March 2011 - Steven Araki, CA

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Estate Taxation Issues - KPMG

Estate Taxation Issues - KPMG

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  • 1. Estate Taxation Issues Presented by: Steven Araki, CA David Metzger, CA
  • 2. 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
  • 3. 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
  • 4. 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)
  • 5. 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
  • 6. 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
  • 7. 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
  • 8. 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
  • 9. 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
  • 10. 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
  • 11. 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
  • 12. 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)
  • 13. 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
  • 14. 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
  • 15. 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
  • 16. 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
  • 17. 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
  • 18. 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
  • 19. 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
  • 20. 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
  • 21. 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
  • 22. 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
  • 23. 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
  • 24. 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
  • 25. © 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 - David Metzger, CA - (604) 854-2270 -