Topics

Estate Planning

Estate Planning is a comprehensive on-going process designed to determine and understand a client’s entire financial picture and it includes understanding the client’s goals and needs as well as the client’s personal and business affairs. Accordingly, such a plan is predicated on the client’s full disclosure.

They are many reasons why an individual may want to undertake a traditional estate plan, including but not limited to the following:

• To ensure that assets/wealth pass to the next generation in a cost effective manner with minimum taxes;
• To ensure that assets provided in a Will and/or trust deed are protected (from creditors and others) and preserved for family members and/or other intended beneficiaries such as charities;
• To ensure that the life insurance proceeds will be sufficient to fund the taxes due on death as well as other administrative expenditures and provide liquidity for the business;
• To ensure that the Will is consistent with the client’s intentions;
• To ensure that the shares of a private corporation are transitioned to other or new shareholders in a least disruptive manner; and
• To mitigate the potential probate taxes due on death.

Estate plans are tailored to a client’s particular needs and it is those needs that will dictate the specific plan. The one constant that all estate plans require is competent and knowledgeable professionals such as lawyers and tax accountants.

Should you have any questions or concerns, please give me, Harv Mand, a call to discuss your particular needs and how I could help you achieve your estate planning goals.

Voluntary Disclosures Program

The voluntary disclosures program (“VDP”) is a program administered by the Canada Revenue Agency (the “CRA”) that enables a taxpayer an opportunity to voluntarily disclose previously undisclosed information or to correct previously reported information without incident of penalty.

Effective March 1, 2018, the Voluntary Disclosure program no longer allows a “no-name” basis voluntary disclosure; further, the program is now broken up into two types of categories: a general program and a limited program. The general program is for inadvertent or minor non-compliance cases whereas the limited program applies to cases where there is an element of intentional conduct on the part of the taxpayer or related party. The relief under the VDP varies depending upon the type of program.

In general, a submission under the VDP must meet the criteria as outlined in Information Circular 00- 1R6, “Voluntary Disclosures Program”, among other things, it must:

1. be voluntary, i.e. the VDP submission cannot be a result of any action or pending action taken by the CRA;
2. be complete, i.e. the taxpayer must provide all relevant facts and documentation to support the position taken;
3. involve a non‐compliance penalty or a potential penalty;
4. include a disclosure at least one year past the due date; and
5. include a payment for the estimated tax owing upfront.

Provided that the submission has been accepted by the CRA, the taxpayer could be afforded relief on the underlying penalties and possibly interest. However, the taxpayer would still be subject to the original tax, if any, that would otherwise have been imposed and/or due had the information been available to the CRA for assessment at that earlier time.

As an example, a taxpayer that is required but failed to file the information return, the T1135, “Foreign Income Verification Statement”, may be subject to a late-filing penalty of up to $2,500. And if the failure to file is for multiple tax years, each non-compliant tax year would be subject to the $2,500 penalty. Accordingly, by taking a position under the VDP, a taxpayer will not only get his/her filings onside but may end up with significant tax savings through reduced penalties.

If you are in a non-compliance situation or would like to correct previously provided information and meet the criteria listed above, please contact me, Harv Mand, to discuss how we could proceed with a submission pursuant to the Voluntary Disclosures Program.

Foreign Disclosure Statements

Over the recent years, governments throughout the world have put a greater emphasis on its citizens and/or residents to disclose any investments and property that they may hold abroad. Such disclosures allow the respective governments to better track and tax the income that may be derived from the said investments and Canada is no different.

A Canadian resident taxpayer may be unaware of certain filing obligations that may be applicable where the taxpayer has foreign interest or conducts business with foreign persons. Unfortunately, significant penalties (such as the failure to comply, failure to furnish foreign-based information or providing false statements or omissions, among others) can ensue if the Canadian resident is remiss in its filing obligation.

The foreign-based disclosures include the Forms T1134, T1135, T106, and T1141/T1142.

The Form T1134 (“Information Return Relating to Controlled and Not-Controlled Foreign Affiliates”) may apply to residents of Canada that own shares of a foreign corporation. The return is due within 15 months of the taxpayer’s year-end.

The Form T1135 (“Foreign Income Verification Statement”) applies to taxpayers who have an aggregate cost amount of all “specified foreign property” of more than $100,000. Among other things, “specified foreign property” can include funds deposited or held outside of Canada, real estate situated outside of Canada, and shares of foreign corporations other than a foreign affiliate. This return is due on or before the due date of the taxpayer’s income tax return.

The Form T106 (“Information Return of Non-Arm’s Length Transactions with Non-residents”) applies if the total “reportable transactions” with non-residents exceed $1,000,000. The T106 Summary and Slips are due on or before the filing due date of the “reporting person”.

The Form T1141 (“Information Return in Respect of Contributions to Non-Resident Trusts, Arrangements or Entities”) and Form T1142 (“Information Return in Respect of Distributions and Indebtedness to Non-Resident Trusts”) may apply where a Canadian resident (individual, corporation, trust or partnership) has transactions with a non-resident trust. The informational returns are due on or before the filing due date of the Canadian resident.

Accordingly, if you require assistance with the filing of your foreign-based disclosures, please contact me, Harv Mand, to help assist you with the various tax rules and compliance needs.

Estate Freeze

An estate freeze is a strategy that is used by a taxpayer to “freeze” the value of the shares of a particular company, commonly, a family-owned business, in order to allow others, including family trusts, to become shareholders and participate in the future growth of the company.

Generally, the plan requires the current shareholder to exchange one class of shares for another class of shares, normally fixed-value preference shares, on a rollover or tax-deferred basis so as to avoid any current tax.

Depending upon the complexity of the plan, such a plan can either be an “internal” reorganization where only one company is involved, i.e. the company whose shares are being frozen, or an “external” reorganization, i.e. a reorganization which involves several corporations such as an operating and holding company.

An estate freeze can be used for a variety of reasons such as:

1. to “crystallize” the value of an existing shareholder in order to “lock-in” the lifetime capital gains exemption amount;
2. to limit the taxes on death by freezing the quantum of the gain to a fixed amount;
3. to determine the amount of life insurance required to fund the taxes on death;
4. to pass on the future growth of the company on a tax-free basis to family members as part of a succession plan or to key employees at a nominal basis;
5. to income split with family members subject to the Tax on Split Income rules; and
6. to “purify” the assets of the company by removing non-business assets from the company in order for the shares of the company to qualify for the lifetime capital gains exemption.

The introduction of a family trust as a shareholder during an estate freeze could be beneficial where there is an opportunity to multiply the lifetime capital gains exemption or income split, however, the inclusion of a family trust must be properly planned and executed in order to avoid any unexpected tax consequences.

Accordingly, if you require assistance to implement an estate plan, purify a company or introduce new shareholders, please contact me, Harv Mand, to ensure that the intended plan meets your particular objectives.

Taxes on Death

A death in the family can be a very trying and traumatic event for the remaining living family members. During this period, taxes would conceivably be an afterthought and/or pushed to the background.

On death, the deceased individual is deemed to have disposed of his/her capital property (and inventory) immediately before death for proceeds equal to fair market value. Where the adjusted cost basis of the capital property is less than the fair market value, a capital gain will result in an income inclusion on the taxpayer’s terminal return. Further, the balances in the RRSP and/or RRIF accounts would be fully includable in the deceased taxpayer’s terminal return.

If the decedent owned shares of a private corporation, the tax filings could become a lot more complex and cumbersome as there may multiple layers of tax that could result: on death; on dividend distributions from the private corporations; and on the disposition of the underlying property in the private corporation. Additional and timely tax planning will be necessary to potentially avoid these additional layers of tax.

The filing due-date of the terminal tax return will depend upon the date of death: if the taxpayer passes away before November 1st, the terminal return is due April 30th of the subsequent tax year; however, if death occurs after November 1st, the terminal return is due within six months after the date of death.

Further, a separate return, a “rights and things” return, can be filed for payments received after the date of death. Payments would include such things as employment income from commissions, vacation, and unpaid sick leave; declared but unpaid dividends; and old age security benefits that were due but unpaid. The “rights and things” return allows the qualifying income to be taxed at the low marginal rates and utilize certain non-refundable tax credits.

Also, depending upon the province of jurisdiction, the estate may be subject to probate taxes as well.

Unfortunately, the new rules regarding testamentary trusts (and other personal trusts) that were enacted as at January 1, 2016 may potentially add a wrinkle to previous tax plans or negate their effectiveness.

Accordingly, if you need assistance with tax planning or compliance, please contact me, Harv Mand, to help navigate you through the various tax rules and filings.

Trusts

A trust is a fiduciary relationship between a settlor, the person that transfers the property by way of a gift, and a trustee, the person who holds the assets on behalf of the beneficiaries. Essentially, a trust is used to keep control and legal title of the property separated from the beneficiaries.

In general, there are two types of trusts: ones that are created during the settlor’s lifetime (“inter vivos” trusts) and ones that are created as a consequence of the settlor’s death (“testamentary” trusts). There are a variety of inter vivos trusts, including but not limited to the following: discretionary family trusts, personal trusts, alter ego trusts, and joint partner trusts. Spousal trusts can fall into either category depending upon when it was created.

Effective January 1, 2016, the federal graduated tax rates will no longer be available to a testamentary trust and/or estate unless it qualifies as a graduated rate estate or a qualified disability trust. Accordingly, most trusts (including grand-fathered inter-vivos trusts and trusts created by will) and estates will be subject to tax at the federal top marginal tax rate of 33%. If an estate is considered a GRE, then it will be eligible to be taxed at the federal graduated tax rates for a period of up to 36 months from the date of the individual’s death

To create a trust, three certainties must exist: the certainty of intention to create a trust, certainty of subjects (i.e. the property settled), and certainty of objects (i.e. the particular beneficiaries).

There are many reasons why a trust may be used, some of which may be the following:

1. Asset protection whether it be from third‐party creditors, from a beneficiary’s own behavior, or from a marital claim;
2. To preserve a particular property for future generations such as a family cottage;
3. The flexibility to income split or income “sprinkle’ with family members in lower tax brackets subject to the Tax on Split Income rules;
4. To multiply access to the capital gains exemption in situations involving shares of a qualifying small business corporation;
5. To mitigate or defer the potential tax liability that would otherwise arise on death whether it is income taxes or probate fees; or
6. To provide custodial management over a particular asset for a beneficiary with special needs.

Obviously, the creation of a trust does not come without its costs such as the potential annual compliance costs, dealing with the 21-year deemed disposition rules, attribution and “kiddie” tax rules, non-resident beneficiary issues, and the introduction of the new trust rules. However, to many, the benefits of a trust greatly outweigh the costs.

Accordingly, if you are interested in determining whether a trust meets your particular needs, whether personally or corporately, or need someone to help navigate you through the recent legislative changes pertaining to trusts, please do not hesitate to contact me, Harv Mand, to further discuss the viability of a trust for you.

Leaving Canada and Departure Tax

In general, a resident of Canada is taxed on his/her worldwide income for the year; however, when a taxpayer ceases his/her Canadian residency, certain tax consequences may arise. Accordingly, please be aware of the potential tax implications, in particular, the “departure tax”.

ICanada is one of the few tax jurisdictions that impose a tax on residents leaving (emigrating) to another country. The departure tax deems the emigrating taxpayer to dispose at fair market value all of the taxpayer’s property immediately before departure.

Fortunately, there are some exclusions to this deemed disposition, including but not limited to real estate situated in Canada, property used in a business that is carried on through a permanent establishment in Canada, and registered investments.

The departure tax applies to individuals, trusts, and corporations.

However, as a non-resident of Canada, an individual may still receive certain types of income payments (such as income from OAS, CPP, and RRSP among others) from Canadian payers; these income payments will be subject to a non-resident withholding tax which, in general, will be considered the final Canadian tax obligation on that income to Canada. In certain situations, it may be preferable for the non-resident individual to elect to file a return under section 217 of the Canadian Income Tax Act to take advantage of the marginal tax rates and potentially, non-refundable tax credits. The section 217 return is due June 30th of the subsequent year.

Note that Canada does have a similar deemed disposition rule that applies to immigrants as well: the immigrant is deemed to dispose of its property for proceeds equal to fair market value immediately before taking up residence in Canada; accordingly, the adjusted cost basis of the immigrant’s property for Canadian tax purposes will be equal to the fair market value immediately before coming to Canada.

Accordingly, if you are planning on leaving Canada or have recently left Canada, please contact me, Harv Mand, to ensure that you do not have any tax surprises upon your departure.

Lifetime Capital Gains Exemption

Generally, when a taxpayer disposes of capital property at a gain, the taxpayer is subject to income tax on that capital gain. However, there are some exceptions to this general rule which allow an individual to either potentially mitigate or eliminate the entire tax, including the principal residence exemption and the lifetime capital gains exemption, among others.

The lifetime capital gains exemption allows an individual to shelter during their lifetime $824,176 (2016 limit and indexed annually) of capital gains derived from the sale of shares from a qualified small business corporation (“QSBC”)

For a share to be considered a share of a QSBC, it must meet three tests:

1. Small business corporation test
2. Holding period ownership test; and
3. Holding period asset test.

The Small Business Corporation test requires that at the time of sale (or determination test time), the company whose shares were sold must be considered a Canadian controlled private corporation of which all or substantially all (interpreted to be more than 90%) of the fair market value of the assets at the time are attributable to assets that are used principally (interpreted to be over 50%) in an active business carried on primarily in Canada.

The Holding Period Ownership test requires that the shares must not have been owned by anyone other than the individual, or a person or partnership related to the individual, throughout the 24 months preceding the determination test time, i.e. the shares must not be held during that period by anyone unrelated to the individual.

The Holding Period Asset test requires that more than 50% of the fair market value of the corporation’s assets must have been attributable to assets used in an active business in the 24-month period preceding the determination test time.

Accordingly, if you are proposing to sell your business or the shares of a Canadian business, please contact me, Harv Mand, to determine whether you are eligible for the capital gains exemption.

Purchase and Sale of a Business

Most entrepreneurs hope that their hard work, sweat and tears materialize into a successful and thriving business; however, over time and as the years go on, an individual may be presented with a difficult decision: whether to continue the business through succession planning (i.e. as a family business) or to sell to a third party. Conversely, the purchaser is presented with their own set of problems, including how to structure and finance the acquisition.

Generally, vendors prefer to sell the shares of a corporation, especially in situation where the lifetime capital gains exemption is available. Conversely, the purchasers prefer to buy the assets of a company in order to receive a higher cost basis in the acquired property without assuming any potential liabilities that the existing company may have had. In certain circumstances, it may be worthwhile to utilize a hybrid alternative.

Aside from the share versus asset decision, there are many other issues to consider such as but not limited to the acquisition of control rules, the ownership structure, restrictive covenants, and secondary taxes.

There are many reasons that may motivate a vendor to sell and a purchaser to buy a business, however, without a competent experienced tax person to help navigate you through ever-changing tax rules and the potential pitfalls of the underlying transaction, you may end up begrudging the deal shortly after completion.

Accordingly, if you are looking to sell or buy a business, please contact me, Harv Mand, to help guide and assist you through the sale or purchase of a business.

Non-Residents with Rental Properties in Canada

The Canadian real estate market has been red-hot for the past decade plus, especially in certain regions of the country and it is no secret that this is large part due to foreign investment.

In an effort to cool down the foreign investment in Canadian real estate market, various additional taxes at the Federal, Provincial, and Municipal levels were introduced, including foreign buyer’s tax and the vacant homes tax, among others.

Whether the property is used for personal-use or rental purposes, a non-resident will be exposed to certain Canadian compliance obligations. For example, on disposition of real estate situated in Canada, the non-resident is obligated to provide the Canadian government, in particular the Canada Revenue Agency (the “CRA”) notice within 10 days of the disposition. Further, on disposition, the non-resident taxpayer will be subject to a 25% withholding tax on the gross proceeds unless a compliance waiver is timely filed to reduce the withholding tax to 25% of the net gain (gross proceeds less cost of the property).

Fortunately, a non-resident taxpayer can elect to file a Canadian non-resident tax return to report the net gain, including commission expenses, in order to take advantage of the Canadian marginal tax rates. Generally, the non-resident taxpayers overall tax burden is reduced by filing this elective return.

Where the property in question is a rental property, the non-resident will be subject to withholding tax of 25% on the gross rental income paid or credited to the non-resident. The tax must be remitted by the 15th day of the subsequent month. Further, the tax withheld will be considered the non-resident’s final tax obligation to Canada on behalf of the rental income; however, the payer of the rent is obligated to file an NR4 statement reporting the gross rent and taxes withheld for the year. Conversely, the non-resident could elect under section 216 of the Canadian Income Tax Act to file a separate Canadian tax return which would allow the non-resident to pay tax on the net rental income at the appropriate marginal tax rates.

For those filing the section 216 election and return, it may be worthwhile to have their Canadian agents file Form NR6 in order to have the 25% non-resident tax reduced from gross rental income to net rental income; the acceptance of the Form is subject to the CRA approval.
In any event, the section 216 returns are due by June 30th of the subsequent tax year for those that have filed and received approval of the Form NR6 otherwise, the section 216 return is due within two years from the end of the year in which the rental income was paid or credited to you.

Accordingly, if you are a non-resident of Canada who is contemplating selling real estate situated in Canada or has a Canadian rental property and requires assistance with the Canadian compliance, please contact me, Harv Mand, to ensure that the correct filings are timely filed.

Investment in United States Real Estate

With the high real estate prices in Canada, it is no wonder that more and more Canadians are looking to the United States for investment, development, and vacation property opportunities.

However, for the unwary investor, owning a property in the United States may end up causing a lot more headaches than the benefits. A taxpayer that is considering investing in the United States’ real estate market should be cognizant of some of the potential issues that they may be exposed to as a result of their decision, including but not limited to the following:

• Double taxation and/or higher overall taxes;
• U.S. Estate Tax;
• Frivolous lawsuits and liability concerns;
• Excessive compliance (as both US and Canadian compliance and tax rules must be adhered to, including potentially, the Canadian FAPI rules);
• U.S. withholding tax on distributions to non-residents and FIRPTA withholdings on the eventual sale of the underlying property; and
• Branch Tax.

The good news is that if the purchase is properly structured, some of these concerns could be alleviated.

There are many ways to own property in the United States such as personally, corporately, through the use of a trust or partnership or perhaps, through a combination of vehicles; however, each will have potential benefits and costs.

Unfortunately, there is not one ideal solution or structure that will meet everyone’s needs; instead, the ownership structure will vary with the Canadian investor’s primary objectives and the hierarchy of those goals. Certain goals may conflict with others, for example, a tax minimization strategy may be competing against a secondary goal of minimum compliance or risk exposure, and accordingly, the individual will need to prioritize their particular objectives to determine the appropriate structure.

Accordingly, if you are looking to purchase a property in the United States, please contact me, Harv Mand, to determine what form of ownership is suitable for your particular needs and fact scenario.

Tax On Split Income (TOSI) Rules

In the name of taxpayer equality, the federal government introduced new legislation to deter income splitting amongst business owners and their families. These rules were effective as of January 1, 2018.

Among other things, the new rules introduced measures that expand the “kiddie tax” rules to include adults. Previously, the tax on split income (“TOSI”) rules (otherwise known as the “kiddie tax” rules) applied to certain income received by individuals under the age of 18. If a taxpayer was caught by these rules, the income would be taxed in the highest marginal tax bracket. Generally, income received by a child from a parent’s business (or related business) such as dividends would be subject to these provisions and accordingly, taxed at the high rate. Note that reasonable wages paid to a family member for services performed continues to be a valid source of income sprinkling.

The “kiddie tax” rules will continue to apply to individuals under the age of 18. However, under the new rules, income distributions such as dividends will now also be taxed at the high rate if they are received by certain adult individuals from a related business.

Notwithstanding that there are some exceptions to these rules, the traditional method of income splitting within private corporations has drastically changed under the new rules.

Accordingly, if you require some guidance to help you navigate through these complicated rules, please contact me, Harv Mand.

As part of tax reform introduced in 2018, the federal government has linked the small business deduction to the passive income earned within the associated group.

Effective for tax years that begin after 2018, passive income earned in excess of $50,000 will grind down the small business deduction (“SBD”) limit of $500,000 at a rate of $1 to $5. For example, if the passive income earned within a CCPC is $75,000, the small business limit of $500,000 will be reduced by $125,000 [($75,000 – $50,000) x $5]; the resulting $375,000 of small business limit would need to be shared amongst the associated group of corporations. Under the new rules, the small business limit would be completely eliminated once the passive income earned within an associated group exceeds $150,000.

Accordingly, if you require some guidance to help you navigate through these complicated rules, please contact me, Harv Mand.