Estate Planning & Taxation

Estate Planning & Taxation • Diana Mau, C.A. • 205-8833 Odlin Crescent, Richmond, B.C. V6X 3Z7 • Tel: 604-279-9270 • Fax: 604-279-8769 • www.dianamau.bc.ca

Estate Planning- misconceptions • I have given away all my assets to my children • I have a will

Estate planning : Non-Tax Considerations • To ensure loved ones are taken care of • Transfer of assets to intended beneficiaries according to the deceased’s wishes • To ensure liquidity – cash to pay funeral expenses & income taxes • To avoid family disputes • To expedite the settlement of estate

Estate Planning – Tax Considerations • Prior to Death – tax planning to minimize taxes such as income splitting, trusts & estate freeze and will planning etc. • Year of Death – to minimize income taxes payable, probate fees in the year of death

Tax Planning Ideas while Alive • Income Splitting • Estate Freeze • Insurance • Trust

Income Tax Rates 2012

Purposes of Income Splitting • Taxes payable on a given amount of income will be greater if that amount accrues to one person, lower if that amount of income is split between two or more people • Example: income of $490,000 • Taxes payable one person- $196,000 • Taxes payable four persons - $35,500 x4 or $142,000 • Tax savings of $54,000

Income Splitting - Problems • Attribution Rule – applicable to where an individual has transferred property to spouse or common-law partner or individuals under age 18 and who do not deal at arm’s length, the income is attributed back to the transferor • For spouses & common-law partners, attribution also applies to capital gains

Income Splitting • Cash gifts to children 18 or over, no attribution applies. Income earned is taxed in the child’s hands. But parents would be completely losing control over the money

Income Splitting • Free or low interest loans made to children 18 or over for producing property income, there may be attribution if one of the main reasons for making the loan is to reduce or avoid tax • Free or low interest loans made to children 18 or over to purchase PR is OK

Income Splitting by gifting property • Parents gifting rental property to Children • Parents are deemed to have the property disposed at FMV, resulting in capital gains or recapture of CCA to parents • Parents would also lose control over the property • Property Transfer tax on transfer of title of property other than PR

Income Splitting of Real Property • If the property is occupied by the children as a PR, then parents can take back a mortgage on the property as security. No attribution would apply as there is no rental income deriving from the property

Principal Residence (PR) In general, capital gains arising on the disposition of a PR can be exempted from taxation The exempted gain = Gain x (B + 1) / Y B is the no. of years since 1971 designed as PR Y is the no. of years since 1971 the taxpayer has owned the property

Principal Residence (Cont 2) Since 1982, a family unit can designate one PR for a particular year A PR is an accommodation owned by the taxpayer that was ordinarily inhabited in the year by the taxpayer, his spouse, a former spouse or a child and is designated by the taxpayer as a PR.

Change in Use – PR to Rental Deemed disposition at FMV on change in use Elect deemed not to have commenced rental provided no CCA is claimed The property can continue to be designated as a PR for up to 4 years The 4 year limit can be extended without limit if you are being relocated for employment reason to a location where your original residence is at least 40 km further away from your new place of employment

Change in use – Rental to PR In general, deemed disposition at FMV on change of use You can elect out of the deemed disposition as long as no CCA is claimed The election also allows to designate the property as a PR for up to 4 years

How to make the best use of PR gain exemption Children age 19 or over Loan to children to acquire a property Register a mortgage to parent for security Designate the property as PR for 4 years

Overcoming attribution • Income attribution on loans or transfer made to children 18 or over can be avoided if one can substantiate the main reason for making the loan is NOT to reduce or avoid tax • Example: children use the property income for education and not returning the property income to parents

Other Tax Planning Ideas • Splitting pension income- Commencing 2007, it is possible to transfer up to 50% of qualified pension to a lower income spouse • RESP – Registered Educational Savings Plans • TFSA – $5,000 Tax Free Savings Accounts per year • Spousal RRSP

Estate Freeze • Objective: To freeze the value the of estate for tax purposes at a particular time • Arrangements are made for all future appreciation to accrue to related parties such as a spouse, children or grandchildren

Estate Freeze Example Mr. Chan Chan Inc Net Assets 10M Common shares 2 M R/E 8 M

Estate Freeze Example Mr. Chan Chan son 2 Chan son 1 Common Common Preferred ACB 2 M Redeem 10M Chan Inc Using Section 86 rollover , Mr. Chan’s old common Shares are exchanged for preferred shares, while Sons subscribed for new nominal common shares

Benefits of Estate Freeze • To transfer future growth of a corporation into the hands of intended beneficiaries with no immediate tax effects on the transferor • The beneficiaries will be taxed in income earned subsequent to the estate freeze • Multiple use of $750,000 of lifetime capital gains deduction for qualified small business corporation

Insurance - Benefits • Will bypass probate if a beneficiary is designated • Creditor protection- exempt from seizure if the designation is in favour of a life insured’s spouse, child grandchild or parent • Tax preferred treatment for Whole or Universal life policies • Privacy- insurance does not flow into the estate and the probate registry • Insurance declaration- testamentary trust

Insurance Declaration • To desire to establish an insurance trust outside the will, the concern was it would be an inter-vivos trust • CRA’s position is trusts funded from the proceeds of life insurance on death of an individual will be viewed as a testamentary trust • A powerful & inexpensive tool to set up a testamentary trust

Trust- what is a trust? Settlor Trustee Beneficiaries A trust is a relationship that arises when a settlor transfer property to a trustee to hold for the benefit of the beneficiaries.

Trusts • Settlor is the person who sets up the trust and make the initial transfer of property to the Trustee • Trustee is the person who holds the formal legal title to the property • Beneficiaries are persons who will benefit from the property that is held by the Trustee

Income splitting of a trust • A high income individual transfer investments property to a family trust • The father is the settlors • The father & 2 other investment advisors are trustees to avoid reversionary trust. The trustees hold title to the investment property • The adult children are the beneficiaries

Income splitting of a trust-Cont • Assuming the father is at the top tax bracket, the father can save $5,000 every year on $50,000 eligible dividends if the dividends would be earned by an adult child if the child has no other income • The same tax savings can be achieved with or without the family trust, but a discretionary trust can provide the father more control over the capital & the income allocation

End of family trust for minors • In 2000, the federal Govt ended the tax benefit of income spitting of private corporations by introducing the “KIDDIE TAX”, taxing the dividends from private corporations to children under age 18 received directly or through a trust at the top tax rate and restricting personal credit

Understanding taxation on death • What are the CPP & OAS benefits on death? • What are the tax consequences on death?

Termination of CPP on death • If the deceased has commenced receiving CPP, CPP benefits to a contributor will cease upon death • There are CPP benefits for surviving spouse or common-law partners & children

CPP benefits for survivors • CPP provide benefits for the surviving family members of a deceased contributor. Benefits based on contributions made by contributors. • Benefits provided in 3 categories • 1. Death benefit • 2. Survivor’s pension • 3. Children’s benefit

You have to apply for get CPP Benefits (not automatic) • Retroactive benefits are available for up to 12 months

CPP Death Benefit • Is a one-time lump sum payment upon the death of a qualifying contributor to the deceased estate. • The max amount is $2,500. • Amount included as income of the estate.

Survivor’s Pension • Survivor’s pension is a monthly benefit paid to the legal spouse or common-law partner of the deceased contributor • Survivor’s benefit depends upon the deceased’s contributions to CPP, age of the surviving spouse, whether the surviving spouse is supporting dependents and whether or not the surviving spouse is receiving any CPP benefits • Max CPP for surviving spouse age 65 & over, 60% of the contributors’ CPP

Children’s Benefit • A dependent child is a natural or adopted child of the contributor and who is: • Under the age of 18 or • Is between 18 to 24 and is in school full-time • The children’s benefit is a flat amount, $225 per month in 2013

CPP Payment Rates - 2013

Old Age Security (OAS) • Federally funded from general revenue • A social security program designed for lower & middle income Canadians who have resided in Canada for a minimum of 10 years after age 18

OAS Benefit Payment Rates

Taxation on Death No Gift Tax No Inheritance Tax Probate - probate is a court process that proves the validity of a will Income Tax on Deemed Disposition on Death

Probate Tax • Probate tax is proportional to the value of the estate, so that lower the value of the estate, the lower the probate tax. • Probate planning is aimed at reducing the value of the estate.

Probate Tax in B.C. Assets < $25,000 $25,000 - $50,000 Over $50,000 Filing fees of $208 $0 0.6% 1.4%

No Probate Tax No probate tax on joint assets & designated assets as they pass outside your will and they do not form part of your estate

Probate Planning By having estate assets passing outside wills (wills substitutes) Inter vivos gifts Inter vivos trusts Registering assets in joint tenancy with right of survivorship Beneficiary designations such as RRSP, RRIF and insurance Multiple wills –will discuss in the Will Section

When is probate necessary Intestacy – where the deceased died intestate & there are assets in the estate When an estate is involved in litigation Real estate other than joint tenancy with right of survivorship Bank account over $10,000

Income Tax on Death Final or Terminal personal income tax return from January 1 to the date of death of that year Death causes a deemed disposition at fair market value (FMV) relative to capital property owned by the deceased taxpayer (except for those properties qualifying for spousal rollover)

Income Tax on Death (Cont 2) Deemed disposition at FMV may result in capital gains on capital property or recapture of capital cost allowance (CCA) on depreciable property 50% of the capital gain is taxable

Spousal Rollover Exception to deemed disposition on death at FMV – Spousal Rollover No deemed disposition at FMV when the property is left to a spouse or common-law partner or to a trust for the benefit of the spouse or common-law partner

Tax Consequences of a Spousal Rollover The deceased taxpayer’s capital property is deemed disposed at adjusted cost base (ACB) or undepreciated capital cost (UCC) of depreciable property, resulting in no capital gain or recapture to the deceased’s terminal tax return The receiving spouse assumes the deceased’s old ACB or UCC cost for the property, or simply inheriting the old cost base of the deceased

Estate Planning & Taxation