Rolling Assets Into Trust - Hull on Estate and Succession Planning Podcast #84

Posted on October 30^th, 2007 by Hull & Hull LLP

Suzana Popovic-Montag:  Hi, and welcome to Hull on Estate and Succession Planning.  You’re listening to Episode #84 of our podcast on Tuesday, October 30^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.  How are you?

Ian Hull:  Just terrific thanks.

Suzana Popovic-Montag:  That’s good.  Already for Halloween?

Ian Hull:  Almost.

Suzana Popovic-Montag:  That’s good.

Ian Hull:  Nothing like leaving it till the last minute.

Suzana Popovic-Montag:  That’s what we do these days.

Ian Hull:  Well, we were in the last podcast, we were sort of rounding up on our issues relating to inter vivos trusts but we also talked a lot about designations of beneficiaries.  So why don’t we talk a little bit about RRSPs and some tax issues surrounding them.

Suzana Popovic-Montag:  That’s a great idea, Ian, because we know basically that RRSPs and RRIFs, the Registered Retirement Income Funds, are deemed at law to be disposed of on death at fair market value.  And it’s the Income Tax Act that provides for that, that says, you know, on death, there’s a disposition.

Ian Hull:  So to be clear then, the value at death is the fully taxable income of the year in the year of death itself.  So it can be a big hit in terms of the tax burden and from that standpoint, the tax burden is typically paid out of the residue of the estate.

Suzana Popovic-Montag:  That’s right.  There is, though, an exception that arises in circumstances where the proceeds from the RRSP can qualify as a refund of premiums.

Ian Hull:  Well that’s right, and that’s a good point.  That doesn’t always arise in these situations but something we should also consider. 

Alright, so now just talking about this deferring tax with RRSPs.  The proceeds themselves qualify as refunds of premiums only though if they’ve been paid to a surviving spouse or common-law spouse or a financially dependent child or grandchild.  So that’s how we get into this area of exceptions where we don’t have to pay this, what can be an enormous deemed disposition tax.

Suzana Popovic-Montag:  And if there is a beneficiary designation that’s actually in favour of one of those eligible persons that you talked about, Ian, the surviving spouse, the common-law partner, or some financially dependent child or grandchild, then the proceeds are actually going to be paid directly to that beneficiary as this refund of premiums.

Ian Hull:  Well that’s interesting.  And that’s a really important, almost akin to the rollover idea.  They call it as income tax can only do something different but it’s the same in terms of its effect.  So if the RRSP proceeds paid to the estate qualify as a refund in premiums and if they’re allocated to and are distributed by the executor to the eligible person, then we aren’t looking at that draconian and quite painful deemed disposition payment.

Suzana Popovic-Montag:  And what will happen in those circumstances is that the refund of the premiums is going to actually be included in the income of the recipient in the year that it’s received, as opposed to being included in the estate.

Ian Hull:  Okay. Now you were talking about the spouse or common-law partners and I mentioned this whole rollover idea.  How does that work again?

Suzana Popovic-Montag:  Well the spouse or common-law partner can put that refund of premiums into their own RRSP if they are under the age of 69, or into an RRIF or other annuity contract and then defer the tax, pursuant to the provisions of  the Income Tax Act.

Ian Hull:  And one thing that is not always considered and a bit little known, so to speak, is that dependent children or grandchildren may also use this refund of premiums to purchase a fixed term annuity to the age of 18 or something of that nature in terms of a financial instrument product and again, hopefully deferring this tax.

Suzana Popovic-Montag:  And Ian, when we talk about children or grandchildren who are dependent on the deceased, what are we talking about?

Ian Hull:  Well, it’s a good question because there’s a lot of to and fro on this issue and there’s certainly a lot of cases out there.  But in terms of looking at it from Revenue Canada’s standpoint and CRA’s standpoint, a child or a grandchild who is dependent because of a physical or mental infirmity is one that has to qualify in that sense.

Suzana Popovic-Montag:  I see.

Ian Hull:  So that kind of a situation, of course, and, you know, we can identify physical or mental infirmity fairly broadly, then that child can transfer the refund of premiums into this RRSP or the RRIF or the life or term annuity.  And all of this allows us to give some good tax deferral for someone who clearly would greatly benefit.

Suzana Popovic-Montag:  And thinking in turning to the next, we have sort of a deferring tax, there’s also a tax that arises on capital gains, and I thought maybe we could just talk about that a little bit.

Ian Hull:  For sure, because this is the thing we talked about trusts and those other instruments that we were using before.  But this is an important consideration because the deemed realization of capital property at fair market value is done immediately prior to death in terms of the calculation.

Suzana Popovic-Montag:  So you’re saying, Ian, then that when someone passes away, there’s this deemed, you know, realization of a capital property. So everything they own suddenly is deemed to have been disposed of, and if it was disposed of at a value greater than what it was purchased for, then that’s that capital gain we’re talking about taxing?

Ian Hull:  That’s right.  And it’s, I mean, it really is, it’s a bit of an artificial moment in time because obviously when you die, you haven’t got a fair market value, you haven’t got an instant value there but, you know, say you own a cottage property or a chalet in addition to your house because the house is a principal residence and treated slightly differently.  But say you’ve got a second property, the deemed disposition occurs on the date of your death.  Well, this cottage may not be sold for another three generations, who knows.  So you have to go back and work up what that is, as you say, in terms of the growth and the capital tax payable.

Suzana Popovic-Montag:  And in these circumstances, the deferral of the tax or a rollover of the property could be done.  And I think in that case then, it’s adjusted cost base, which is available to people so that on these transfers to a spouse or to a qualifying spousal trust, there is this deferral essentially of tax.

Ian Hull:  Right.  And we talked about in earlier podcasts why we would set up trusts.  Well this is one of those situations where you are essentially rolling the asset into or assets, say there’s an investment account or a bank account, and then a cottage.  You’re rolling it into this spousal or qualifying spousal trust, therefore, and as you say, it’s at the cost base, the adjusted cost base.  So you’re really allowing for an important deferral and one that can be very important because spouses and certainly when you want to do some estate planning, maybe one spouse has more assets than the other or the like.  And you want to make sure that that surviving spouse isn’t hit with a heavy burden of tax or too heavy of a burden of tax.  And this rollover goes a long way to avoiding that.

Suzana Popovic-Montag:  And so the idea then, just so I understand it, really is that on the date of a spouse’s death, there’s a deemed realization of all property.  So capital property in this case, which will generate either a capital gain or a capital loss.  And instead of paying tax on it at that moment of time, provided that the deceased has planned his or her affairs properly, then that gets transferred over to the surviving spouse, or to that surviving spouse’s trust?

Ian Hull:  That’s right.

Suzana Popovic-Montag:  Oh, that’s great.

Ian Hull:  So now, let’s sort of talk a little bit about what that is.  I mean, we’ve talked about the concept generally but let’s talk about what it is to be, how do you qualify as a spousal trust?

Suzana Popovic-Montag: Well in that situation, the surviving spouse has to be entitled to all of the income during his or her lifetime.  So we talked about previously that a trust usually has a breakdown between the income beneficiaries and the capital beneficiaries and to be a qualifying spousal trust, there is that requirement that all the income specifically goes to the spouse and no one else.

Ian Hull:  And that is so crucial.  I mean what CRA says is that if you’re going to do this and you’re going to take advantage of it, we’re only going to give it to certain situations and that is to a surviving spouse.  So if you allow for anyone else to get at the income from this trust, you’re going to create problems.  We’ll talk about those problems in a few minutes but the idea is, is that you restrict who gets the benefit.

Suzana Popovic-Montag:  And I’m presuming that’s what they refer to as “tainting” the spousal trust.

Ian Hull:  That’s right.  And because as the rules are clear in the Income Tax Act, only the surviving spouse can have use of the income or the capital, to be fair.  You can also, the surviving spouse if the trust is set up properly, you can also use the income and then maybe you need another $10,000 or something to buy a new car or something, you’re allowed to pull capital out as well.  But the key is, is that it’s only the person…the question is, is that whose benefit is the money going to?  And like you say, this whole idea of tainted and it will be tainted or it will not be an effective, proper spousal trust if you have anyone else able to access that money.

Suzana Popovic-Montag:  So either the income or the capital during the spouse’s life?

Ian Hull:  Right.  Now, it’s interesting, like for example, what a lot of trusts will have is a contingent interest which is that there’s a possibility of someone else getting access to it.  And say you say, well the income and capital can go to my surviving spouse or my daughter, Betty.  And if you have that kind of language in the trust, you’ve changed it.  It is no longer a truly spousal trust in the mind of CRA.

Suzana Popovic-Montag:  And so the idea really is to be careful when those trusts are being drafted so that, as you say, a contingent interest doesn’t somehow taint the trust.  And I imagine the same would be the situation if there’s a direction in the trust to pay the income until death or remarriage, which is kind of language that we see typically in situations where a spouse survives another spouse.  And that kind of direction would also taint the trust, I imagine.

Ian Hull:  That’s right because you’re allowing other events to transpire.  Alright, well I know this is sort of a bit heavy in terms of the tax side, but it’s such an important part of the planning that we, you know, when we were sitting back and trying to plan our next 50 podcasts, we thought one of the things that we maybe have glossed over which is fine, but we may have glossed over a little bit was some of the detail on these tax issues.  And because we keep talking about the fact that it is so tax-driven, most estate planning.  Well, in fact, it is for a good reason and so we are going to continue to spend a little bit more time on some of these basic tax concepts so that we understand what is, you know, probably 75% of the planning that goes behind estate planning is tax-driven and why.

Suzana Popovic-Montag:  Well, that’s great Ian.  Thanks very much.  I look forward to our next podcast.

Ian Hull:  Thanks Suzana.

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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This week on Hull on Estate and Succession Planning, Ian and Suzana talk about Inter Vivos and Principal Residence Trusts as effective tools to consider when tax planning a will.

Inter Vivos and Principal Residence Trusts - Hull on Estate and Succession Planning Podcast #83

Posted on October 23^rd, 2007 by Hull & Hull LLP

Suzana Popovic-Montag:  Hi, and welcome to Hull on Estate and Succession Planning.  You’re listening to Episode #83 of our podcast on Tuesday, October 23^rd, 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.  How are you today?

Ian Hull:  I’m fantastic.  Just coming off…I had a late night last night on a mediation and I tell you, it was a great experience as often they are.  I was advocating instead of mediating, which you and I do together most of our mediation time.  But we were…it was interesting.  It was in front of a sitting judge who chose to case conference.  It took a whole day but it was a great reminder to me as we turn to our topics today about tax planning Wills and looking at the sort of core planning issues.  It was a great reminder to me that as much as you want to try to plan and organize your estate, the human dynamic is a big, big part of life after death, so to speak, for your beneficiaries.  I learned a couple of really important lessons again and they were lessons that I’d heard before and experienced before, but they were great lessons.  One was that because it was a sitting judge, we were able to get the perspective of a sitting judge in terms of how this might unfold.  And you and I, of course, mediate a lot of cases with retired judges.  I haven’t done a lot with sitting judges for awhile and it was fascinating to get that perspective, so that was number 1 that I learned a lot from.  And then secondly was what really surprised me really at the end of the day was the whole dynamic of a mediation generally.  But anyway, it was a good experience.

Suzana Popovic-Montag:  I think those situations, especially when you have a sitting judge, resonates so much Ian, with both counsel and the clients.  It just seems that it adds a whole layer that, using a retired judge for instance, or some other person who isn’t…doesn’t have that kind of credibility associated with it.  It’s a very different kind of situation.

Ian Hull:  It really is and, you know, it’s a good reminder that, as I say, we sit down, we want to plan our estates, we want to keep our eye on the ball on the tax issues and the planning issues that we were sort of keeping focused on in our mini-series we’re doing now.  But I was really surprised at how the non-legal parts of it played out in this particular mediation, not different much than most mediations, but still surprised nonetheless that, you know, the non-legal issues really prevailed, the emotional issues between, this was a fight between two brothers over an estate.  But one of the things that struck me about the middle of the mediation was that we started to talk about a solution.  And one of the solutions was to create a new trust.  And in this case that I was mediating there was a situation where a testamentary trust was established.  But there was talk about trying to resolve it by creating a new trust, an inter vivos trust.  And I sort of took a deep breath and thought about it and as we were working through some of the scenarios and so on, I thought, you know, gee, it’s a good thing that, from our perspective, we, you know, have done a lot of the leg work on these inter vivos trusts and looking at how they can be an effective tool because when you’re under the hot lights of a mediation, you don’t have time to learn the product, so to speak.  So we turned to it pretty quickly.  And one of the first things we talked about was that inter vivos trusts can, of course, be an effective tool in avoiding the estate administration tax that is payable on death if the assets side in the estate itself.

Suzana Popovic-Montag:  Another thing that I would think, you know, when you deal with these kinds of inter vivos trust arrangements, you want to…I certainly try to remember the fact that, you know, as soon as you start transferring assets into a trust, that’s going to effectively lead to a deemed realization of the property that’s transferred into it at fair market value.  And that’s something that I just try to keep in mind because, you know, it’s easy to say I’m going to set up a trust but there still are tax consequences associated with that.

Ian Hull:  For sure, and just another sort of lesson that we came out of at the last mediation that I was involved with was, that was the first question that I asked as we were starting to consider this, is that in that case, the estate had fallen in.  The person had died and we were thinking about establishing with some of the money that was in this estate, this inter vivos trust.  And the first question I asked was, have the deemed disposition taxes been paid on the estate?  And fortunately in that case, they had.  But it is a very important starting point that you realize that whenever you create these trusts, the tax is payable on the transfer.

One of the twists that we can’t forget with our clients, which I try to make sure I tell my clients to consider in the inter vivos trust environment, is to create a principal residence trust.  And that is a trust really that helps us deal with an isolated asset being the home.  And in Canada, we are blessed with no tax payable on principal residence but if you want to put your principal residence in a trust, you can do it, if properly drafted, into a principal residence trust and the taxing authorities, Canada Revenue Agency, won’t treat it as a special asset and they’ll treat it as a principal residence in terms of the tax payable on it when you both put it in and take it out.  And that’s a very important option.  And it’s an estate planning option that I like to run by my clients because sometimes, for example, you have a younger child who…maybe not younger but maybe they’re in their twenties and you don’t want to pass on the asset directly or give someone the asset directly without letting them enjoy the benefit of a non-taxable growth in the principal residence.  But at the other end of the day, you also may want to add some protections to that home and where it goes and how it gets out of.  And one example I think of is that in another matter that I was involved with, what we did was we created in an inter vivos trust, the principal residence trust, we created a pool of money to be put into the principal residence trust and the trust provision said that the money in this trust may, not has to, may be used to buy a principal residence.  And what they did in that case was they used…they put $1,000,000 in that trust and they used $700,000 of it to buy the principal residence and they kept the rest to help with the expenses.  So this podcast isn’t about how to draft principal residence trusts but it is a planning tool in the inter vivos world, inter vivos trust world that can be very effective.

Suzana Popovic-Montag:  That also brings to mind the possibility of other kinds of trusts in addition to that.  Like, I know you’ve talked a lot about in the past joint partner trusts and alter ego trust arrangements as well.

Ian Hull:  Yeah, and they are a really important tool.  In Canada, they certainly changed the landscape fairly dramatically and I think both the alter ego trusts and the joint partner trusts justify a special podcast in a sense.  We have talked about them in the past but I’m going to make a note that we want to come back to that issue because it’s an important planning issue, but one that, for the purposes of this…today’s podcast, I think we need to sort of more or less gloss over in the sense that we don’t want to get too…we want to try to cover the general concept of an inter vivos trust.  But the alter ego trusts and the joint partner trusts are again inter vivos trust planning that are set up to essentially allow you to transfer assets into a trust and not get stung with the deemed disposition.  And we go back to first principles.  As we said, the inter vivos trust is a deemed disposition the minute you put an asset into the trust.  So if you have an asset that has been growing that you haven’t paid the tax on the capital gains yet and you decide to put that asset into a trust, that instant there’s deemed disposition tax payable.  Now, with an alter ego trust or a joint partner trust properly drafted, you can avoid that deemed disposition because of the special rules around it.  And one of the core special rules, without getting in too much detail, one of the core special rules for these two special trusts are that to enjoy the lack of being taxed, so to speak is, is that you have to be age 65 or over.  So they are only established for a very, you know, specific market, so to speak.

Okay, those two, as I say, I’ve made a note because I think there’s really a lot there to consider, but we’re going to come back to those trusts from a planning standpoint.  And in fact, you know, I’m going to make another note and say that we could probably have some more discussion on the principal residence trusts as well.  But let’s leave that for another day because that covers our sort of general comments on inter vivos trusts.

Just then to turn to one topic that we’re not going to have time today to cover entirely but the question of RRSPs is such a…it’s sort of the…it used to be the biggest planning issue that most Canadians deal with.  I mean, most Canadians who have pass on wealth, aren’t passing on massive amounts of wealth, they are passing on savings.  And one of the core savings that often lands in an estate is the RRSP.  And we’ll talk a little bit about what the general concept is, but we also know from a planning standpoint that that has to be one of the core areas to consider when we are sort of revisiting our Will plan from a tax perspective.  We used to…I mean, until the joint accounts issues flared up over the past 5 years, that now seems to be one of the core planning issues.  But until that happened, the RRSP was the dominant issue for most regular Canadians like you and I in terms of our savings, because that typically is the only pot that’s there.

Suzana Popovic-Montag:  And now recently with the RESPs, the Registered Education Savings Plans, those are things that are also coming into the mix, as well as, and we’ve talked about in previous podcasts, life insurance proceeds. All of those are other creative ways to sort of deal with the tax consequences of an estate plan.

Ian Hull:  So just…I’m just going to introduce the concept and then we’re going to work through it in some detail because of the importance of it in future…in the next podcasts.  But the concept again comes back to the whole idea that, you know, this whole idea that there’s a deemed disposition of the capital growth unless, and we talked about the inter vivos pure trust, it has to be…you have to pay the tax when you create the trust.  We talked about the idea that you can maybe avoid it with a principal residence trust.  You can probably avoid it…well certainly avoid it with the alter ego trust and the joint partner trust.  Well the same goes with deferring tax on RRSPs.  With RRSPs and RRIFs, what we’ve done from a planning standpoint and what we’re going to talk about in our next podcast is, is that what special treatments can we deal with with these investments to try to at least work around the impending doom…not death…the impending doom of a deemed disposition.  So I look forward to that topic and I appreciate your comments today too, Suzana.

Suzana Popovic-Montag:  Thanks very much Ian.  Speak to you soon.

Ian Hull:  Thanks a lot.

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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