This week on Hull on Estates and Succession Planning, Ian and Suzana discuss the necessity of planning for the payment of taxes on death.

Payment of Taxes on Death - Hull on Estate and Succession Planning Podcast #89

Posted on December 4^th, 2007 by Hull & Hull LLP

Suzana Popovic-Montag:  Hi, and welcome to Hull on Estate and Succession Planning.  You’re listening to Episode #89 of our podcast on Tuesday, December 4^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 awesome, thanks.

Suzana Popovic-Montag:  That’s good.

Ian Hull:  Always looking forward to our podcasts once a week to sort of sit back and reflect on relatively new and exciting stuff in the estates law world, so looking forward to today’s podcast.  I spent a bit of time on the weekend and saw our friend, Terry Fallis, who has just launched his book.  It’s out in Indigo and it’s in some of the major bookstores and he was very excited.  We missed his book launch last week because of a mediation that went too long but Terry’s very excited about it and it’s been fun to catch up with him.

Suzana Popovic-Montag:  It’s a wonderful accomplishment.  And speaking of accomplishment s, Ian, I did want to mention the fact that I saw that article that featured you and your Dad in the Bay Street Bull Magazine talking about family businesses.  And I just thought it was a wonderful expose that did a lot of credit to the two of you and your accomplishments.

Ian Hull:  Well, thank you very much.  That was fun to do and it was fun photograph to take with my Dad, which…we got in our gowns and went down on the street and took a photo.  So it was pretty neat.

Suzana Popovic-Montag:  Well, that’s wonderful, congratulations on that.

Ian Hull:  Thank you.

So last week, we were working through and pretty well completed the whole sort of analysis of charitable tax issues and how that sort of unfolds at the level that we’ve been trying to sort of portray the basic tax issues from.  Today, let’s start turning the corner on payment of taxes on death, because that is sort of a first starting point.  Everybody thinks that that’s the worst thing that can happen to them after death.  So I guess dying is worse but paying the taxes is second worst, so...

Suzana Popovic-Montag:  But when you’re dead, you don’t have to pay those so…

Ian Hull:  That’s true.  So why don’t we talk about payment of the taxes on death.

Suzana Popovic-Montag:  Sure Ian.  We know that typically the Wills will provide the actual debt clause that will direct that the payment of taxes and of debts will be paid out of the residue of the estate.

Ian Hull:  Now, an interesting thing that can develop is because of the rule that taxes are paid out of residue, inequitable situations arise where you have one beneficiary receiving, for example, an RRSP or a specific bequest.

Suzana Popovic-Montag:  And I guess that’s because there is a tax that may be associated with either of those two bequests and in that kind of situation, normally, if there is a residue clause that provides that debts will be paid out of the residue, then the individual would be entitled to that RRSP or that specific bequest net of tax, so to speak.  So they wouldn’t have to bear the tax consequences, but it would be the estate that would.

Ian Hull:  And it’s sort of an interesting planning point that a lot of people forget, and that is, of course, that when you give an RRSP to someone specifically, the tax is payable out of the residue.  So this person gets the $100,000 RRSP tax-free unless you properly plan.  So it’s a fairly basic gifting technique that we see in Wills, so we don’t want to have it come back on us later, if we’re not watching where the tax is going to be paid.

Suzana Popovic-Montag:  Because if we don’t, the truth is, the residual beneficiaries are going to resent the fact that their funding someone else’s tax liability and that someone else is getting their gift free of the tax.  So it’s just something, as you say, important that we want to keep in mind.

Ian Hull:  So another…let’s talk about real property and real estate, when we’re gifting real estate.  How do we deal with that, and the tax questions that might arise there?

Suzana Popovic-Montag:  Where a residual beneficiary, Ian, desires to get real estate as part of his or her share of the estate, so instead of taking the cash equivalent of the value of the property, they actually want the real estate itself, in those situations the individual is going to be liable to pay the land transfer tax that’s going to be associated with that property.

Ian Hull:  So it seems to me, though, it is quite unusual to see the payment of land transfer tax addressed in the Will and this is a big tax now in Toronto here.  We’ve got an even bigger land transfer tax now added to our tax burden here and a great gnashing of teeth and crying about that here in Toronto.  But it is a bit unusual to see that actually being dealt within the Will, isn’t it?

Suzana Popovic-Montag:  It is, Ian.  I don’t think I can recall too many Wills where I’ve ever seen it, but it certainly is something that, you know, is a good idea to include in a clause that actually provides the executor with the ability to transfer real property as part of a residual share without having the land transfer tax liability associated with it.

Ian Hull:  Now, we’ve talked about the separate Wills and mutual Wills in other podcasts.  That’s obviously another factor to consider in terms of taxes and payment of taxes on death.

Suzana Popovic-Montag:  That’s for sure because we know that we’ve seen many situations where there are separate Wills set up, for instance, for the private company’s shares and for other assets that don’t necessarily require probate, and then a separate Will dealing with those assets that will require probate.

Ian Hull:  And one of the things that we’re starting to see, because these primary and secondary Wills are starting to fall in more and more, is that sometimes when we’re estate planning, we’re not considering when we have a primary and a secondary Will, like you say, where the tax is to be paid.  And we’re not putting in the Wills precisely, for example, if the holding is in the secondary Will, do all the taxes in respect of the holding company get paid under the secondary Will or does the primary Will fund the tax liability that may be the subject to the holding company, those kinds of things.  So it’s a good point to press our advisors when we’re setting up our estate plan to just make sure that we might say to them look, okay this is all very fancy-dancy, two Wills.  I like the approach, but who’s going to pay the tax and where and does it set out in the Will clearly where the liability of tax will flow, because it can be a big issue.

Suzana Popovic-Montag:  Particularly, Ian, when the residual beneficiaries under the primary Will or the secondary Will are different.  Because in those situations, you know, despite all the planning, I’m actually quite surprised that, you know, secondary and primary Wills are quite sophisticated estate planning.  And notwithstanding that, as you say, we don’t many times see a clear delineation between the two Wills as to who’s responsible for those kinds of debts and taxes.

Ian Hull:  Alright.  So we’ve considered the RRSP unique situation.  We’ve considered the land transfer tax unique situation.  What about properties with accrued capital gains which get bequeathed to an individual beneficiary?  Like, for example, a cottage or something that’s, say you bought when…thirty years ago and then on the death, it’s a significant capital gain that is owed on the cottage, or something like that?

Suzana Popovic-Montag:  That’s an interesting scenario and one that quite often does arise.  And one of the things that I know you always recommend is considering whether the tax should actually be funded by a mortgage on the property or directly out of the residue of the estate.

Ian Hull:  It’s just something to consider if the residuary beneficiaries are looking to make sure that flows through without too much tax burden.

Alright, now if the residuary beneficiaries are different under a primary and a secondary Will, that’s another situation as well where it becomes very important to make sure you set out who’s going to pay what tax and on what basis in this whole primary Will and secondary Will equation.  Sometimes, for example, the operating company is going on to the daughter because she’s been in the business all these years.  But…and that goes in the secondary Will, no probate fees, all is well.  But in the primary Will, the main assets, the conventional investment account and maybe the house or something are going to the son to equalize.  In that kind of scenario, again we want to make sure that when we have secondary and primary Wills with different beneficiaries, obviously different assets as well, we really want to make sure we’ve addressed what tax liability is to be paid and where.

Suzana Popovic-Montag:  And Ian, what would you say would be the result in those situations where there is no clear distinction between which estate, so to speak, is liable for those taxes.  What would we do in those circumstances?

Ian Hull:  Well, I think the tragic part of this, and if we don’t start addressing these in our Wills carefully is, is that you’re going to end up in Court because the law is very mixed in terms of where the tax will fall because, quite frankly, it is new law in every respect.  So you’re not…you’re going to be looking to the Will and you’re going to be looking to case law that really is very light on how this is to be…this competing battle is to be figured out.  There’s some great stuff written, Clare Sullivan wrote a great article about a year and a half ago on where liability of tax lies and where it’s paid in primary and secondary Wills, and you know, her conclusion was, is that the Courts are going to be stepping in and really having to grapple with this, if it becomes a big issue and it becomes a big number.  Now, that’s obviously in situations where you’ve got significant tax liability and the amounts have to make sense before you’re going to get into those battles.  But, boy, that would be a shame to have to go to Court if the Will isn’t clear, to get some direction on what is a very important issue, and that is, who pays the tax and where from.

Suzana Popovic-Montag:  Well, that’s a good point, and I’m sure a very expensive proceeding as well.  So to the extent that we can try to predict and deal with that in advance, I think that can only help us in our estate planning.

Ian Hull:  Okay.  Well I think that touches on some of the core tax issues and payment on death.  What we thought we might do in our next podcast is, because of the fact that in Canada anyway certainly, there are lots of foreign real estate issues, situations where someone might have a condominium in Florida or something like that.  What are some estate planning issues to consider and what are some tax issues to consider in the context of those assets.  So I think we’ll try to turn to that at our next podcast.

Suzana Popovic-Montag:  I look forward to that discussion.  Thanks very much, Ian.

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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The question of "fair but not equal" is often a lifelong struggle for those who want to pass on a family business. In some cases, there is simply not enough money to fund a relatively equal division of the estate, as the core assets of the estate are tied up within the family business.

In certain situations, the non-participating family business members are treated in a "fair manner" by being given, for example, the proceeds of an insurance policy as opposed to the family business on death. The child who is charged with running the family business may not see that as being particularly fair. He or she may feel that for him or her to financially succeed, he will have to work in the business for the rest of his life, while the other siblings who are receiving fixed assets simply have to wait for the estate to fall in and they do not have the same lifelong work commitments to fulfill.

For example, some communication within the family about an agreed upon valuation process should begin well in advance of one's death. If the process can be agreed upon, then arriving at a value of the family business is much simpler. If the process is addressed well in advance of death, then there are fewer surprises to the non-business participating family members.

In our experience, sometimes it is best to leave the distribution formula up to the next generation. Meaning, let the children who are ultimately going to share the asset decide on the formula to be employed upon your death.

We will continue to look at these non-tax estate planning issues in future blogs.

All the best,

Ian & Suzana.