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Rectification in Tax and Estate Matters Part I – Tax
Confucius said “A man who has committed a mistake and doesn’t correct it is committing another mistake.”
When we are dealing with tax and estate matters, even a simple mistake may have disastrous consequences. One way such a mistake may be corrected is by way of a rectification order. Indeed, rectification is an important remedy that allows for the correction of errors or mistakes in legal instruments that have resulted in an unintended result. This newsletter will review the doctrine of rectification as it applies to tax matters. Our next newsletter will focus on rectification in estate matters.
What is Rectification?
A rectification order is an equitable remedy to correct errors in legal instruments that do not reflect the true intention of the parties resulting in unintended and, likely, unfortunate results. A rectification order allows the affected parties to rectify the terms of a transaction as was initially intended by the parties. The effect of the rectification is retroactive.
The remedy of rectification is available only under certain defined circumstances; essentially to correct a mistake. However, rectification is not permitted if the intention of the parties is simply to alter the terms of an instrument nor can it be invoked in an attempt to correct every mistake in order to alter unwanted results.
In order for a rectification order to be granted, one must file an Application to the Superior Court of Ontario; only a court may grant such remedy. Interestingly, the Tax Court of Canada cannot grant equitable remedies, and, as a result, rectification of a tax matter can only be heard by the appropriate forum, the Superior Court of Ontario. The duty of the Court is to examine the evidence and assess the facts in order to determine whether the application is truly one to correct a mistake which result in an unintended legal effect or an undesirable legal consequence. The Court must ensure that the parties are not just changing their minds “in the middle of a transaction.” The evidence is the key to the determination.
To be successful in obtaining a rectification order, one must establish:
- the existence and nature of the common intention of the parties prior to preparation of the instrument alleged to be deficient;
- that the common intention remained unchanged at the time the document was made; and
- that the instrument, by mistake, does not reflect that initial common intention.
If one can prove the above, the Court may grant a rectification order thus restoring the party(ies) to their initial common intention. Applicants should be aware that rectification orders are a discretionary remedy granted at the discretion of the Court and one should not anticipate the granting of an order.
Rectification in Tax Matters
In tax matters where unintended tax consequences arise as a result of a mistake, rectification may be a valuable tool, if not a “life saver,” for taxpayers who find themselves in a situation where their tax planning went awry.
Although the equitable doctrine of rectification is not new, it only truly emerged as a valuable tool in tax matters in the last decade or so. The leading case, Canada v. Juliar, has been a key decision in establishing such remedy to taxpayers. Indeed, in Juliar, the Court granted a rectification order in a tax matter which ultimately fixed a mistake in a document intended for tax planning purposes. The granting of the rectification order enabled the taxpayer to avoid having to face a tax liability from an unanticipated outcome. Interestingly, the Court had no issue with the fact that the taxpayers’ intention throughout the transaction was to avoid immediate tax consequences.
Since the Juliar decision, the law and the doctrine of rectification in tax matters has expanded considerably. Taxpayers appear to show a willingness to consider an application for rectification to correct/rectify transactions that achieved unintended tax consequences. Notably, the jurisprudence has acknowledged that the avoidance of tax is a legitimate intention in rectification matters involving a tax issue. As a result, rectification may be available where transactions that resulted in unintended tax consequences might be altered in order to achieve the initial tax intention; that is the avoidance or minimization of tax.
A more recent decision from the Supreme Court of British Columbia, McPeake v. Canada, is also instructive as to how and when granting a rectification order may be appropriate in tax matters. The McPeake decision is consistent with prior cases where the taxpayers demonstrate an intention to avoid tax but the documents or transactions failed to reflect their true intentions.
The McPeake decision stands out also on the basis that in tax matters, the taxpayers must convince the Court that their initial intention was to avoid tax. Another interesting point of that decision is the fact that the Court accepted that it ought to consider the unfairness or harm the taxpayer may suffer should the rectification order not be granted (thus allowing a tax liability to arise although the avoidance of such liability is what gave rise to the transaction in the first place).
Rectification Application and the Crown
The Crown also distinguishes between an error in implementation and an error in tax planning and the Agency will vigorously oppose rectification orders disguised as an attempt to implement a form of retroactive tax planning.
The Crown’s position is that a taxpayer requesting a rectification order should provide the Agency with notice of the application; especially in instances where the rectification application is being made on the basis that the taxpayer is alleging unintended tax consequences.
However, whether or not the Crown should be notified of any particular application for rectification is a dilemma for the taxpayer and his lawyer to resolve. There is a valid argument to be made that since the Crown may not be a party to the original instrument and the original transaction, it has no interest in the application to rectify the written instrument and the transactions. There is jurisprudence where the Court has said that notice to the Crown was “appropriate” or a matter of courtesy; however, the Court has never said it is mandatory.
In reality, the decision of whether to serve notice to the Crown or not is essentially a matter of assessing the basis of the application and ultimately, it is a strategic decision. Further, should one serve notice to the Crown, they risk having the Crown oppose the application. However, opting not to serve notice may result in the judge requesting notice be served prior to rendering his or her decision. Having to serve the Crown after the initial application is likely to raise suspicion from the Crown.
It is important to know that the Department of Justice has a rectification committee which discusses and decides whether to oppose an application. The CRA and the Department of Justice have established a procedure to be followed when applying to the Court for a rectification order; notably, that a letter be sent to the Director of the Tax Services Office advising rectification will be sough, that the CRA should be named as a party in the Motion and that the Department of Justice be served with the Notice of Motion.
Once served, the rectification committee will review and discuss the merit of the application and inform the party(ies) whether it intends to oppose the application.
Conclusion
In tax matters, an application for a rectification order remains a valuable tool for taxpayers and should be considered when adverse tax consequences are erroneously triggered by an error or errors in implementing a transaction.
An application for a rectification should be considered by tax advisors, including accountants, lawyers and any other tax advisors. Indeed, rectification may be the key to correct an oversight in their tax planning memorandum or an error in the drafting of an instrument. Rectification may translate into a lifeline for their mistake, thus avoiding a liability; something well worth considering.
Ultimately, the original intent is the key determining factor in the decision whether to grant a rectification order.
In our next newsletter, we will address rectification in estate matters.
Tierney Stauffer LLP would be glad to assist and advise you. If you have any questions, please do not hesitate to contact us.
Sébastien Desmarais
LL.B., LL.L., J.D.
Lawyer, Tierney Stauffer LLP
This article is provided as an information resource and is not intended to replace advice from a quaified legal professional and should not be relied upon to make decisions. In all cases, contact your legal professional for advice on any matter referenced in this document before making decisions. Any use of this document does not constitute a lawyer-client relationship.
Succession Planning – How to Plan for Passing the Torch
For many business owners, the phrase “succession planning” evokes images of passing the company torch to a family member. But succession planning does not necessarily mean passing a business along to one’s relative. Instead, it refers to planning the way in which you wish to exit your business, and, as this article will summarize, this can be done in a number of different ways.
The importance of having a succession plan should not be overlooked. Having a plan in place will help ease the transfer of a business from one owner to another, manage expectations of family members, employees, managers and business partners who may desire ownership of the business, thereby helping departing business owners preserve their relationships with these individuals and maximize the net financial return from your business. Placing your business in the hands of another takes time to orchestrate and can raise many issues, including properly valuating your business, assessing tax implications and estate planning issues, and training your successor. Therefore, it is important to begin succession planning early.
When planning the succession of your business, there are a number of options to consider, such as transferring the business to a family member or an employee, manager or partner of the business or selling the business to an unrelated third party. In addition to deciding how your business will be passed on to a new owner, there are a number of other elements which should be considered. Th e following list sets out a few of these items, but should not be considered an exhaustive list.
Choose your Successor
If you wish to keep the business in the family, you will need to determine if this is a viable option. The key question for you to consider is whether there is someone in your family who is interested in owning the business and who has the necessary skill set for running the business? This can be a very difficult element as you will often have a family member who has the interest but not the skill set. Failing a family member, you may consider whether an individual already involved as an employee in the business is a candidate for taking over the business.
After you have chosen your successor, you will need to arrange for his/her training in the business. It is also a good idea to have on-going communication with your successor to keep him/her involved in the succession process. This will allow him/her to understand his/her role in the business and in the overall transition process.
As well, having the potential successor become a minority owner early in the process (subject to the right protective agreements if things don’t work out) is often an excellent method of both “test driving” the potential successor’s involvement, and creating a financial stake for the successor in the business.
If neither of the potential internal buyers is viable, you may need to sell your company to an unrelated third party. In any of these cases, it is always a good idea to consider what other stakeholders (i.e. family members, business partners and/or employees) should be consulted prior to making a decision. If you are concerned that a conflict in the decision-making process might arise, you can implement an agreed-upon conflict resolution mechanism.
Decide on a Timeline
As with any plan, you will need to decide on, and establish, a timeline in which you wish to exit your business and transfer ownership. If you intend on maintaining voting control of the company after you have retired from working for your company, which is often the case if you are owed money from the successor and maintained some ownership then you should, at a minimum, consider what dates you wish to retire, transfer your share ownership and transfer voting control.
Position Your Business For Sale
The income tax rules in place today require businesses to meet certain tests in order for the owners to achieve the best tax results from sales. It is very important that early steps are taken to properly structure your business to maximize your net return on a sale. Your lawyer or accountant should be consulted now as it is often too late once a decision to sell is made to put in place the required structure.
Planning for Unforeseen Circumstances
It is always prudent to have a contingency plan to make sure financial resources are in place to ensure your business could continue in the case of an unforeseen circumstance, such as an accident, illness or death. Life and disability insurance are great tools to consider.
Regular Review of your Succession Plan
Review your succession plan regularly to determine whether it is still appropriate and applicable to your then-current circumstances and to current income tax rules. Ensure you revise the plan if changes are needed. Succession planning will raise financial, tax and legal implications so it is always a good idea to speak with advisors, such as your accountant, lawyer, and banker, before deciding which route is best for you.
Stephen Tierney & Jennifer Brigandi
Stephen Tierney is a Partner and Jennifer Brigandi is an Associate in the Business Law Group of Tierney Stauffer LLP. If you require further details, or require a lawyer to review or help draft your succession plan, please contact Jennifer at (613) 288-3221 or jbrigandi@tslawyers.ca
Tierney Stauffer LLP is a full service law firm with offices in Ottawa, Cornwall and arnprior. We focus on solutions.
Why You Need a Will
Upon the breakdown of a marriage or a long-term relationship, there are a number of issues which normally need to be resolved depending upon the circumstances of the parties. These issues may include: the custody of children, child support, spousal support and the division of property.
If you presently have no valid Will, or if you have not reviewed your Will lately, you should consider meeting with a member of our Wills, Estates and Trust Practice Group to obtain advice on how best to protect your family or loved ones in the event of your death.
The following true-to-life scenarios may help to illustrate some of the dangers of failing to plan for your demise, or proceeding on faulty assumptions as to your present estate plan.
1. You are a 65 year old woman, recently married for the second time to a wealthy man.
You signed a will shortly after the death of your first husband which leaves your entire estate to your three children, and you see no reason to make any changes to that will, in view of the fact that your new husband has no need of your assets. Did you know that your recent marriage revoked your previous Will, and if you die without making a new will, your husband will inherit a significant portion of your estate?
2. You are a 50 year old man, divorced from your wife of 35 years.
You remain “best friends” and are very much in each other’s lives. You have no children and both of your parents and your only brother have died. You have two nieces which you barely know. You made a Will 20 years before your divorce which leaves your entire estate to your former wife. In view of your continuing relationship, you see no reason to change the disposition of your estate. Did you know that upon your death, any benefits accruing to your former wife are revoked, absent a contrary intention contained in your Will, and that your estate will devolve upon your nieces?
3. You are a 35 year old male, married with three children ages 1 month to 5 years.
Your wife is a stay-at-home Mom with no job skills and no assets of her own. You have no Will. Did you know that if you die without a Will, your wife will have to share a substantial part of your estate with your children, and may not have enough to live on without being forced into employment to make ends meet? Did you also know that any share to which your children are entitled must be paid into Court and supervised by an official of the Ontario Government until they attain the age of eighteen years?
4. You are married and all of your assets are owned jointly with your spouse.
You have no children, and you see no need to prepare a Will at this time, since on the death of either one of you, the survivor will inherit everything. The survivor would of course prepare a Will at that time. Did you know that if you and your wife die in a common disaster, one-half of your joint estate would be divided among members of your family, which could include parents, siblings, and nieces and nephews, while the other half of your joint estate would be divided in the same fashion among members of your spouse’s family? Is this what you would want?
5. Consider the same scenario as above.
Instead imagine that you die immediately in the same disaster, while your spouse survives, but dies from his or her injuries, one day later. Did you know that your entire joint estate would go to your spouse’s family?
Make an appointment with one of our skilled professionals today, to ensure that your wishes will be implemented on your death, and further to determine the most cost efficient and practical methods of accomplishing that objective. At the same time, consider planning for potential incapacity by putting Powers of Attorney in place.
If you have questions about your will or would like to draft a will, please contact one of our family law lawyers at (613) 728-8057. You can also contact Gail Nicholls directly at (613) 288-3234 or by e-mail at gailnicholls@tslawyers.ca.
Gail Nicholls,
Counsel Group,
Tierney Stauffer LLP
This article is provided as an information resource and is not intended to replace advice from a quaified legal professional and should not be relied upon to make decisions. In all cases, contact your legal professional for advice on any matter referenced in this document before making decisions. Any use of this document does not constitute a lawyer-client relationship.
U.S. Estate Tax – Should You be Concerned?
We have all heard the saying that there are two things in life that are certain: death and taxes. For tax and estate professionals, both are always concerns but especially so for clients owning U.S. properties or assets. This is due to the U.S. estate tax.
Canada does not impose an estate tax upon the death of an individual. In fact, when Canadians die they are deemed to dispose of all their capital property at fair market value.
The U.S. system works differently: upon the death of a U.S. citizen, a tax is levied on the fair market value of the deceased’s world-wide property. Furthermore, the U.S. estate tax applies to all property situated in the U.S. including property owned by non-residents of the U.S. (oft en referred to as “Canadian Snowbirds”).
Consequently, upon death, a Canadian resident who owns U.S. real property or U.S. stocks may be regarded to have a large “deemed” capital gain with respect to such property in addition to a possible U.S. estate tax liability depending on the value of their U.S. properties or assets.
The first $3.5 million USD of a U.S. citizens’ estate is exempt from tax. However, non-residents, including Canadians, are only entitled to a pro-rated exemption under the Canada-U.S. Tax Treaty. This exemption is equal to $3.5 million USD multiplied by the ratio of U.S. property to your worldwide estate. Essentially, if your worldwide estate is worth less than $3.5 million, you need not worry about paying U.S. estate tax … at least for now.
In June 2001, the U.S. passed a law that commenced the phasing-out of the estate tax over the following decade. Essentially, the estate tax rate has been gradually reduced and the exemption amount increased and, based on the legislation, the estate tax will be repealed for the 2010 tax year. However, this may not be permanent as the legislation contains a “sunset clause” whereby, unless further steps are taken by Congress, the repeal of the estate tax will only last for one year, being 2010.
In 2011, the estate tax rules will revert back to the rules applied before 2001 resulting in the effective exemption of only $1 million USD (compared to $3.5 USD in 2009) and a maximum estate tax rate of 55% (compared to 45% in 2009). Many U.S. tax experts expect this issue to be addressed by Congress already proposed legislation that would cap the top estate tax rate at 35% and maintain the personal exemption at $3.5 million USD.
Nonetheless, Canadians who own U.S. property or assets should consult their tax professionals until Congress legislates on this issue. Until Congress acts on this issue, Canadian Snowbirds should review the U.S. estate tax with their estate planning advisor.
Canadians who have an estate worth more than $1 million USD may be at risk of having to pay U.S. estate tax.
If you have questions regarding this issue or any other issue pertaining to your estate, please contact Sebastien Desmarais, Associate, Tierney Stauff er LLP at (613) 288-3220 or sdesmarais@tslawyers.ca.
Sébastien Desmarais
LL.B., LL.L., J.D.
Associate, Tierney Stauffer LLP
This article is provided as an information resource and is not intended to replace advice from a quaified legal professional and should not be relied upon to make decisions. In all cases, contact your legal professional for advice on any matter referenced in this document before making decisions. Any use of this document does not constitute a lawyer-client relationship.
What is a Henson Trust (Absolute Discretionary Trust)?
A Henson Trust is an excellent way to allow for financial care for disabled children after the death of the parent(s). The terms Henson Trust, Absolute Discretionary Trust and Discretionary Trust are used interchangeably and refer to a very specific type of trust when used in the context of planning for a person with a disability.
The purposes of a Henson Trust are to protect the assets (typically an inheritance) of a disabled person, as well as that person’s rights to collect government benefits and entitlements.
The key provision of a Henson Trust is that the trustee has “absolute discretion” in determining whether to use the trust assets to provide assistance to the beneficiary, and in what quantity. This provision means that the assets do not vest with the beneficiary and thus cannot be used to deny means-tested government benefits.
In addition, the trust may provide income tax relief by being taxed at a lower marginal rate than if the beneficiary’s total assets were considered. It can also be used to shield assets from matrimonial division in case of divorce of the beneficiary. In most cases, the trust assets are immune from claims by creditors of the beneficiary.
A Henson Trust can be established either as an Inter Vivos (Living) or a Testamentary Trust (Created by last Will and Testament). The most commonly used type of Henson Trust is the Testamentary Trust established in a parent’s or caregiver’s Will.
History of the Henson Trust
Leonard Henson had a daughter named Audrey. Audrey was a person with a developmental disability and she lived in a group home managed by the Guelph Association for Community Living. Leonard knew that if he left his estate directly to his daughter, it would exceed the allowable asset limits as set out by the Family Benefits Allowance (now called the Ontario Disability Support Program). He realized that having assets in the hands of his daughter directly would not be to her advantage and that her benefits would be terminated until the assets were “spent down” to a level below the threshold amount. In addition, Leonard’s wife had pre-deceased him and he had no other family.
Leonard discovered a technique that would allow Audrey to retain her government benefits while at the same time allowing her to receive quality of life enhancements from his estate. That technique was the use of the Absolute Discretionary Trust to be created in his Will as a Testamentary Trust. The Will required the creation of an Absolute Discretionary Trust which appointed the Guelph Association for Community Living as Trustee and his daughter Audrey as beneficiary of the trust. Once Audrey died, his Will instructed that the remaining funds in the Trust were to be passed on to the Guelph Association for Community Living.
The Ministry of Community, Family and Children’s Services (the ministry which controls the FBA (ODSP)), determined that Audrey had inherited the estate of her father and since it was in excess of the allowable amount of assets, they terminated her benefits. The Guelph Association for Community Living challenged this decision and the Ministry took the trust and the Trustee to court. The first court found that the funds contained in Audrey’s trust account did not meet the FBA (ODSP) definition of assets and therefore, it ruled in favour of the Trustees. The Ministry launched an appeal. The appeal reached the Supreme Court of Ontario and in September of 1989 was dismissed. The court allowed the trust to benefit Audrey without affecting her government benefits.
That decision has enabled families who have a son or daughter with a disability and are residents of Ontario with a vehicle in which they can place assets for their children without disqualifying them from receiving the ODSP payments to which they would otherwise be entitled.
For further information or assistance, please contact Douglas Laughton, Partner, Tierney Stauffer LLP at 613-288-3225 or dlaughton@tslawyers.ca. If you have questions about trusts in general, you can contact us at 613-728-8057 or by e-mail at info@tslaywers.ca.
Douglas J. Laughton
B.A. (Hons.), LL.B.
Partner, Tierney Stauffer LLP
This article is provided as an information resource and is not intended to replace advice from a quaified legal professional and should not be relied upon to make decisions. In all cases, contact your legal professional for advice on any matter referenced in this document before making decisions. Any use of this document does not constitute a lawyer-client relationship.
The Role of Life Insurance in Estate and Tax Planning
The best way to increase the value of your estate is to minimize the tax implications arising on your death. On that basis, because of the potential tax savings, life insurance policies are useful estate planning tools that ought to be considered when planning your estate.
TAX BENEFITS
One of the greatest benefi ts of life insurance is that, upon the death of the insured individual, it provides a tax-free lump sum payment directly to the designated beneficiary(ies), tax free. Consequently, the insured individual knows that he or she provided protection and financial security to his or her surviving spouse or his or her surviving dependents.
Another reason to consider life insurance in the context of estate planning is estate preservation. The Income Tax Act provides that a deceased taxpayer is deemed to have disposed of each capital property owned by him or her immediately before death for proceeds equal to the fair market value at that time. For tax purposes, that signifies a deemed a capital gain will be realized upon death.
In this context, life insurance may be purchased to provide the necessary funds to pay the capital gain, thereby preventing the beneficiary(ies) of the estate from having to sell some of the assets to pay for the taxes.
Since the proceeds of the life insurance are paid directly to the designated beneficiary(ies), they do not form part of the estate and, as a result, probate tax is saved on that amount. It may be advantageous to transfer cash into life insurance and designate a beneficiary(ies) to avoid probate tax being levied on the value of these assets in the estate.
Life insurance should be considered a valuable estate planning tool as it can be cost efficient and will allow the insurance proceeds to be received tax-free by the designated beneficiary(ies).
TRUSTS
Th ere has been much debate as to whether one’s life insurance proceeds should be paid to their estate or to designated individual beneficiaries. Fundamentally, the issue is whether the proceeds are to be paid to a designated beneficiary, thus avoiding probate tax, or paid to the estate in order to take full advantage of the graduated tax rates available to testamentary trusts on the income generated after death by the insurance proceeds.
The testamentary insurance trust may ultimately be the solution to that debate as it allows for funding of a trust using insurance proceeds such that the trust will also qualify as a testamentary trust for tax purposes. It is important to ensure
that the parameters of the testamentary insurance trust have been established prior to death in the deceased’s will in a manner intended to avoid probate tax. Also, care must be taken to ensure such trust meets the defi nition of a testamentary trust and that it comes into eff ect in such a way so as to avoid probate tax.
If structured properly, the estate will avoid paying probate tax on the proceeds of the life insurance while the beneficiaries will benefit from the graduated tax rates of the testamentary trust on the income generated by the insurance proceeds. Th is arrangement may translate into considerable taxsavings for the beneficiaries.
THE ROLE OF LIFE INSURANCE IN A BUSINESS SUCCESSION PLAN
When developing a business succession plan, consider the use of life insurance as a source of funding to provide for the needs of the business upon the death of the business owner, a key executive, or shareholder. There are several key
tax advantages in using life insurance proceeds.
One of the main tax advantages is arranging for the life insurance proceeds to be payable to the corporation on a tax-free basis. As a result, the proceeds of the life insurance (over the adjusted cost base of the policy) will increase the capital dividend account of the corporation thereby allowing for the payment of tax-free capital dividends to the shareholders of the corporation or to the estate of the deceased shareholder. Depending on the Will of the deceased shareholder, the surviving spouse may receive tax-free capital dividends in a spousal testamentary trust allowing for income splitting.
Life insurance can also be an efficient means of funding the obligations under a buy/sell agreement found in a shareholder agreement. The life insurance proceeds would be paid to the corporation thereby increasing the capital dividend account allowing for tax-free capital dividends to be available for purchase by the surviving shareholders from the deceased shareholder. If the shareholder agreement provides for such a buy/sell agreement, the estate may also be entitled to claim the capital gain exemption on the sale of the shares to the surviving shareholders.
In order for this to occur, the shares must meet the definition of “qualified small business corporation shares” as defined in the Income Tax Act. If so, the estate would be eligible to receive up to $750,000 in tax-free shares. The business succession options set out above must be carefully implemented otherwise the business owner or the corporation might be assessed a taxable shareholder benefit by the Canada Revenue Agency.
It is not uncommon for a business owner to own the shares of a holding company which in turn own shares of the operating company. In those situations, there are a number of factual and tax considerations that must be considered in determining who will be the owner and beneficiary of the insurance policy; and which entity must pay the insurance premiums.
Life insurance may be used for reasons other than estate and business succession. Indeed, it may be possible to use some life insurance to fund the business owner’s retirement or for the company to offer some form of “supplementary executive retirement plan” to an executive person.
The success of your estate planning relies on a clear understanding of the rules of taxation upon death and the rules of taxation of life insurance. Seek professional advice when planning your estate, especially if you are considering implementing a business or succession plan with the use of life insurance, because an error could result in adverse tax consequences.
If you have any questions concerning estate or tax planning, please do not hesitate to contact me directly.
Sébastien Desmarais
LL.B., LL.L., J.D.
Associate, Tierney Stauffer LLP
This article is provided as an information resource and is not intended to replace advice from a quaified legal professional and should not be relied upon to make decisions. In all cases, contact your legal professional for advice on any matter referenced in this document before making decisions. Any use of this document does not constitute a lawyer-client relationship.
Common Law Spouses and Intestacy
Many common law spouses believe that because they have been living together, they are considered married in the eyes of the law and consequently, if one common law spouse dies intestate (without a Will), the surviving one common law spouse is entitled to receive part of or the entire Estate. This is not the case.
The Succession Law Reform Act (the “SLRA”) states that if one dies without a will, married spouses are entitled to a preferential share of the estate equal to $200,000 plus 1/2 of the balance to share with the deceased child or 1/3 of the balance to share with the deceased’s children.
However, common law relationships of heterosexual or same sex partners, lack the same recognition as married spouses under the SLRA leaving the surviving common law spouse with no statutory right to an inheritance from their spouse’s Estate.
That means if a common law spouse dies without a will, the surviving common law spouse has no entitlement to any part of the Estate.
For example consider Jack and Jill who have decided never to marry but have been living together for 15 years and have three children aged 12, 9 and 7. Unfortunately, Jack dies in a car accident leaving an estate valued at $300,000. Jack has no Will.
Because Jack and Jill were never married, Jill has no legal right to an inheritance or to property through an equalization payment and Jack’s estate will be divided equally among his three children where each would inherit $100,000 (held in trust until they have reached the age of majority).
As a common law spouse, Jill can only hope to succeed in an action where she would sue the Estate seeking support as a dependent.
The above example may seem unfair but the Supreme Court of Canada in Walsh v. Bona, held that such distinction does not offend the Canadian Charter of Rights and Freedoms because the differentiation was based on the individuals’ choice of whether or not to marry.
Common law spouses who want their spouse to have a right to an inheritance in their Estate must have a valid Will. If you or someone you know is in a common law relationship and does not have a Will, to avoid a situation such as this, it is time to consider getting one.
If you have questions regarding this issue or any other issue pertaining to Wills and Estates Planning, please contact:
Sébastien Desmarais
LL.B., LL.L., J.D.
Associate, Tierney Stauffer LLP
This article is provided as an information resource and is not intended to replace advice from a quaified legal professional and should not be relied upon to make decisions. In all cases, contact your legal professional for advice on any matter referenced in this document before making decisions. Any use of this document does not constitute a lawyer-client relationship.
Estate Planning and Probate Tax
Probate is a legal process that confirms and validates the last Will and Testament of a deceased person.
There is no specific law in Ontario that requires the Will of a deceased person to be probated. As a general rule, the larger and more complex the assets held by the deceased, the more likely the probating of the Will shall be required. Probate tax is calculated at an approximate rate of $5.00 per thousand dollars for the first $50,000 in the Estate and $15.00 per thousand for every thousand dollars over and above $50,000 in the Estate.
Depending on how the assets of the Estate are held, probate tax can be reduced or even avoided altogether.
With the proper estate planning, a business owner can eliminate some of the probate fees that are triggered by his or her death and the ensuing transfer of property. One way to do this is through the use of “double Wills” where one Will deals with assets requiring probate (such as cash and real estate) and the other deals with assets that do not require probate such as shares of a corporation.
If ou have any questions concerning the termination of an employee or employment law in general, please do not hesitate to contact David Sinclair directly 613.288.3226 or by email at dsinclair@tslawyers.ca.
David Sinclair
B.Com., B.A., LL.B.
Associate, Tierney Stauffer LLP
This article is provided as an information resource and is not intended to replace advice from a quaified legal professional and should not be relied upon to make decisions. In all cases, contact your legal professional for advice on any matter referenced in this document before making decisions. Any use of this document does not constitute a lawyer-client relationship.
Planning Your Business Succession
Every successful business owner will one day be faced with the dilemma of having to choose a successor. Letting go of the reins of his or her business that has been built through years of labor will not be easy and a smooth succession can only be achieved if the business owner is ready to sell or pass the reins to his or her heir(s).
There is no single boilerplate for a succession plan for all businesses as every business succession is unique. However, all successful successions have similarities and I will highlight some of those similarities in this article.
BEAT THE ODDS
The statistics on small business succession are discouraging as approximately 50% of small businesses that pass to the next generation of owners remain in business five years later. The statistics concerning family owned-business are less encouraging as only 30% will survive a next generation and probably only half of those will survive to the following generation.
Although the reasons why some business successions fail while others succeed are vast and open to interpretation, lack of preparation and poor communication are common traits in many failed plans.
SHAREHOLDER AGREEMENT
Most successful entrepreneurs and professionals will agree that a shareholder agreement is important as it establishes a solid business foundation for the shareholders. The shareholder agreement can also provide the initial steps for planning the business succession as it usually maps out the structural transitions of the business in situations such as the death or disability of an owner, a marriage breakdown of a shareholder or the outcome of a feud between co-owners. Essentially, the shareholder agreement is a negotiated document between the shareholders of the business defining the relationship of the shareholders and the future succession of the business.
A well-drafted shareholder agreement provides solutions to those unfortunate situations by inserting specific clauses that pre-determine the outcome. A shareholder agreement should include clauses such as:
- Disability – addressing how and when the shares of a co-owner who becomes permanently disabled can be bought out.
- Death – determining how to deal with the deceased owner’s shares.
- Retirement – determining the retirement income for the owners who cease to work actively in the business.
In our opinion, a shareholder agreement should always be part of the business succession discussion.
HAVE A PLAN
Business succession planning is a process that should be considered sooner rather than later. To achieve a smooth succession of the business it is best to develop a comprehensive plan that both achieves the retiring owner’s objectives and serves the successor’s needs.
In an ideal scenario, the business owner(s) and the “next generation” would meet with a group of professionals (accountant, lawyer and advisors) to discuss their individual goals and the various options to attain these specific goals. The design of the plan should be viewed with an open mind as compromises are inevitable and without the input of all the succession would be vulnerable.
The succession plan should address three main areas:
- The transfer of labour
- The transfer of management and decision-making (control)
- The transfer of ownership.
However, the main issue to address in any succession plan is: who is/are the successor(s) and how it will be accomplished. The answers to those questions will provide the basis for the structure of the business succession plan.
IMPLEMENTING THE PLAN
Establishing a succession plan is only the first step of the business succession; that plan must then be implemented. It is often at this stage that plans derail because of a lack of willpower on behalf of the parties or because the plans are put on the backburner.
Once a succession plan has been agreed upon, someone must take the leadership role and establish the timetable for the stages of the succession. The leader must make sure that all parties involved (owners, accountant, lawyer and advisor) are made aware of the deadlines and, more importantly, he or she must ensure those deadlines are met.
It is possible that the succession plan may change in light of unforeseeable events so the parties involved must remain flexible and open-minded. However, unless those unanticipated events jeopardize the entire succession plan (such as the death of the owner), the succession plan should only be postponed and not dismissed in its entirety.
TAX CONSEQUENCES
You must take into consideration tax consequences when implementing an estate and business succession plan.
If one voluntarily avoids preparing a business succession plan, at his or her death he or she will be deemed to have disposed of all his or her assets at fair market value potentially resulting in a significant tax debt payable by the estate and the business being left in complete disarray.
Deemed Disposition at Fair Market Value
One of the greatest concerns business owners face when planning for their estate and the business succession is how he or she can minimize the capital gains tax that will arise on the sale or other type of transfer of ownership.
As mentioned above, although avoiding the issue and letting his or her Will dictate the business succession is probably the worst choice one can make, unfortunately many owners prefer opting for this option in hopes of avoiding conflict because of the succession. If the business owner decides to leave their shares of their company to their children under their Will, they will be deemed to have disposed of these shares at fair market value triggering a capital gain which may potentially deplete the value of their Estate.
Capital Gains Exemption
Every individual resident in Canada is entitled to a lifetime capital gains exemption of up to $750,000 upon disposition of shares of a qualifying small business corporation. To qualify for the exemptions the following criteria have to be met:
- The shares must have been owned throughout the 24 month period preceding the date the shares were disposed of;
- At least 50% of the fair market value of the business’s assets must be used in the course of carrying on an active business in Canada;
- At the date the shares are disposed, approximately 90% of the fair market value of the business’s assets must be used in the course of carrying on an active business in Canada.
The capital gains exemption allows the business owner to contemplate several succession strategies such as an estate freeze
Estate Freeze
One strategy that is often mentioned is the estate freeze; a technique that limits the growth of your capital property and the resulting tax on death during your lifetime by transferring the future growth in the capital property to your heirs.
In order to protect their Estate by preventing its value to grow to a size that might incur considerable taxes and probate fees, the business owner will:
- exchange their common shares for preferred shares of equal value where the new preferred shares would not grow; and
- family members (wife, children and grandchildren) would be given common shares and all future growth would attach to those common shares.
An estate freeze allows for a tax deferral for a period commencing when the family members acquire the new preferred shares until the sale of those shares. The estate freeze allows the business owner to minimize the taxes arising at his death.
However, it is important to understand that an estate freeze involves major changes on the part of the business owner and the family. Several issues will also need to be addressed as a result of the freeze and we recommend that anyone who is contemplating an estate freeze consult their accountant and their lawyer in order to fully understand the implications of a freeze for the business and for the family members.
The estate freeze is the most common technique used when a business succession is contemplated but it is not the only technique. Depending on the situation, there are other techniques that are more complex and beyond the scope of this Newsletter. For more information, we recommend you consult your accountant and lawyer.
SUCCESSION OF THE FAMILY BUSINESS – A WEB OF COMPLEXITIES?
Succession of the family business is more delicate as it often involves the varying interests of the children and the parents’ concerns of being fair toward them; it is a balancing act between the realities of the business and the family.
First, one must ask whether there is a viable family successor(s). It is also important to identify the goals of that successor(s) and to develop the right succession plan in light of those goals.
Second, involving family members in the business at an early stage provides an opportunity for the next generation to familiarize themselves with the requirements of managing the business to be involved in the decision-making process. Family involvement should be a key component of the family business succession plan.
Third, it will be necessary for the family to address important and difficult issues such as management authority and family participation. The emergence of a strong corporate governance plan will only be possible if all related parties participate in the generation of the plan and all recognize their responsibility in this plan. The ultimate goal is to have the parent recognize will be in the need to pass the reins to the next generation and having confidence that business is in good hands and will continue to thrive in the future.
CONSULT WITH PROFESSIONALS
Business succession planning can strain the personal relationship of co-owners or your family members. However, maintaining the status quo and doing nothing is the worst option as it only postpones the issues and your legacy could be jeopardized.
Letting go is seldom easy but making well-informed decisions will make the transition less stressful and ensure your business transition results in a lasting and profitable gift. In contemplating retirement and handing the reins of your business to your successor(s), we recommend consulting with your accountant, lawyer, and any other professional advisor that may be necessary for your particular business, in order to be thoroughly advised.
REVIEW YOUR WILL
After all this planning, don’t forget to review your Will. At Tierney Stauffer LLP, we will gladly review your Will with you and discuss more advanced estate planning aimed at maximizing the value of your estate while minimizing the taxes and probate fees.
Planning the succession of your business is not easy so reduce the stress and complexities by seeking proper advice. Don’t forget that this is in your own best interests as well as the best interests of your loved ones.
If you have questions regarding this issue or any other issue pertaining to Wills and Estates Planning, please contact Sebastien Desmarais at (613) 288-3220 or sdesmarais@tslawyers.ca.
Sébastien Desmarais
LL.B., LL.L., J.D.
Associate, Tierney Stauffer LLP
This article is provided as an information resource and is not intended to replace advice from a quaified legal professional and should not be relied upon to make decisions. In all cases, contact your legal professional for advice on any matter referenced in this document before making decisions. Any use of this document does not constitute a lawyer-client relationship.
Trustees Controlling the Corporation – a Challenging Situation
Estate planning intrinsically results in tax planning; one cannot dissociate the two. Indeed, the easiest manner to maximize the value of an estate is by minimizing the tax payable at death. The same approach applies to the successful business owner; maximizing profit by minimizing taxes.
Trusts are oft enused to accomplish eff ective tax/estate planning. However, the use of a trust to control a private corporation imposes fiduciary obligations on the part of the trustees to administer the corporation for both the shareholders and the beneficiaries of the trust; a challenging balancing act for the trustees at the best of times.
This newsletter will explore the various duties of trustees and some of the conflicts of interest that can arise.
Powers and Authority of Trustees and Directors
Trustees have a duty to carry their powers and authority in accordance with the Deed of Trust whereas Estate Trustees have a duty to act in accordance with the instructions conferred by the Testator’s Will. Trustees have a fiduciary duty to act in the best interest of the beneficiaries; that is a duty of loyalty and a duty of care toward the beneficiaries.
Trustees have three fundamental duties they must always comply with:
- they may not delegate their duties to a third-party;
- they may not profit personally from their dealings with the trust property; and
- they must act honestly, with prudence and reasonableness.
Trustees also have a duty to act personally, with care and in good faith and must avoid conflicts of interest.
Directors, on the other hand, owe a fiduciary duty to the corporation, and only the corporation. Directors are intended to make policy and specific decisions concerning a variety of business risks as long as it is for the best of the corporation.
It is said that the directors are considered to be the alter ego of a corporation.
Trustees Controlling a Corporation
In many tax planning strategies such as an estate freeze, a family trust is introduced as the majority shareholder of the corporation holding the shares that will represent the future growth of the corporation.
The introduction of a family trust as the majority shareholder is usually viewed as providing greater flexibility in tax planning strategies and estate planning but results in different considerations for decision-making: the duties of the
directors versus the duties of the trustees.
Trustees holding the majority of the shares of a company face the possibility of having to make decisions that may impact the viability and value of the corporation and intrinsically affect the beneficiaries’ interest in the trust. It is nearly impossible to avoid some conflict of interest in these circumstances; indeed when acting as both a trustee and a director, the individual has a duality of fiduciary duties which may ultimately conflict. Where trustees hold shares representing voting control of the corporation, it is difficult to imagine how they can exercise their fiduciary duty without being appointed on the board of directors of the company. They may elect to only have one of them appointed but such does not discharge the other trustees of their fiduciary duties; they nonetheless must place themselves in a position to make informed decisions concerning the company in order to protect the assets of the trust.
If the trustees decide that all of them will be elected to the board of directors, they must vote in accordance with their fiduciary duties as trustees. If the Deed of Trust or the Will requires a decision by vote by majority, then the trustees must vote and make decisions as directors in a fashion similar to casting their vote as trustees.
There are significant differences in the operation of trust law and corporate law. The trustees who must act appropriately as directors must also act in the best interest of the beneficiaries which can sometimes conflict with what is in the best
interest of the shareholders; not always an easy juggling act.
Estate Trustees Controlling a Corporation
Estate trustees are faced with the same challenges stated above and, further, they must as well meet their fiduciary duties toward the beneficiaries of the estate. The issue is therefore how can you balance the duty of care to the
beneficiaries of the estate and the corporation??
Estate trustees must also deal with estate planning strategies that render their decision-making even more difficult as they are required to consider different beneficiaries who may have different interests. For example, what if the testator
leaves a life interest of the income of the corporation to his spouse but on her death the shares including all income not paid to the spouse, are to be equally divided amongst his children. In whose interest do they manage the corporation,
the spouse or the children?
This is just one example of the complex issues that can arise from the duality of acting as estate trustee and director of a corporation. A well drafted Will should provide clear instructions to the estate trustee for such circumstances but
often it does not, leaving the estate trustee in a thorny situation.
It is noteworthy that if the estate is dependent upon an income stream from a corporation, the estate trustee must serve as a director to ensure that the appropriate business decisions are made on timing and distributions of profit of a business.
However, an estate trustee/director of a corporation is caught in an impossible situation that can only result in a conflict of interest. The estate trustee/director must then face the possibility of having their decisions reviewed by either the shareholders or the beneficiaries of the estate.
Jurisprudence appears to indicate that the beneficiary of an estate is not entitled to any disclosure of the corporate and financial records of the corporation. However, as long as the beneficiary’s interest is involved, the beneficiary is entitled and may seek from the estate trustee all documents or communications between the trustee and the corporation.
Furthermore, trustees may also see their actions as director questioned by the beneficiaries claiming an “oppression remedy.” Professionals who advise on estate planning ought to consider this remedy when discussing estate planning with the testator.
The decision of the trustee/director may always be subject to review and remediation in accordance with the available remedy under the legislation or equity.
Conclusion
We have seen that it is nearly impossible to avoid a conflict of interest when one is acting as both a trustee and a director. In those instances, the trustees/directors have a duality of fiduciary duties which may ultimately result in a conflict.
Many professionals view this “conflict” as a novel concept and dismiss it on the basis that in practice, the trustees and directors have the discretion to administer the trust and the corporation “as they see fit.”
I submit that such view fails to properly advise trustees who must carry both the duties of trusteeship and directorship. It is true that trustees may be absolved of any personal liability if the Deed of Trust or the Will so states. However, that is only partially true as they can still be held liable under equitable remedies or under corporate legislation.
If you are acting as both trustee and director, it is essential that you recognize your fiduciary duties and to whom to you owe such duties. Failure to do so could result in untenable positions and potential personal liability. If you have any questions concerning the duties of a director or trustee, please do not hesitate to contact me directly at 613-288-
3220 or by email at sdesmarais@tslawyers.ca
Sebastian Desmarias
Associate, Tierney Stauffer LLP
This article is provided as an information resource and is not intended to replace advice from a quaified legal professional and should not be relied upon to make decisions. In all cases, contact your legal professional for advice on any matter referenced in this document before making decisions. Any use of this document does not constitute a lawyer-client relationship.
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