Dependent Relief and The Succession Law Reform Act - Hull on Estates Podcast #117

Posted on July 1^st, 2008 by Hull & Hull LLP

Natalia Angelini: Hello and welcome to Hull on Estates. You’re listening to Episode 117 on Tuesday, July 1^st, 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.

Natalia Angelini: Hi and welcome to another episode of Hull on Estates. I’m Natalia Angelini.

Craig Vander Zee: And I’m Craig Vander Zee.

Natalia Angelini: If you want to be heard on Hull on Estates you can participate in our discussion by leaving a comment, give us a call at 206-350-6636. The number is in the show notes along with our e-mail address, hull.lawyers@gmail.com or you can visit our blog page at estatelaw.hullandhull.com. So welcome everyone, it’s Canada Day.

Craig Vander Zee: Happy Canada Day to you, Natalia.

Natalia Angelini: Thank you. I’m thrilled to be at work on Canada Day and podcasting with you, Craig.

Craig Vander Zee: It’s certainly my pleasure as well. 

Natalia Angelini: Great. So why don’t we get started. Today we’re talking about dependents relief and in particular, we’re going to be discussing the case of Cummings and Cummings and some of the subsequent cases that have applied it.

Craig Vander Zee: Well starting off, Natalia, as we know, the Succession Law Reform Act governs the rights of beneficiaries to receive support and other benefits upon the death of an individual. And more specifically, without getting into the wording of Section 58, it’s Section 58 which enables one to make this application to the Court for dependent support.

Natalia Angelini: That’s right and that’s what happened in Cummings and Cummings and perhaps, Craig, you can tell our listeners what the decision was in that case.

Craig Vander Zee: Well I think before heading into the decisions on Cummings and Cummings, it’s really important to really understand what we’re talking about today, that whether moral and ethical considerations find their way into the consideration of a judge in the Court when a dependent support claim is being considered. And what is certainly, Cummings is well recent in jurisprudence, it’s certainly not recent in the sense of it just coming out. But what was interesting in Cummings is that the Court of Appeal said that prior to 1978, while moral and ethical considerations were important in dependent support claims, or at least that they were thought of as considerations, the Ontario Court of Appeal had not considered to what extent they’re taking into consideration given the new legislation. Because prior to 1978, and prior to the Succession Law Reform Act, Ontario had a prior Act which was called the Dependent’s Relief Act.  And in 1978, when the Succession Law Reform Act came into being, Section 58 was then the enabling Section in the legislation and what the Court of Appeal was saying is, that this particular aspect, moral and ethical consideration, had not been specifically considered by that Court and how it would affect the actual Section. And that’s why Cummings is important, because it’s really the first time in excess of 20 years that the Court took a look and actually focused on how and in what manner moral and ethical considerations are to be regarded when a dependent’s support claim is brought. 

Natalia Angelini: Exactly, great point, Craig. And what the Court of Appeal did find in Cummings was that when examining all of the circumstances of a dependent support application, the Court has to consider two things. Firstly, what legal obligations would have been imposed on the deceased had the question of provision arisen during his or her lifetime. And secondly, what moral obligations arise between the deceased and his or her dependents as a result of society’s expectations of what a judicious person would do in the circumstances. 

Craig Vander Zee: And the Court found its way to that reasoning, in part, based on the Supreme Court of Canada’s decision in Tatteron and Tatteron which was a 1994 decision by the Supreme Court of Canada.  And what distinguishes Tatteron is it was a decision that arose out of B.C. and was a decision that was considered in the context of British Columbia’s Wills Variations Act.  And the Court, at that point in time the Court being the Supreme Court of Canada, found that a deceased’s moral duty towards his or her dependents is a relevant consideration in a dependent’s relief application and that judges are not limited by simply conducting a needs based economic analysis in determining what disposition to make. 

So, while the thought might have been prior to Cummings, at least in Ontario, that it’s a needs based decision, the Court said in Cummings, no, we’re going to rely on what the Supreme Court of Canada said in Tatteron that takes it one step beyond a needs based analysis. And while there were differences perhaps, obviously between the British Columbia Wills Variation Act and the Succession Law Reform Act, the Ontario Court of Appeal just essentially came to the conclusion that those disparities weren’t important and certainly not important enough to have this not being a consideration.  And so clearly then, the Court of Appeal enunciated that a needs based analysis is not the end test. The end test is to consider moral and ethical considerations. And with that, I think we then turn to the Cummings decision and the facts to see why the Court might have come to that decision.

Natalia Angelini: Okay, great. Why don’t I turn to the facts of the case? So, I’ll just succinctly set them out. Essentially Mr. Cummings died leaving a widow, a former spouse and two children, Paul and Elizabeth.  And they were children from his marriage to his former spouse. So, his children were dependents under the SLRA, there was no dispute about that.  And one of the children, Paul, even though he was an adult, he suffered from Muscular Dystrophy, so it was also not in dispute that his future care would far exceed the value of the deceased’s estate.

Craig Vander Zee: I think what’s important in Cummings to point out is that the two children, the daughter was 18, she was attending university, and the son, who you’ve just mentioned who was unfortunately suffering from Muscular Dystrophy, was 24 years old. And it wasn’t argued as between the parties that the son’s future care wouldn’t exceed the assets in the estate. And what happened was that the widow and the first wife both did not make dependent support claims. It was essentially clear, my understanding that they didn’t need support and had agreed, or at least weren’t making dependent support claims. So that it was really the claims being advanced on behalf of the children.  And the actual claims themselves were for payment of arrears of child support ordered in the judgment for divorce. I guess the deceased had arrears outstanding.  And then also to provide for a trust as set out in the Will for both of the children, and then also seeking additional payments for support. Now the twist on this is that there was only $135,000 in the estate, unless you clawed back assets under Section 72 of the Succession Law Reform Act that would allow for the estate to be of an increased value. And when the assets, being a cottage property and the matrimonial home and the deceased’s RRSPs, all of which the widow had interest in or was a designated beneficiary of, were clawed back in, at least his portion, the estate had a value of $637,000.  And so that’s what the Court was left with in deciding how to deal with that amount.

Natalia Angelini: Right, and the Court concluded that in all of the circumstances, that the support should be set at $250,000 and that was to be payable by way of a lump sum with a maximum of $10,000 for the daughter to complete her Master’s degree and the balance of it to go to care for the adult son. In addition, the Court also ordered that support arrears, in just over $50,000 should be paid to the former spouse.

Craig Vander Zee: And really, one of the important things, what the Court tried to do, was to balance the varied interests of the parties before the Court. And the Court of Appeal held that moral considerations are not something to be contemplated in addition to or in isolation from the factors that are listed in the Succession Law Reform Act when considering an application. And so it is something that, in the context of a dependent support claim, that needs to be at the forefront of the parties. And while there have been a number of decisions about Cummings since Cummings came out and again, it’s a 2004 decision, really the aftermath of Cummings is yet to completely unfold. There have been a number of cases, but in many of these cases as might be anticipated, you have situations where you would think that dependent support would be given in the context.  And so it’s difficult to actually, perhaps, isolate the exact amount that’s factored or that’s being included because of a moral based decision versus an economic needs based analysis. But a couple of those decisions we can talk about briefly right now, Natalia.

Natalia Angelini: Great, so why don’t we start with an interesting case by the name of Simpson and Leardi. It’s a 2005 decision of the Ontario Superior Court of Justice.  And in that case, the deceased had left a substantial estate of about $10 million and the plaintiff, herself, had about $3 million.  But she was seeking support under the SLRA and she had already been awarded interim support of about $2700 a month.

Craig Vander Zee: Yeah, I think the important thing there is that the Will left her $1,000 per month and that she had already brought an interim support proceeding where the Court granted her $2750 per month. And at this point, that is, the point in time where it was before the Court, the estate trustees were bringing on a motion to cease, terminate that increased support on the basis that she no longer had a need for it.

Natalia Angelini: Right and the plaintiff was defending that motion and cited Cummings to support her argument that when the moral duty of the deceased is to take her into account, that she should get her fair share of the wealth. And she did concede, however, that on a needs based analysis, she would not likely obtain a support order. However, she still maintained that the interim order should continue.

Craig Vander Zee: And the judge here took a look at the situation and said, well no, what you’re really trying to do is to expand upon Cummings here. The plaintiff was making the argument that really what should be done is you’re taking into account the respective wealth of the parties and reapportion that wealth in a fair manner because the estates were $10 and $3 million respectively. And the Court said, no, no, no, we’re not going that far on this. We’re going to terminate the interim support. The application for support is still ongoing so it’s important to remember here that the judge wasn’t making a decision in a final way as to the support.  But the judge just said on an interim basis, no, you’re not going to make an argument here based on equalization of wealth. That’s not what Cummings stood for.  And as a result, the interim support was cancelled but the application for support continued and that might be pursued by the plaintiff.

Natalia Angelini: Right and one of the things that the Court might have taken into account when making that decision was that the plaintiff’s personal financial circumstances had improved since the interim order. So that might have just been one nuance that assisted in that determination being made.

Craig Vander Zee: One other case to consider, Natalia, is the case of Broderick I’m going to have problems here pronouncing this one, so thank you for letting me be the one to pronounce the name, Papathousiou. Anyways…

Natalia Angelini: No, no, no, Papathanasiou.

Craig Vander Zee: Okay, well…

Natalia Angelini: for all the Greek people out there, I hope haven’t offended.

Craig Vander Zee: What I can say is it’s a 2006 case, the Ontario Superior Court of Justice. And in this case, Miss Broderick contended that she had lived with the deceased in a common-law relationship for eight years prior to his death, and the deceased had not provided for her in his Will, or even during her lifetime. Miss Broderick had earned even in some years more money than the deceased, but they lived in residences owned by the deceased. I guess they had moved a couple of times but on each occasion, the funds for the residence and the ownership of the residence was in and had been provided by the deceased. And she brought a dependent support claim asking the Court for an order that support be provided to her under the Succession Law Reform Act.

Natalia Angelini: So the Court essentially found in favour of Miss Broderick in this matter and it found that contributions by her to the deceased, both to his personal and financial well-being to the detriment of her own finances, should be recognized by an award from the estate. And the Court, in making this decision, cited Cummings.  However, making that determination, the Court also found that there weren’t enough assets in the estate to provide for Miss Broderick so it ordered that the deceased’s condominium be sold and that she get one-half of the net proceeds in recognition of her contributions.

Craig Vander Zee: And it’s, you know, in these kinds of cases, sometimes it’s difficult to know if Cummings had not been a case that had come around in recent years what she would have received.  But, you know, clearly the Court found that she had contributed to both the personal and financial well-being of the individual.  And also, what is intriguing about these types of cases is that they appear to be situations where there would have been a possibility of dependent support.  In this particular one, they had found that she had contributed to the finances and to his personal well-being and had not been compensated, although that was clearly to her detriment. So the Court, in making that finding, as you said, Natalia, relied on Cummings and the deceased’s moral duty towards her as a dependent and that being a relevant decision. 

Given our time today, I don’t think we’re going to get into the other cases.  But there are some others to consider which are: Reid v Reid, it’s a 2005 Ontario Superior Court of Justice case.  And then also the case of Pirelli and Foley Estate, which is a 2006 decision of the Ontario Superior Court of Justice.  And what’s interesting, just quickly about Pirelli is that it appears to expand on the reasoning in Cummings where the judge, in this particular case, said after you look and identify all the dependents who make a claim on an estate, then the Court must tentatively value those claims of those dependents by considering the factors set out in the legislation and the legal and moral obligations of the estate to the dependents. But, and here is what seems to be the addition to it, is that the Court must identify those non-dependent persons who may have a legal or moral claim to a share of the estate.  And then the Court must attempt to balance the competing claims to the estate by taking into account the size of the estate, the strength of the claims and the intentions of the deceased amongst other things.  And so while it is unclear, for sure, where Pirelli leaves us, and whether that would be followed in another case, it does give us some view into a crystal ball as to where these types of claims may be going in the future. And so, again, the aftermath of Cummings is not yet known, but certainly and without a doubt, it’s being applied by Courts in Ontario.

Natalia Angelini: Absolutely. Thanks, Craig.

Craig Vander Zee: And with that, I bid you a good Canada Day and I hope you enjoy the fireworks tonight. 

Natalia Angelini: It was a pleasure podcasting with you and we look forward to hearing from our listeners.  So you can send us an e-mail at hull.lawyers@gmail.com or just pick up the phone and leave us a message on our comment line at 206-350-6636. Be sure to visit our blog at estatelaw.hullandhull.com where you’ll find even more information and discussion on today’s practice of estate law. We hope you enjoyed the show. I’m Natalia Angelini.

Craig Vander Zee: And I’m Craig Vander Zee. Until next week, so long.

Natalia Angelini: So long.

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.

/mem

Posted on March 25^th, 2008 by Hull & Hull LLP

Suzana Popovic-Montag: Hi and welcome to Hull on Estate and Succession Planning. You’re listening to Episode #105 of our podcast on Tuesday, March 25^th, 2008.

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: Just great, thanks. Glad to be podcasting again with you. Missed you last week.

Suzana Popovic-Montag: Sorry about that.

Ian Hull: No it’s – these things happen.

Suzana Popovic-Montag: They do.

Ian Hull: Don’t forget to all those who are listening, feel free to call us at 206-457-1985.

Suzana Popovic-Montag: Or if you’d like to drop us an e-mail at hullandhull@gmail.com or, of course, you can visit our blog at estatelaw.hullandhull.com.

Ian Hull: Okay, we’ve been trying to follow through the process of an estate administration per se, and what it takes to get the job. One of the things that we talked a little bit about, not at the last podcast but the one before, was the application for probate itself. And I thought what we could do today is, sort of, talk about some of the things that might come as a surprise to people just how much notice you have to give to the beneficiaries.  And just who needs to be given notice in the application process and some of the other, sort of, what I might consider more mundane steps you have to take in the process. We talked, not in the last podcast but the one before though, about the bonding requirements in Ontario anyway, the probate tax that gets calculated.

Suzana Popovic-Montag: And we didn’t mention the fact though, Ian, that when you don’t necessarily know the exact value of the estate and you can’t necessarily calculate the administration tax that will be payable, you can still file on the basis of an estimated value for the estate, as long as you provide an undertaking that our statute here in Ontario provides for.

Ian Hull: That’s right.  It gives us some flexibility and so it means that you don’t have to know the numbers right down to the dollar.

Alright one of the next things that I think of whenever I’m applying for probate is I think of the Affidavit of Execution.  And that’s because you need it, it is such a vital document. I mean, when you’re dealing with an estate, to administer an estate, you have to have a valid Will and you have to prove that it was properly executed with two witnesses in the room at the same time as the deceased. So the Affidavit of Execution is something you want to track down and sometimes that’s not as easy as it sounds.

Suzana Popovic-Montag: And that Affidavit, for people who aren’t familiar with it, is an Affidavit by those witnesses to the Will saying that they were actually present for the signing of the Will and that all the formalities required by the legislation were abided by.

Ian Hull: And some difficulties can arise because, for example, say the Will was done 20 years ago and you don’t have any real information about the Will and the Affidavit wasn’t signed at the time, you can get into some trouble with the Affidavit of Execution in the sense of trying to track it down. So I always remind my clients whenever they do sign their Will up, make sure that they have asked their lawyer where the Affidavit of Execution is and make sure it’s in a secure place, because it is a vital part of the application itself.

Suzana Popovic-Montag: That’s for sure, Ian. And then once you’ve got all this documentation in place and this information all put together, then what you’ll typically do is actually meet with the lawyer and have the documentation signed up.

Ian Hull: Now in Ontario, and I think it’s a useful exercise to go through because when you do this for the first time, I find people are often surprised at just what needs to be involved in an application for probate. Now let’s talk a little bit about some of the people that get notice of the application itself.

Suzana Popovic-Montag: And that basically is all of the beneficiaries who are named in the Will. And so if you’ve got a beneficiary who’s actually a charity, in that instance, you have to serve not only the charity itself but also possibly the Public Guardian and Trustee as well.

Ian Hull: And people forget that when you have made a gift of a charity, what you’ve done is you’ve created a new layer of bureaucracy in the probate process and in the accounting process, if the gift is part of the residue, and we’ll get into more of that later. But the point is, is that it’s wonderful to give to charities in the Will but I notice in the last 10 years certainly, the taxing authorities in Canada have started to encourage us to gift during your lifetime. You get better tax advantages than you used to for that gifting and, quite frankly, on death, the gift to a charity can be a bit cumbersome. It’s not overwhelming, but it’s just another layer in the process.

Suzana Popovic-Montag: And another government institution that you serve with this notice of application, if you have minors who are beneficiaries of an estate, is the Children’s Lawyer’s office here in Ontario. And that is, again, if you’ve got a minor who’s a beneficiary of an estate, you’ll serve the Children’s Lawyer on their behalf, as well as the parents of the minor.

Ian Hull: So we can’t forget, too, because a lot of these Wills will have what we call is a gift-over provision and they will have a situation where there may be a trust or something of that nature, and so there are minor beneficiaries’ interests that need to be protected. And the governing authority gets a copy of it, opens a file and then is in a position to audit your administration, so to speak. So you put them on notice of the Will and you put them on notice of the financial interests.

Suzana Popovic-Montag: And if you have beneficiaries who are actually not capable, whether if mentally or otherwise, you may have to also, in those circumstances, serve their guardian of property or their attorney for property, if they’ve got one that you are aware of.

Ian Hull: That’s a really good point because sometimes people overlook that aspect of the administration.

Now the final step, of course, is to go up to the Court and file the application itself, and that can be done by your lawyer or it can be done by yourself, it depends in your circumstances. So let’s just take a minute now and we’ve filed for the application, we’ve covered off and maybe been a bit surprised at who all knows about the information.  And I say that because, in Ontario anyway, we’re required to say and provide a copy of the Will to the individual who’s a beneficiary. But we’re not necessarily required to put the amount of the estate. You actually file an Affidavit of Execution with the Court and you also file an Affidavit verifying the amount of the assets when you file in Ontario, so that it’s a public document, but it is not necessarily produced in this first series of disclosure steps. So it’s one of those things that I often will say to my clients “Look, you know what, it’s a public record. Maybe you want to go up to the Court, get a copy of the Affidavit that they file in support because in it will tell you the value of the estate and you might get some answers very quickly as to what’s going on.”

Alright, so we’ve got our Certificate of Appointment and now what do we do? This is the document we’ve all been waiting for, so to speak, and we are in a position now to start to show it to third parties to start to meaningfully administer the estate and get access to certain aspects of the assets that we haven’t been – we’ve been prevented from getting until we got this famous probate document.

Suzana Popovic-Montag: And so one of the first things that my clients will normally want is to have a couple of copies, notarial copies, you know, our Court of approval or seal of approval on that document, indicating that it is a valid probate document that they can then take and use with the authorities who actually require it, in order to help them collect and administer the assets of the estate.

Ian Hull: And that lets you get into various… gets access to various assets. It’s like getting into a safety deposit box, for example.

Suzana Popovic-Montag: And also closing out bank accounts as well.

Ian Hull: And we talked about in other podcasts and the problem is, is that the banks and third parties will not necessarily deal with you as executor without this formal order.  And banks are classics for that and the brokerage companies are classics for that because they want to know that they’re dealing with the right person before they start to release the funds to the estate bank account. Often the bank will also insist on probate before they’ll even open an estate account. So that’s case by case, but that’s something that, you know, as I say, it’s great to have the document now, get lots of notarial copies of it, use them properly and you’re in a position to start to really meaningfully administer the assets.

Suzana Popovic-Montag: And that’s particularly important when you’re trying to collect life insurance policies which typically are in large denominations. And so you’ve now got that Certificate that you can give to the institutions in order to be able to get those funds.

Ian Hull: Another one asset that we sometimes run into glitches on is RRSPs, here in Canada, and again, with our probate documentation, we can usually complete that transfer fairly quickly.

Suzana Popovic-Montag: As part and parcel of that, too, just other kinds of securities where you have to provide the transfer agents with proof of the fact that you’ve got authority to deal with those assets. And again, you’ve now got it in hand and you can give that to them in order to collect those assets as well.

Ian Hull: And, of course, one of the fundamental assets that you have to concern yourself with is the transfer of real estate. And with many different jurisdictions, it is mixed in terms of whether or not you need probate or not. But I would say, sort of, as a good general rule, probate is almost always required. And so now we can start to transfer and sell real estate.

Okay, now one little twist that some people don’t often think of the beauty of probate and before we get into some of this, what I will call some of the other action items that you can take the steps on with the probate document, are things like dealing with personal affects. And for our next podcast, I want to start to…we’ll talk a little bit about not just personal affects but automobiles, talk about other assets that we can now start to administer with the document in hand, that being probate, and with authority that we’ve been waiting for.

So thanks so much Suzana. Good to have you back and we look forward to our next podcast.

Suzana Popovic-Montag: Thanks to you, too, Ian. And just a reminder to our listeners, that we’ve got our comment line set up at 206-457-1985.

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.

/mem

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.

/mem