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It’s just about tax time, so I thought I would briefly discuss the taxation of executor compensation.

The basic premise is that executor compensation is taxable in the hands of the recipient. It is either income from an office or employment (if the executor is not in the business of being an executor) or income from a business (if the executor is in the business of being an executor, or if such a function is in the executor’s usual course of business). Various consequences flow from the distinction, such as allowable deductions, and withholding requirements for EI and CPP.

CRA takes this obligation to report executor compensation quite seriously. An example of the lengths to which CRA will go is found in the decision of Oolup v. The Queen. There, Ms. Oolup, the executor held a joint account with her grandmother, the deceased. She was advised by her lawyer that upon the death of the deceased, the joint account became hers, by right of survivorship. However, for “reasons of family harmony”, she decided to keep only $10,000 from the joint account, and divided the rest with the deceased’s next of kin.

CRA took the position that the $10,000 was executor compensation, and was therefore taxable, and they assessed Ms. Oolup accordingly. To get to this point, they argued that the joint account was held on a resulting trust for the estate. The CRA argued that the presumption of resulting trust applied, and was not rebutted. Accordingly, they asserted that Ms. Oolup received the $10,000 from the estate, as executor compensation.

Luckily for Ms. Oolup, she was able to rebut the presumption, and the court found that the joint account funds became her property upon the death of the deceased. She received the money by right of survivorship. Therefore, her keeping $10,000 was not receipt of compensation by her, and was not to be included in her income.

Thank you for reading,

Paul Trudelle

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Sham and Secret Trusts - Hull on Estates Podcast #105

Posted on April 8^th, 2008 by Hull & Hull LLP

Suzana Popovic-Montag: Hi and welcome to Hull on Estates. You’re listening to Episode #105 of our podcast on Tuesday, April 8^th, 2008.

Welcome to Hull on Estates, a series of podcasts for the Canadian legal community dealing with issues and insights surrounding estate planning in Canada.   Hosted by the lawyers of Hull & Hull, the podcast will touch on some key considerations when planning estates and Wills.  Now, here are today’s hosts.

Ian Hull: Hi Suzana, its Ian Hull here.

Suzana Popovic-Montag: Hi and it’s Suzana Popovic-Montag. How are you today?

Ian Hull: Just great. We’re celebrating what, 105 now? We haven’t been doing this since 100 so good to be back, good to think about some issues that have been rumbling around in my mind. Just want to remind everyone to feel free to call in to our call-in number at 206-350-6636.

Suzana Popovic-Montag: Or you can drop us an e-mail at our gmail address which is hull.lawyers@gmail.com. Or, of course, you can visit us at our blog which is estatelaw.hullandhull.com.

Ian Hull: So Suzana, I know that when this launches into the internet, we are going to both actually be out of the country. I’m not going to be as nearly as exotic a spot as you are. But you’re off to Vienna and Prague to test the world markets on estate law and on law generally at a great conference. What your trip triggered in my mind was I thought we might have a discussion today about was issues that have, sort of, a broad and international perspective. And that, of course, ties into trust law generally. Where you’re going, both jurisdictions in Prague, it’ll be slightly different, I think it’s more of a civil code, but the Vienna system as well you’re going to be tied into the – learning a lot about the civil code. But the common law and where to cross the border is governed, trust laws are fairly consistent. And one of the things that they use tremendously in planning in Europe is, of course, trusts to avoid what can be very draconian and overwhelming tax liabilities on death. The classic scenario, certainly in the U.K., that a lot is written about and much case law comes out of, is situations where you create a trust that isn’t really a trust and we call it, of course, sham trusts. Another scenario is, of course, where you might have a situation where you created a secret trust or a semi-secret trust. So I thought it might be fun to talk a little bit about those angles on trust law.  And why don’t we start with the sham trust, if that’s ok.?

Suzana Popovic-Montag: That’s great, Ian and I know you’ve written quite a bit on this topic and I think it’s a really interesting one. It doesn’t necessarily – it isn’t necessarily something that we see a lot of but it definitely is something that is on the rise in terms of the literature that’s out there. What a sham trust really is and I guess the best way to, sort of, start with a description of it, is to start with the concept of a bare trust which is a simple trust in that the trustee is a repository of the trust property and he or she or it has no real active management duties to perform.

Ian Hull: And, of course, we’re talking about sham trusts, trying to essentially avoid sham trusts because if it is called a sham trust, then CRA and, of course, the Courts won’t give you the protections nor the tax advantages that may or may not exist. So your comment about the bare trust is crucial because that can be a useful and legitimate tool to create a trust relationship. There are, of course, really the opposite to a trust, proper trust with the three certainties or a bare trust as you’re describing, which is a proper trust with the three certainties only with a see-through flow-through in terms of the responsibilities. The opposite would be the sham trust itself. And that’s where the Courts and CRA get a little fussy about it.

Suzana Popovic-Montag: And on the face of it, it really does appear to be a trust in the sense that there is a trustee, there is a beneficiary and equitable rights are created in those beneficiaries.

Ian Hull: So in a situation where a sham trust has been held by the Court, a trust has been held to be a sham trust and not legitimate for the purposes being sought, is where the Court finds that the only real duty of the trustee is to do what the settlor says. And I know that’s sort of a bit vague but the Courts often go on and say well, you know, they describe these sham trusts as pretend trusts.

Suzana Popovic-Montag: And they do that because the common intention of the parties in these kinds of circumstances, the Court will find, is that it was not to actually create a trust with its associated rights and obligations.

Ian Hull: And really the Court just gets frustrated and a little cranky with people who create these sort of trust arrangements because they see them as an act or a document that is intended to mislead third parties.

Suzana Popovic-Montag: And I know sometimes the cases will actually go so far as to say and I’m just quoting from one of the cases that I am thinking of, that it’s an illusion basically, that it’s calculated to lead the tax collector, i.e. CRA, away from the actual tax payer. And so what it ultimately does is creates this façade of a reality of a trust, when in fact there isn’t one.

Ian Hull: Alright, so let’s talking about determining if it is a sham trust and what the Courts will look at.

Suzana Popovic-Montag: Well I think the first thing that they start with, of course, is the actual terms of the trust.

Ian Hull: And then they tend to talk about it being really a question of control.

Suzana Popovic-Montag: And in that sense, you know, it seems to be that they’re looking at whether or not the settlor has maintained control notwithstanding the fact that a trust has, on the face of it, been established.

Ian Hull: And one of the tests that I’ve seen in the case law is that the Courts will say, is the trust a mere alter ego of the settlor and that’s all?

Suzana Popovic-Montag: Now, Ian, I think we sort of understand the concept of a sham trust.  And what would you say would be sort of a good example of that, that you’ve seen recently or where people would want to try to create these situations and then ultimately not be successful because a Court finds that, in fact, it’s not a valid trust?

Ian Hull: Well the classic one that we see in Canada is the off-shore trust. Of course, off-shore trusts can be a good idea, they’re not all sham trusts, for sure. They create excellent tax planning, estate planning and creditor protection availability for wealthy clients. But if it’s not done correctly, you do create the difficulties that a Court from another jurisdiction will be looking through the trust and determining whether or not it is a sham.

Suzana Popovic-Montag: And I guess that sort of underscores the importance of working possibly with counsel in the jurisdiction where you’re trying to establish that trust, as well, in order to create something that hopefully will sustain the test by a Court.

Ian Hull: And, of course, and you know again, talking about the positives, is these trusts, the bare trusts in particular, can be a useful tool, these off-shore trusts can be useful tools, they create a tremendous amount of ability for wealthy clients to have confidentiality.  And while they have to in Canada, of course, declare their worldwide income, they don’t necessarily have to have it openly documented for others to see what exists and where it exists.

Suzana Popovic-Montag: And so there definitely are advantages to it. But what would you say would be a consequence of the fact that it’s a Court or someone who would ultimately determine, I guess CRA, that it isn’t in fact a valid trust?

Ian Hull: Well I think the key is, I mean many times these sham trusts are established for tax reasons. But the trust… where the Courts, what the Courts will do is, is that they’ll say, if it is indeed a sham trust, the trust assets are then taxed as if it was in the hands of the settlor. So, you know, any of the advantages that you may have tried to create are lost.

Suzana Popovic-Montag: And I guess most importantly, the creditor protection and, I guess, as well the loss of confidentiality to some extent, as well.

Ian Hull: For sure and I think that’s  – you know, in many situations, a bit of a deal breaker.

Suzana Popovic-Montag: I think if we just spend a couple minutes, we’ve got some time here, Ian, to turn to the concept of secret trusts. And I know I’ve heard you speak about them in the past and you say, you know, what they really amount to is taking the trust concept as we understand it at law and then becoming, you know, agent 007s.

Ian Hull: Absolutely. It’s the James Bond trust. And this trust, if done properly, can be a useful tool to again, it doesn’t elude CRA, but it might elude people who want to keep their assets more confidential and it’s an on-shore opportunity and an off-shore.  But it’s an on-shore opportunity to create a situation where the assets transfer from the settlor or a testator, depending if it’s someone who’s passed away, to a beneficiary, but through a third party.

Suzana Popovic-Montag: And the advantage there is that, of course, trusts can remain private documents, whereas Wills are potentially very public. And so if you’re trying to create an arrangement where you’re providing for a beneficiary-trustee relationship without it necessarily being known by everyone, you try to create this kind of secret trust arrangement.

Ian Hull: That’s right. And I mean, so the client really in this situation wants to make a gift but the nature of that gift they do not want to make public for whatever reason. And I think of an easy illustration was one that I ran into on a case that talked about a situation where the individual had a lot of wealth, wanted to pass on some of that wealth to the child after death, didn’t want the child really – not that the child should know, but didn’t want the public to know just how wealthy that child was going to be, because he feared people would prey on that child and try to take advantage of that child’s financial circumstances.

So the steps were to leave it through to a third party, hold it on a secret trust, the terms of which we’ll talk about in a moment here.  But the terms of which are disclosed properly and then the identification of the terms of the trust can, sort of, hold their own.

Alright, so we’re just about winding up, but I just want to remind, sort of, when I think about it, I’m reminded of the secret trust because the key is, is that the trust is typically not reduced in writing, the trustee will typically keep the money for him or herself, which obviously creates its own problems, but it is one that you need to have in some way, either through provisions of the Will or some way, articulated what the terms of the trust are.

Suzana Popovic-Montag: And that really is the key because this arrangement, by very virtue of the fact that it is a secret one, has to somehow be, as you say, reduced to provide the settlor with as much guarantee or as much protection as possible, in light of the fact that, you know, there are these inherent difficulties with it.

Ian Hull: So, in conclusion, you need, sort of, the essential ingredients to pull off a secret trust, is of course, you need a trust with the three certainties.

Suzana Popovic-Montag: And you also need an intention of the deceased to actually benefit the secret beneficiaries.

Ian Hull: You need communication of the trust terms to the trustee and/or the beneficiary.

Suzana Popovic-Montag: And thirdly, you want to have acceptance by the trustee or the beneficiary which is going to be sufficient to actually induce the testator not to execute a Will to that effect.

Ian Hull: Terrific. Okay well, thank you very much, Suzana, good to be back on Hull on Estates. Hope that was certainly interesting for me to review these reasonably unique trust questions, but they do pop up from time to time and can be an important part of an estates practice. So I remind everyone to feel free to call in to our call-in number, 206-350-6636.

Suzana Popovic-Montag: Or, of course, feel free to send us an e-mail at hull.lawyers@gmail.com or visit our blog and webpage at estatelaw.hullandhull.com. Thanks very much, Ian

This has been Hull on Estates with the lawyers of Hull & Hull.  The podcast you have been listening to has been provided as an information service.  It is a summary of current legal issues in estates and estate planning.  It is not legal advice and you are reminded to always talk with a legal professional regarding your specific circumstances.

To listen to other podcasts, or to leave a question or comment, please visit our website at www.hullandhull.com.

Our theme music is Upper Structure by DJ AKid  and is courtesy of the Podsafe Music Network.

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Deferring Tax on Capital Gains - Hull on Estate and Succession Planning Podcast #85

Posted on November 6^th, 2007 by Hull & Hull LLP

Suzana Popovic-Montag:  Hi, and welcome to Hull on Estate and Succession Planning.  You’re listening to Episode #85 of our podcast on Tuesday, November 6^th, 2007.

Welcome to Hull on Estate and Succession Planning, a series of podcasts hosted by

Ian Hull and Suzana Popovic-Montag, that will provide information and insights into estate planning in Canada, from the offices of Hull Estate Mediation in Toronto, Ontario, Canada.  Here are Ian and Suzana.

Ian Hull:  Hi Suzana.

Suzana Popovic-Montag:  Hi there Ian.

Ian Hull:  So we’ve survived Halloween.

Suzana Popovic-Montag:  We have.  Did you have fun?

Ian Hull:  More food for me not to eat.

Well, we had a good discussion last podcast about deferring tax on capital gains and dealing with those sort of fundamental planning issues.  Let’s…I think we might, but why don’t we spend a few minutes winding up on that issue a little bit and then talking a little bit about some drafting issues if we have time.

Suzana Popovic-Montag:  That’s a great idea, Ian.  Because we were just getting into, you know, different ways that a spousal trust could be tainted and what the consequences of that were.  And one of the things we pointed out was that in these situations, you wouldn’t have any rollover available to the estate.

Ian Hull:  So this whole rollover idea is our great deferring step and there’s this whole theory of tax planning with estates, but with everything and that is, is that even if you have to pay the tax, let’s wait to the very last moment in time to pay it.  So husband wife, happily married, one of the spouses dies before the other.  That spouse doesn’t have to pay tax if you roll it over to the surviving spouse and you’re essentially deferring it.  You’re not avoiding the tax, which is important.  But it’s deferring it.  And there’s a cost to deferring it.  In this case we talked about is that we’re putting it into a trust.  So there’s a certain lack of control.  You’re not giving it all to the surviving spouse.  Or you can have rollover available when you give it to the person 100%.  Like, for example, you would rollover your house.  It might be held in joint tenancy or you pass it on pursuant to your Will to your spouse.  There’s a rollover in that sense.  Full control to that surviving spouse.  That surviving spouse can do with that asset as they see fit.  But when you put it into a trust, you lose control and therefore Revenue Canada says, or CRA now, says wait a minute, if you’re going to keep…take advantage of this trust arrangement, we’re not going to let you make it go to anybody, or allow any income in that trust to anyone other than the surviving spouse.

Suzana Popovic-Montag:  One of the neat things that does arise in some situations, Ian, is where you, even though a spousal trust has somehow become tainted, it may be possible to untaint the trust.

Ian Hull:  Yeah, and that’s a very…certainly from our perspective, when we do this kind of work in the litigation side, it’s a dangerous game.  We tend to tell our clients that the cleaning of the trust is not a guarantee and ultimately CRA may have some difficulties with it.  And a classic scenario was, years ago, they used to have in the trusts the ability to borrow and if the language wasn’t perfectly drafted, CRA used to say that that was a tainted trust.  And we went into Court and tried to cleanse those trusts.  But we would have to say to our client that the cleansing from a Court Order doesn’t necessarily bind CRA.  So you left yourself exposed.  So you really want to try to avoid the cleaning if you can help it, but it is, you’re so right, available.  And it’s not the end game if the trust has been tainted or made dirty, so to speak.

Suzana Popovic-Montag:  Now another thing that I try to keep in mind when I’m speaking with clients is the fact that a rollover can be available on transfers to either a spouse directly or to a spousal trust that may arise as a result of a disclaimer by a beneficiary of the estate or a release or a surrender by a beneficiary, who’s other than the spouse of a deceased.

Ian Hull:  That’s right.  And there’s also transfers that are available as a result of a variation of the trust application.  There’s an Act in Ontario and throughout Canada, the Variations of Trust Act, that allows for a variation or amendment to the trust.  Dependent’s relief claims can also allow for this.  So there are some, as you talked about earlier, there’s ways to cleanse the trust.  There are some creative angles that are available, what we call post-mortem as well, after death, to help enjoy some of these important rollover benefits.

Suzana Popovic-Montag:  Now Ian, let’s turn perhaps to just a brief discussion about what happens then on the death of that second spouse, once that rollover has expired, so to speak.

Ian Hull:  Yeah.  Well, that’s the day of reckoning and lots of people try to avoid it.  Even on that day of reckoning, depending on how you set it up, there is some wiggle room.  But the basic rule is, is that tax on capital gains becomes payable on the disposition by that spouse or by that spousal trust, however it’s been established.

Suzana Popovic-Montag:  And so there’s a deemed realization of the capital property that’s in that spousal trust on the death of the survivor or if that survivor then transfers it to someone else other than the spouse.

Ian Hull:  That’s right.  So we…finally CRA gets their money.

Suzana Popovic-Montag:  isn’t that always the case?

Ian Hull:  That’s right.

Just a comment, and we don’t pretend to be the drafting experts nor wanting to, in the podcast format, deal too much with the drafting issues.  But we talked about some of the answers that can get through the Court system if there are problems with the trust itself.  But why don’t we spend a couple of minutes just on drafting issues, to help maximize or help make sure this deferral is effective.

Suzana Popovic-Montag:  One of the things that sort of comes to mind in that situation, Ian, is where we’ve got a testator who decides to require some kind of remarriage clause, or wishes to include in his or her Will the ability to sprinkle income amongst the spouse and the children.

Ian Hull:  So, in a sense, there is someone who…the spouse is dying, and has died, and has created a document, a Will, that is tainted, so to speak, and wants to be tainted.

Suzana Popovic-Montag:  Right.  So they’re doing both a tainted and an untainted trust, is the way that I sort of think of it as.

Ian Hull:  That’s right.  And so we establish one or more spousal trusts, or one or more trusts that qualify as a spousal trust, and we also establish what might be a testamentary trust.  And a classic estate planning technique in that scenario is, and has been used for many years, and it’s not perfect for everyone, but there is a classic estate scenario when we set up these various trusts.

Suzana Popovic-Montag:  And I guess the idea really is to allow, in the untainted trust, you know, what we talked about in allowing for that rollover provision, but recognizing the fact that, you know, not every asset can be put into that kind of arrangement.  And so allowing a trustee or an executor the discretion to allocate the assets of the estate between the tainted and the non-tainted spousal trust.

Ian Hull:  And what will happen is, is that literally the Will will provide that trusts are to be established.  And the classic scenario is, we call it the kid’s trust and the spousal trust.  And the executors are told in the Will that they have to, on the date of death or the day after the date of death, whenever the trigger point is, they have to sit down and decide how much money is there and what would be the most appropriate.  So if there is a $500,000 estate, would you put all of that money into the spousal trust?  Would you put half of that money into the spousal trust, and the other half into the children’s trust?  Those are the kind of questions that you would have to push on to the executors to make that decision.

Suzana Popovic-Montag:  And I imagine they would be getting legal accounting tax advice in order to determine which assets, you know, for instance, had the greatest capital gain or recapture, that they’d want to allocate specifically to the qualifying spousal trust, and which they would put elsewhere, in order to actually maximize that deferral of tax for as long as possible.

Ian Hull:  That’s right.  Now that’s all well and good in theory, but we’ve talked about problems that get created.  And one of them is, of course, that the children or the spouse feels that they are not being treated properly.  And the executors have the curse of trying to make the decision of how much goes in the trust.  But they also have the legal curse around them in the sense that the surviving spouse has special rights.  So you can’t just give, for example on that $500,000 example, you can’t just say, let’s just willy nilly split it 50/50 for example, $250,000 to the kid’s trust and $250,000 to the spousal trust, because of the super-priority, so to speak, that the spouse has.

Suzana Popovic-Montag:  And I imagine you’re referring, Ian, to the right of the spouse to elect under, in Ontario, the Family Law Act.  Something that we’ve talked about in the past, just the entitlement of a surviving spouse, to say notwithstanding the terms of the Will, I’m actually going to elect to take half of the value of the estate.  And there’s a calculation that’s involved in that.  But that being sort of the big idea.

Ian Hull:  That’s right.  And it’s the community of property analysis that everybody whose married to another spouse for a long period of time, and what long means is always debated in the Courts.  But if you have a lengthy relationship, and it’s a married relationship, the Courts across Canada and in the United States say there is a community of property here.  So notwithstanding what the executors want to do, you have an override clause, so to speak.  And you also have many other claims that are available…not many…but I mean several other claims that are available to a surviving spouse in different jurisdictions.  So it seems to me that this, coming back to one of our important themes, is this is where you want to have some discussion before you die with your executors, with your family, to determine (a) does the two trust arrangement make sense and (b) how would, what would be a realistic and reasonable allocation of whatever money is left.

Suzana Popovic-Montag:  And I think tempering all of that, of course, with the recognition that despite all this wonderful planning and what the intention is, that at the end of the day, if a spouse chooses to, he or she can completely ignore that and pursue other remedies.

Ian Hull:  Absolutely.

Alright, well I think that’s a good start. What we might do in the next podcast is talk a little bit more about some capital gains issues and some of the family law issues that tie into that.  But we’ll also want to focus our attention away from the spousal trust arrangement into the testamentary trust, because in estate planning, the two core trust arrangements are, one is the spousal trust, and the other is a testamentary trust.  So I think we need to spend some time on that.  But we also need to wrap up some more of our considerations with the super-priority of the surviving spouse.

Suzana Popovic-Montag:  That’s great, Ian.  I look forward to our next podcast.

Ian Hull:  Thanks a lot, Suzana.

Suzana Popovic-Montag:  Thanks to you.

You’ve been listening to Hull on Estate and Succession Planning with Ian Hull and Suzana Popovic-Montag.  The podcast you have been listening to has been provided as an information service.  It is a summary of current legal issues in estates and estate planning.  It is not legal advice and you are reminded to always talk with a legal professional regarding your specific circumstances.

To listen to other Hull On podcasts, or to leave a question or comment, please visit our website at www.hullestatemediation.com.

Our theme music is UpTempo14 by Gary and is courtesy of the Podsafe Music Network.

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