US Estate Tax Changes – Jan 1, 2011 – Welcome News for Canadians

President Obama and the Republican party have agreed to a compromise to preserve the “Bush tax cuts” for the wealthiest in a revision of the U.S. estate tax.

In 2010 there was no U.S. estate tax. As of January 1, 2011, the U.S. estate tax was to have been reinstated in accordance with the 2001 situation: an estate tax rate of 55 percent and an exemption amount of $1 million U.S.  

As a result of negotiations between President Obama and the GOP demands to preserve tax cuts for the wealthiest, an amendment was agrred to for the U.S. estate tax.  For the next two years, the Obama-GOP deal will impose a 35 percent tax on estates larger than $5 million for individuals and $10 million for couples.   

Year	Exemption Amount	Tax Rate
2007	$2,000,000	45%
2008	$2,000,000	45%
2009	$3,500,000	45%
2010	N / A	0%
2011	$5,000,000	35%

 For Canadian residents who had concerns over the U.S. estate tax, this amendment is welcome news.

For more information, please contact the author.

Sébastien Desmarais, Lawyer
Tierney Stauffer LLP
sdesmarais@tslawyers.ca

 

When Your Tax Debt Becomes Their Tax Debt

The ability to tax means little without the ability to collect.  As a result, the Income Tax Act (the “ITA”) provides a myriad of ways to collect taxes owed that would otherwise not be obtainable when taxpayers attempt to evade their creditors (Canada v. Livingston).  It should come as no surprise that the Minister of Revenue (the “Minister”) will vigilantly review any transfer of property of a tax debtor at less than fair market value.

Section 160 of the ITA aims at preventing a tax debtor from transferring property to a spouse or a non-arm’s length individual in an attempt to frustrate the Minister’s efforts to collect taxes.  For the Minister to issue a section 160 assessment, the following must have happened:

 There was a transfer of property;

1. The parties were not be dealing at arm’s length;
2. There was no consideration or there was inadequate consideration flowing from the transferee to the transferor (tax debtor); and
3. The transferor was liable to pay tax under the ITA at the time of the transfer.

 If the above criteria are met, the transferee becomes personally liable to pay the lesser of the tax debt of the transferor or the shortfall in the consideration paid for the property.   In such circumstances, the transferee is jointly and severally liable for the tax debtor’s debt and he or she can only discharge the debt by paying or by challenging his or her assessment or the tax debtor’s underlying assessment.

 The typical application of section 160 is where a husband transfers his interest in the family home to his wife, leaving himself with no assets that the CRA can seize for his tax debt.  In such a case, the Minister can assess the wife for the value transferred and any of her assets can be seized for this debt – not just the transferred assets. 

 The comments we often hear from the transferee is “but we didn’t know there was a tax debt” or “we didn’t want to cheat the Minister.”  Although those may well be the intentions of the parties or ignorance of the tax debt will not prevent the Minister from assessing the transferee; there is no due diligence defense available.

 As long as there was a transfer of property for inadequate consideration between non-arm’s length taxpayers, the Minister can assess the transferee under section 160. 

 There is significant jurisprudence regarding section 160. Here are scenarios where a Court held that section 160 applied:

1.  Where the tax debtor makes contribution to his or her spouse’s RRSP;
2. If a dividend is paid by a corporation to a shareholder with which it does not deal at arm’s length; or
3. To a bequest by a deceased non-resident who left Canada with taxes owing many years ago. 

 Furthermore, the Minister is not bound by the normal reassessment period and can assess the transferee for a transfer that occurred years ago.  Also, the tax debt will not be vacated by a transferor’s bankruptcy (which eliminates his or her tax debt) because the transferee’s liability arose at the time of the transfer of property.

 If you contemplate transferring property to your spouse or a relative, you should seek legal advice.  If you have questions regarding this issue or any other issue pertaining to tax matters, please contact the author.

Sebastien Desmarais, Lawyer
Tierney Stauffer LLP
sdesmarais@tslawyers.ca

 

Writing a Will can offer peace of mind for you and your loved ones

Q. Why should I have a Will?

A. Having a Will allows for the peace of mind of knowing your beneficiaries are provided for according to your last wishes. A Will takes effect upon the moment of death and if properly drawn up, will provide all the authority necessary in order to deal with deceased’s final wishes.

A Will allows you to decide who will administer your estate (referred as the Executor or Estate Trustee), who are the beneficiaries, and in what proportion they are entitled to receive.

The Executor is appointed by the Court through a process referred as probate. There are fees associated with probate but those may be minimized depending on the level of your estate planning.

It is important to understand that if a person dies without a Will, it is the Succession Law Reform Act that dictates who inherits. Without a Will, there will be a sense of uncertainty for the loves ones and the beneficiaries. Is that what you want?

A properly prepared Will can ensure that your wishes in terms of the disposition of your estate are carried out accurately and properly. There are a variety of options available to reduce the exposure of the estate to the probate fees or to minimize the income taxes owed at the time of your death. Consult a Lawyer to help you draw up a Will that mirrors your last wishes.

– Sébastien Desmarais, Lawyer
Tierney Stauffer LLP
sdesmarais@tslawyers.ca