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Listen to Episode 89 - Payment of Taxes on Death

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.

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

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Listen to Episode 84 - Rolling Assets Into Trust
This week on Hull on Estate and Succession Planning, Ian and Suzana further last week's discussion on trusts and tax planning wills by illustrating the benefits of rolling over assets and being conscious of tainted trusts.

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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