Tax Issues for Estate Planning - Hull on Estate and Succession Planning #176
Listen to: Tax Issues for Estate Planning - Hull on Estate and Succession Planning #176
This week on Hull on Estate and Succession Planning, Ian Hull goes through a summary of considerations for dealing with Canadian tax issues from an estate planning point of view.
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Tax Issues for Estate Planning - Hull on Estate and Succession Planning #176
Welcome to
Ian Hull: Hi and welcome to Hull on Estates and Succession Planning. My name is Ian Hull and I will be hosting today’s podcast. It’s episode 176 and it’s Tuesday, August 11, 2009.
Well, I am doing a solo podcast today. My partner in crime, Suzana Popovic-Montag, is on holidays so we thought we would carry on with the flag and not miss an episode.
So in preparing for this podcast, I was thinking about this, knowing full well that I had nobody to talk to. I’d have to talk at the camera. I thought what I might try to do today is focus on what I’m identifying as more or less a checklist or a summary of considerations dealing with Canadian tax issues. We have, throughout our podcasts, focused on tax issues and we’ll continue to. We are mindful of the reality of paying tax, obviously, in Canada, with the view that we are not tax experts. All we can do is identify these issues and then have the tax experts tell us how to do it. But I thought from a perspective of any estate planning, it’s not a bad idea to create a bit of a checklist and a bit of a sort of the four boxes, the four corners of what we can expect to have to undertake and consider when we’re looking at taxes. This is by no means exhaustive but at least we start to sort of in hopefully one podcast, identify some of the core issues that we want to consider and we obviously have broken down some of these issues in the past but as I say, there is sometimes usefulness to keeping it all in one podcast.
First of all, when someone passes away, we are always faced with the tax returns that need to be filed generally. There’s a date of death return and then there’s a date of terminal return that has to be filed and if we have ongoing trusts, there are trust returns to be filed. Again, something that any good accountant knows and you can just make sure that when you’re triggered with a tax issue, you immediately seek your tax advice because some of the tax rules are very draconian, limitations on them can be very short.
So once we’ve got the tax returns concept and again, by no means, most people are expected to file those returns. You want to make sure that we’ve locked down our tax advisor but we know in the back of our mind the kinds of returns we’re going to have to do.
The other thing that obviously comes to mind is tax rates. And tax rates themselves become relevant because they affect the type of planning tools you are going to use. Obviously the classic understanding of tax rates are personal tax rates that we have during our lifetime and corporate tax rates, which we generally understand to be less than personal tax rates. So when we plan our affairs during our lifetime, we will often use corporate entities to allow us to take some advantage of that and we will also be mindful of our personal tax rates in the context of, for example, if you personally own your home there is no capital gains on your principal residence on a sale. So you have those sort of basic issues that are there, and they’re not new to us when we are alive. On death, the tax rates get generally affected by the two general concepts of if it’s a testamentary trust, the trust is taxed at a certain rate. And if it’s an inter vivos trust or a trust that was set up pre-death, it’s taxed at another rate. So the testamentary trust, or the one that is usually put in the Will where we say here’s a $100 and I’m going to make it left in trust for my kids so that they will have it for their lifetime. That testamentary trust is actually taxed at a lower marginal rate than an inter vivos trust, which is taxed at the highest marginal rate.
Now there’s good reasons for the testamentary trust and the inter vivos trust, but that’s just from a tax rate standpoint. So we’ve got the tax returns, we’ve got the tax rate considerations, and the different vehicles that can come with us. Then we sort of, in sort of the last summary area I’m looking at, are what are the core tax issues? And we often identify those, both during lifetime and after death, are things like how do we deal with the impact of stock options? Or the capital gains that we talked about earlier? If we owned shares before death, the law is simply as clear as a bell in that on the date of death, you’re deemed to have disposed of those shares. So a simple illustration is someone who might have got some shares from the insurance industry when it capitalized on their stocks and policy owners on demutualization got shares. Well those have been issued out to policy owners in the last 10 years in Canada and they are issued out at a very low cost base. You may hold on to those for many years because why would you want to sell and crystallize the capital gain? Well you have no more choices on the point of death and so you will crystallize a significant gain on those shares typically.
The use of insurance we’ve talked about as well, keep that in mind when we’re dealing with tax issues. Use of trusts, which I’ve just identified, the kinds of trusts. There are positives and negatives to both use of inter vivos trusts, testamentary trusts, family trusts, all of those different schemes. Obviously tax issues play a fundamental role in the whole context of family succession generally and one that can be best managed both before death and after. But mostly before death we really do want to get our ducks in order so that we can take advantage of all of the different plans that we can have that would take effect on death. We’ve obviously got to be mindful of the tax issues that tie into a sale of a business. And again, we may have a deemed disposition of sorts because the family business will be sold if you own it on your death in that sense. You are forced to the deemed disposition. But if we can plan ahead, it can go a long way.
The other issues that we’ve talked about in podcasts before are the estate freezes where we allow the family to split the wealth a little bit during lifetime where you have the head or heads of the family who own the core business passing on the growth of the business to their next generation where you essentially have the head or the heads of the family freeze their value, enjoy that wealth as they live. And then the growth over the years is passed on to the next generation.
And finally, and most importantly, is obviously capital gains taxes and looking for the exemptions, looking for things like rollover on death where a surviving spouse can enjoy a deferred tax, so that the tax is not necessarily payable on the death of the first to die, it’s only payable on the death of the second to die if you can plan things properly. And there are also more complicated available tax deferral steps where we, on death, create a situation which allows for effectively a rollover but not necessarily to a spouse. All of which we would want to go and sit down with our tax advisors.
The last point I wanted to make was, the question is often raised is do I need to go to an accountant or do I need to go to a lawyer for these sorts of issues? And generally speaking, it depends entirely on the complexity. Typically most accountants can do most of this work and most of the heavy lifting is undertaken by the accountants. Having said that, there are moments in time where you will need to obtain the assistance of a tax lawyer who can give you opinions on how this is going to work legally, who can give you opinions on how the unique mechanisms that you may propose to take place on death are going to work in the context of the legal parameters that restrict it. So the accountants, while they can give good advice, at some aspects of it you may need to overlay those aspects with a good tax lawyer.
So for a non-tax person today, and solo, we’ve missed Suzana very much this week, I think that gives us what is my view, a bird’s eye view of the tax issues in the context of estates. And it gives you what I call the Reader’s Digest of issues. It’s about issue identifying. As I say, our firm are not tax experts but we like to make sure that we identify the issues as best we can.
So thanks again and we’ll see you again next week.
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to has been provided as an information service. It is a summary of current
issues in estates and estate planning. It is not legal advice and you are
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