate, but subject to112(3.2) stop loss rule
“ 50%” solution – declare capital dividend on up to half of the deceased’s capital gain on death to maintain the loss carryback and potentially preserve some remaining CDA balance
GRIP exists in Company – eligible dividend tax rate close to capital gain rate
Use in combination with “50%” solution to further reduce effective tax rate

164(6) Strategies (continued)
Internal “bump” planning
Consider if Estate will hold property beyond one year and/or if 88(1)(d) planning not available
Sell capital property to a subsidiary to trigger capital gain
Use resulting CDA and RDTOH to redeem Estate’s shares
Estate uses 164(6) to carryback loss to apply against gain on terminal T1
Result:
Increased ACB of capital property
Eliminates double tax
Effective tax rate 23% vs. 22% on terminal T1

88(1)(d) Bump Strategy
For use when company holds significant non-depreciable capital assets (eg. land, investments)
Estate transfers shares to new Holdco
Company is amalgamated with / wound up into Holdco
Acquisition of control deemed under 88(1)(d.3)
Election made under 88(1)(d) to “bump” the ACB of the non-depreciable property
Watch bump denial rules, depending on who beneficiaries are
Reduces corporate taxes on subsequent sale of asset

Pipeline Strategy
Use when company assets are cash or other high ACB properties
FMV disposition on death creates ACB on the shares
Estate sells shares to Newco for a promissory note
No 84.1 deemed dividend as long as ACB doesn’t include V-Day value or previously used CGE
Company distributes assets to Holdco as intercorporate dividend, which distributes assets to Estate as payment of promissory note
No time constraint
Effectively gets value out of Holdco at capital gains rates
Can combine with 88(1)(d) strategy to eliminate corporate and distribution taxes

Planning For Death
Freeze to minimize capital gain on death
Wasting freeze to reduce capital gain at death
Try to get acquisition of control on death so bump can preserve capital gains rates
Watch who owns voting shares
Watch alter-ego / joint partner trusts
Less flexibility in post-mortem context

© 2011 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. Steven Araki, CA - (604) 793-4716 - snaraki@kpmg.ca David Metzger, CA - (604) 854-2270 - dmetzger@kpmg.ca

March 2011 - Steven Araki, CA

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