This week on Hull on Estates and Succession Planning, Ian and Suzana discuss the core issues surrounding estate taxes.

Posted on December 18^th, 2007 by Hull & Hull LLP

Suzana Popovic-Montag: Hi, and welcome to Hull on Estate and Succession Planning. You’re listening to Episode #91 of our podcast on Tuesday, December 18^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 today?

Ian Hull: I’m fantastic.

Suzana Popovic-Montag: That’s good. How’s your Christmas shopping coming along?

Ian Hull: Yeah.

Suzana Popovic-Montag: One week till Christmas. And the countdown begins.

Ian Hull: Yeah, good question and it hasn’t even begun the shopping, so the stores will hear from me. I remember one Christmas I shopped so fast that Visa called me because I had gone to 3 stores so quickly they thought that I was a thief and took my card. So that we have to look forward to.

But it’s a good time, I think, certainly this time of the year. And more importantly, we’ve been working through some of the estate planning questions. We got a little bit more complex as we moved along in this what we call “mini series” of tax planning the Wills and looking at the tax issues. And I thought today what we could do is just spend a few minutes really just doing a bit of an overview of what we’ve accomplished. I was struck by the fact that recently I was listening to Terry Fallis’ Inside PR and he and Dave Jones are great podcasters. We’ve talked about them in our podcasts from time to time and Episode #87 was one which they were talking about, and it sort of struck me about how we’ve been trying to approach this little mini series on tax planning. They were talking about what is social media and what sort of good does it bring to the process and what kind of…what are the positives and negatives. And clearly, the positive is hopefully an exchange of information that we want to foster and encourage. And certainly through this series, one of the things that I know you and I want to work on in ’08 to enhance this podcast is to get a little bit more exchange. We’re going to set up a 206 number or whatever, a call in number in the new year, encourage people to call in and make some comment if they think it’s appropriate. But, you know, when we were, you and I were working through these tax planning issues, we looked at sort of the three core areas that we find is the most feedback that we’re getting, from both our clients and from counsel and from the public so to speak, talking about avoiding estate planning tax, the Estate Act tax, which is a tax that everybody knows is the probate fee tax. That’s something that the feedback is consistent, although not on a 206 number, but in the informal discussion we have from day-to-day. Talking about how we deal with the capital gains tax. And then thirdly, how we manage US assets and sort of can start to consider the basic issues surrounding US estate taxes.

And so we hope that…Suzana and I certainly hope that we’ve managed to at least talk about these issues at a fairly sophisticated level in the sense that I hope we haven’t been too complex about the issues. But I think that we’ve tried to sort of cover these areas. And so I thought we’d spend a couple of minutes today just talking about, in general terms, those three concepts again and highlighting some of the core issues that we manage to work through over, I would say, I don’t know how many podcasts this mini series has been, but probably there’ve been 10 at least, I would think.

Suzana Popovic-Montag: That sounds about right, Ian.

Ian Hull: So remembering…I try to remember on the estate tax the first thing, being that let’s not…and I think that the core theme was with this tax planning series, was to refocus our attention to away from the soft issues and really spend some time on what are the tax issues. And clearly, avoiding the estate administration tax in Ontario tends to be a fundamental estate planning tool that people undertake. It’s 1.5% of the assets so, as we’ve continued to say, we don’t want to over exaggerate it.

Suzana Popovic-Montag: On our companion podcast last week, Ian, we know that David Smith and Allan Socken were speaking about probate and issues that arise in estate administrations. And one of the things that Dave said is that it’s just remarkable how often and how prevalent the fact that people are trying to avoid a 1.5% tax leads to a whole bunch of issues from a litigation perspective, that people wouldn’t otherwise have expected. It’s just really quite remarkable that when you really think about that number, it’s not as significant, I would suggest, as what other people might think. And the hoops and the lengths that people will go to, to avoid that, it just sometimes just doesn’t warrant it.

Ian Hull: Absolutely. Now remember we had some good discussions on how we manage the capital gains tax. And one of the ways that we talked about managing it was creating the trust environments, both testamentary trusts and inter vivos trusts, so trusts during the lifetime. So on estate administration tax, the simple answer to avoiding it in a large part is the primary and secondary Will, creating two Wills; one dealing with issues that will be taxed, and others dealing with assets that will not be taxes, typically corporations and the like.

Suzana Popovic-Montag: Another thing that we talked about was the use of beneficiary designations in either RRSPs or in life insurance policies and those kinds of instruments.

Ian Hull: So we don’t want to forget the two different trusts because that does help us defer the capital gain. And the capital gain, that terrible moment in time when finally Revenue Canada catches up to us and forces us to pay the tax that we owe. Now, again, just talking about what we wanted to accomplish on the trust analysis that we did was to emphasize that trusts that are created during lifetime create a different, entirely different tax structure too. And they don’t…you’re taxed at different rates as opposed to testamentary trusts. And so there is often an advantage to do the classic scenario where we have a husband and wife who are married. On the death of the first spouse, roll it over into a testamentary trust. It’s taxed at the lightest rate that can be taxed in Canada. That trust then stays alive, so to speak, during the surviving spouse’s lifetime. And then on his or her death, it finally falls into the next generation, the kids. And that’s a really simple but effective way of deferring the capital gains tax.

Another thing we talked about with the capital gains tax was how to offset it through uses of certain products, like you talk about when you can designate the RRSPs and so on, or a RIF or something to an individual who is going to receive a cottage, for example, say there’s a big tax hit. Another option we talked about was putting insurance instruments together even later in life, putting a joint last to die policy together where the two spouses buy a policy even late in life, where the last to die pays it out. And if you dovetail that into a spousal rollover or the spousal trust arrangement that we just talked about, you allow for easy transition into the next generation because you deferred the capital gains tax as far as you can and then on the death of the last spouse, a reasonable premium has been paid for the life insurance and then you have enough funds there, new funds essentially, to pay for this big capital gains tax.

The other area that we talked about finally was just dealing with and managing US assets. And the key issues there being that one that I always want to talk to my clients about is I make sure I want to double-check if they’re US citizens. And there was an interesting legislation that…I don’t know if it actually passed last week or not…but it was right up to the wire. In Canada, where if there was legislation that came about and it reminded me of these tax situations, it came about as a result of the fact this gentleman lived in rural Manitoba, was born actually in a US hospital. It was the closest hospital to where they lived in Manitoba. He was 40 years old now, so 40 years ago, his mother had to have, wanted to give birth somewhere and the closest hospital was a US hospital. He was born there and this gentleman, it’s a little off topic but it ties into the same sort of scenarios that we see in estate planning, and this gentleman ended up getting himself into some trouble with the law. And there was a threat that he was going to be deported or sent back to the US to face US time for his activity, his criminal activity or alleged criminal activity. And it was fascinating because the legislation in Canada now where they’re trying to fix that so that that little loophole won’t happen, that someone who really was almost a US citizen…he may or may not even remember that he was obviously a US citizen. And I use that illustration because we run into this a lot of the time with clients who will say, oh yeah, my Mom did live in the US when she was little. And then you find out, gee, you know, was she filing tax returns? Well yeah, because she got this small pension from this one thing and so she didn’t file or did file, depending on the circumstances, and it creates a whole new layer of estate planning problems. So our third part of this was dealing with, not just those kinds of creative situations, but dealing with that very prevalent situation where you’re either a US citizen or you have US assets and you live in Canada. How do you manage that from a tax planning standpoint? And I hope some of our talk about that was helpful as well.

So I think this was…today’s podcast was really to recap and I guess in some ways, we’re going to…we’re just putting together our next mini series right now. And in some ways, what we’re going to try to keep doing is encapsulating sort of core issues, talking about them over a series of podcasts to the extent that we can, so that we can make sure that we drill down on these issues beyond just sort of superficial comment.

Suzana Popovic-Montag: That’s great, Ian. Thank you very much for that summary. I think you really did sum up everything that we’ve talked about and I do look forward to our next mini series.

Ian Hull: So thanks again for listening to Hull on Estate and Succession Planning. It’s Ian Hull.

Suzana Popovic-Montag: And Suzana Popovic-Montag.

Ian Hull: Thank 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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This week on Hull on Estates and Succession Planning, Ian and Suzana continue their discussion about rolling assets into Trusts and issues surrounding deferring tax on Capital Gains.

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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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.

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