STEP INSIDE Volume 5 • Number 2 • Winter 2006 Amendments sought to new legislation ... · ·...
Transcript of STEP INSIDE Volume 5 • Number 2 • Winter 2006 Amendments sought to new legislation ... · ·...
S T E P INSIDENewsletter of the Society of Trust and Estate Practitioners (Canada)Volume 5 • Number 2 • Winter 2006
CONTENTSAmendments sought tonew legislation protectingRRSPs from creditors . . . . . . . . . . . 1
THE STEP STUDYWhen your client is a minor . . . . 2
The new dividend rules . . . . . . . . 6
Art-flip tax shelters facecourt scrutiny . . . . . . . . . . . . . . . . . . 7
IN THE HEADLINES“Reverse snowbirds” inNova Scotia, disappearingpresumptions in Ontario, newevidence rulings in Alberta,and split-receipting in B.C. . . . . . . 8
BRANCHING OUTUpcoming events acrossthe country . . . . . . . . . . . . . . . . . . . 11
CHAIR’S MESSAGENew format forNational Conference . . . . . . . . . . 12
EDITORIALElimination of capitalgains tax for quicklyre-invested assets? . . . . . . . . . . . . 12
The new RRSP protec-
tion is part of a legislative
package, with amendments
to the federal Bankruptcy
and Insolvency Act, the
Companies’ Creditors Ar-
rangement Act, and a new
statute to provide protection
for wage earners.
Before the former Lib-
eral government fell, it
promised the Senate banking committee
that it will be permitted to conduct consul-
tations with concerned stakeholders, which
were set to testify at committee hearings in
November. They’ll be looking for that op-
portunity when parliament resumes.
“We’re pleased that the bill was passed,”
says Jamie Golombek, Toronto-based chair
of the Investment Funds Institute of Canada
tax committee and VP of taxation and es-
tate planning for AIM Funds Management
Inc. “Unfortunately, we didn’t get the chance
to speak to our concerns, which still exist.”
Representatives from the Canadian Life
and Health Association didn’t get to appear
before the committee either, says Frank
Zinatelli, CLHIA’s VP and associate general
counsel. CLHIA is counting on having “the
opportunity to review the legislation as
soon as parliament comes back,” he says.
The amendments will provide unprec-
edented protection to non-insurance-based
RRSPs. However, they don’t provide the
complete protection against creditors pres-
ently enjoyed by insurance-based RRSP
holders.
The legislation, as drafted, only provides
creditor protection if an RRSP planholder
is bankrupt, says Golombek. It won’t stop
creditors from obtaining a court order
against a debtor who has not declared
bankruptcy.
IFIC would like to see a “level playing-field”
for both insurance-based and non-insurance-
based planholders, he adds. It wants the
legislation to provide creditor protection for
by Stewart Lewis
Editor, STEP INSIDE
New federal bankruptcy legislation that
will shield RRSPs from creditors, if the
planholder goes bankrupt, was passed be-
fore parliament was felled in late Novem-
ber. However, investment and insurance
industry groups are keen to attend further
Senate hearings to put for ward much
needed amendments to the legislation —
before it comes into force in mid-2006.
Amendments sought to new legislationprotecting RRSPs from creditors
Amendments sought, page 5
non-insurance RRSPs that is
equal to insurance-based
RRSPs.
CLHIA plans to take a dif-
ferent tack. The legislation,
if passed as it is written, will
scale back the protection
that insurance-based RRSP
planholders now have under
provincial insurance legisla-
tion, says Zinatelli.
Someone who declares bankruptcy, and
has an insurance-based RRSP, says
Zinatelli, will have to comply with the new
federal legislation. (Under the Constitution,
bankruptcy is a federal matter; insurance
is a provincial matter.)
Zinatelli says CLHIA supports IFIC’s wish.
Ottawa should “go ahead and expand credi-
tor protection for other institutions’ RRSPs
— but not reduce what is already in place.”
The protection under the new federal
bankruptcy legislation imposes three key
conditions that are not imposed by provin-
cial insurance protection.
First, a potential bankrupt will voluntar-
ily have to lock in his or her RRSP. The regu-
lations will set out how this will be achieved.
Bankrupts shouldn’t get access to their
RRSP funds, says Bob Klotz, a Toronto law-
yer who specializes in bankruptcy law. The
lock-in provision accords with the endur-
ing public policy that supports tax deferral
for RRSPs, he says. (Klotz has been a key
player in the development of the amend-
ments in this legislation that involve RRSP
protection. He played a significant role in
drafting recommendations put forward in
2002 by the Personal Insolvency Task Force
— an advisory group established by the fed-
eral finance department to reform the per-
sonal insolvency provisions of the federal
Bankruptcy and Insolvency Act.)
Second, there is a “clawback” on the
amount of plan contributions that would be
protected from creditors. RRSP contribu-
2 STEP INSIDE • VOLUME 5 • NUMBER 2 • WINTER 2006
EDITORStewart Lewis
EDITORIAL BOARDMargaret R. O’Sullivan, Chair
Kathleen Cunningham • Heather EvansJamie Golombek • Michael McIntoshKate Harris Neonakis • Barbara Novek
STEP INSIDE is published four times a year bythe Society of Trust and Estate Practitioners(Canada), an organization of individuals fromthe legal, accounting, corporate trust and re-lated professions who are involved, at a spe-cialist level, with the planning, creation,management of and accounting for trusts andestates, executorship administration and re-lated taxes. STEP Canada has Branches in Van-couver, Calgary, Edmonton, Winnipeg, Toronto,Ottawa, Montreal and Halifax.
Articles appearing in STEP INSIDE do not nec-essarily represent the policies of STEP Canadaand readers should seek the advice of a suit-ably qualified professional before taking anyaction in reliance upon the information con-tained in this publication.
All enquiries, comments and correspondencemay be directed to:
STEP Canada2225 Sheppard Avenue East
Suite 1001, Atria IIIToronto, Ontario M2J 5C2
TEL 416-773-1680 • FAX 416-498-9501E-MAIL [email protected]
Copyright © 2006 Society of Trust andEstate Practitioners (Canada)
ISSN: 14960737
S T E P I N S I D E
THE STEP STUDY
When your client is a minorliving, in equal shares to their two children
(at the time the will was made), Emily and
Robert. Any child who has attained the age
of majority is to receive his or her share
directly. Trusts are provided for any of the
children who are under the age of majority
at the times of the parents’ death.
They had each named the other spouse
as executor, with Janet’s father Bill as alter-
nate. Janet’s younger sister Jill was named
guardian of the children. Jill resides in
Huntsville, where she manages a confer-
ence facility near the location of Janet and
Philip’s cottage in Muskoka.
Janet and Philip were in a comfortable
financial position. Much of their wealth re-
sulted from the sale of their technology
business several years earlier. In addition
to the home in Vancouver and the cottage
in Muskoka, they were the shareholders of
an investment-holding corporation with a
large portfolio of marketable securities.
Each of them held 50% of the common
shares. No other shares were issued and
outstanding. Philip owned a $10 million
policy of life insurance on his life. The ben-
eficiary designation was made in favour of
Janet, with the children indicated as con-
tingent beneficiaries. Similar designations
were made in respect of the RRSPs owned
by Philip and Janet. They also had an ex-
tensive collection of artwork and antiques.
The Vancouver home was held by Janet
and Philip as joint tenants with right of sur-
vivorship. However, in order to avoid
extraprovincial probate issues in the event
of the death of Janet and Philip, the
Muskoka cottage was held as joint tenants
with right of survivorship among Janet,
Philip and their three children.
Catherine RomankoDeputy Public Guardianand Trustee ofBritish Columbia
LEGAL ISSUESby Catherine Romanko
Philip and Janet Smith are survived by three
minor children — 19 is the age of majority in
B.C. — who have an interest in their estates,
and in assets that will pass outside of the
estates, only some of which are to be held
by a trustee during the children’s minority.
The minor children have potential claims for
damages as a result of the accident. The ju-
risdiction of the Public Guardian and Trustee
of British Columbia with respect to its man-
date to protect the property interests of mi-
nor children is therefore invoked.
Notice of application forgrants of letters probateJanet, being younger than Philip, is pre-
sumed to have survived him under B.C. law.
Assuming that Philip’s will does not con-
tain a 30-day survival clause, the residue of
Philip’s estate will pass to Janet’s estate
under the terms of Philip’s will. Bill will have
to bring an application for a grant of letters
probate of each estate. Notice of the appli-
cation must be served on the PGT where a
minor may be a beneficiary under a will,
entitled on intestacy, entitled under the Wills
Variation Act, or a common law or sepa-
rated spouse of the deceased.
Wills Variation Act claimsIn reviewing the application for a grant of
probate of Philip’s will, the PGT would take
no issue with the fact that under the will, the
net estate passes to Janet’s estate with the
minor children receiving no interest, in reli-
ance on the decision in BC (Public Trustee)
v. Cameron Estate (1991), 58 BCLR (2d) 71
(BCSC). In reviewing the application for
grant of probate of Janet’s will, however, the
PGT would note that the residue of the es-
tate passes to two of Janet’s minor children,
excluding a third child who would have a
claim under the Wills Variation Act against
Janet’s estate. The PGT would ensure that a
writ of summons was filed to preserve the
excluded child’s right of action. Because the
excluded child is a minor, she would have
to advance her claim by a litigation guard-
ian, acting by counsel. Bill, as executor, is
Janet, 43, and Philip Smith, 45, were the
parents of three children — Emily, 18, Rob-
ert,15, and Laura, 13. Janet and Philip were
tragically killed in an automobile accident
as they were returning from a visit to the
Royal B.C. Museum in Victoria to their
home in Vancouver. The driver of the other
vehicle has admitted culpability and has
been charged with reckless driving. It was
not possible to determine the order of death
from the police investigation.
Janet and Philip had each prepared a
valid will, and the provisions of each will
generally mirror the other. The wills pro-
vide for a simple distribution of assets. The
residue is to be distributed outright to the
surviving spouse or, if he or she is not then
STEP INSIDE • VOLUME 5 • NUMBER 2 • WINTER 2006 3
The STEP study, page 4
obliged to represent the estate with respect
to the claim and accordingly could not act
as litigation guardian. Janet’s sister, as testa-
mentary guardian, would be an appropriate
person to act but because she is not resi-
dent in British Columbia, she cannot act as
of right and must be appointed by the Court.
If no other litigation guardian is suitable and
willing to act, the PGT may agree to act.
The Wills Variation Act provides that
notice of an action advanced on behalf of
an excluded minor child of a deceased
must be served on the PGT. If the claim ul-
timately settles, the PGT will review and
provide comments to the Court with respect
to the merits of any proposed settlement of
the claim. Ultimately, the Court must ap-
prove any proposal to settle the claim in
order to make it binding on the minor.
Proceeds of life insuranceAlthough Janet is presumed to have sur-
vived Philip, this statutory presumption is
expressly stated to be subject to the Insur-
ance Act, which provides a contrary direc-
tion. That section states that unless a
contract or declaration otherwise provides,
where a life insured and beneficiary die in
circumstances in which it is uncertain
which died first, the insurance money is
payable as if the beneficiary predeceased
the life insured. Janet is thus presumed to
have predeceased Philip, and the proceeds
are payable to the three minor children.
When Philip completed the beneficiary
designations, he failed to name a trustee to
hold and administer any funds to which a
minor has become entitled. However, the
Insurance Act provides that a beneficiary
who has attained the age of 18 years has
the legal capacity to receive insurance
money payable to him or her and to pro-
vide a discharge for it. Accordingly, Emily,
being 18 years of age, is entitled to receive
her share of the insurance money outright.
Meanwhile, since the other two children
have not yet reached the age of 18 years,
their shares of the insurance money are
payable to the PGT in trust.
Proceeds of the RRSPsEntitlement to the proceeds of each RRSP is
determined by the Survivorship and Presump-
tion of Death Act. It provides that where an
instrument contains a provision disposing
of property that is operative if a person dies
before another person, and that person and
the other person die in circumstances where
the survivor cannot be determined, the event
provided for in the instrument is deemed to
have occurred. With respect to both RRSPs,
the spouse will be deemed to have prede-
ceased with the result that the children take
as contingent beneficiaries.
Philip and Janet both failed to name a
trustee to administer their children’s shares
of the RRSP proceeds. The administrator
of the RRSPs accordingly will face a chal-
lenge in attempting to distribute the funds
to the three children who are minors and
under British Columbia law lack the legal
capacity to provide a discharge for pay-
ment. There is no statutory provision direct-
ing the payment of RRSP proceeds in such
circumstances. The administrator can ap-
ply for the appointment of a trustee, either
a private trustee or the PGT.
Distribution of the residueof Janet’s estateThe residue of Janet’s estate will be distrib-
uted to the two children named in the will
and presumably to the one child for whom
a Wills Variation Act claim is advanced. The
Court should be requested to create a trust
and have a trustee named for the excluded
minor child’s share. If a will fails to create
a trust for a minor’s share in an estate con-
sisting of money, on distribution of the es-
tate, the executor must pay the minor’s
share to the PGT for the minor.
Family CompensationAct claimsPhilip and Janet died in an accident caused
by the negligence of the other driver. Un-
der the provisions of the Family Compen-
sation Act, the three children have a claim
for damages for losses arising from the
deaths of their parents.
The action is to be brought by and in
the name of the personal representative of
the deceased and, failing that, in the names
of the individuals entitled to claim with all
claims being advanced in a single action.
It would be prudent for the plaintiffs in
this action to sue all potential defendants,
which would include Philip and Janet as
owners and operators of a vehicle involved
in the accident. Accordingly, Bill, as execu-
tor of both Philip’s and Janet’s estates, can-
not bring the action as to do so would place
him in a conflict of interest. A more appro-
priate approach in this case would be for
the action to be commenced in the names
of the three children by a litigation guard-
ian. Jill as testamentary guardian could act
as this capacity if appointed under the Rules
of Court. Any settlement of the Family Com-
pensation Act claim must be approved by
the PGT.
Heather EvansPartner,Deloitte & Touche LLP;Member, STEP Toronto
TAX ISSUESby Heather Evans
The joint death of Janet and Philip means
that there is, generally, no opportunity to de-
fer the deemed realization and taxation on
death of capital gains and the inclusion in in-
come of balances in deferred income plans.
Philip’s terminal return is therefore rea-
sonably straightforward and will report the
deemed disposition of the various assets
comprising his estate on a tax-deferred ba-
sis. However, Janet’s terminal return for the
taxation year ending on her death will likely
include a large tax liability, particularly as
regards the shares of the holding corpora-
tion. It will therefore be important for the
estate trustee to determine the tax attributes
of the various assets comprising her estate
and consider if sufficient liquidity exists to
fund the tax liabilities.
It is notable in this regard that the inter-
ests in certain assets pass outside the es-
tates directly to the surviving joint owners
or designated beneficiaries. However, there
may be tax liabilities associated with some
of these assets that must be paid on behalf
of the deceased. For example, the princi-
pal residence exemption should shelter the
gain on one of the two residences, but any
accrued gain on the interests in the other
residence will be taxable.
With respect to the RRSPs, the fair mar-
ket value of the property in the plans is
brought into income in the year of death.
However, this deemed income inclusion is
reduced by any “refund of premiums.” A
“refund of premiums” includes amounts
paid out of an RRSP to an individual who
was a child or grandchild of the deceased
annuitant and who was, immediately before
the deceased annuitant’s death, financially
dependent on the deceased for support. In
this case, the amounts are included in the
recipient’s income, subject to an offsetting
deduction where an eligible annuity is pur-
chased on behalf of the child. Such an an-
nuity is only available where the child is 18
years old or under, or dependent by means
of infirmity. Since Emily is 18 she will be
taxed on her portion of the RRSP proceeds.
4 STEP INSIDE • VOLUME 5 • NUMBER 2 • WINTER 2006
With their simple wills, Janet and Philip
missed certain tax planning opportunities.
For example, a testamentary trust could
have been established for each surviving
child, thus creating access to multiple sets
of graduated tax rates. This strategy would
also be more prudent from an asset man-
agement and protection perspective than
an outright distribution to their children on
attaining the age of majority. Planning to
reduce probate fees could also have been
considered. Finally, the absence of a survi-
vorship clause in the wills necessitates a
double grant of probate to transfer the as-
sets first to Janet and then to the children.
The interests in the holding corporation
likely represent the most challenging asset
in relation to post-mortem tax planning.
Although there are several strategies de-
signed to mitigate the adverse tax conse-
quences associated with the deemed
disposition on death, in this situation, there
would appear to be two main options. The
first alternative would involve winding-up
the corporation within one year of death.
The effect is a deemed dividend, taxable
in the estate, and subject to a careful re-
view of the relevant stop-loss rules, a capi-
tal loss that may be applied against the gain
reported in the terminal return. The sec-
ond alternative would involve a corporate
reorganization designed to “bump” the cost
base of the underlying marketable securi-
ties and avoid further tax on their subse-
quent disposition. This is generally
accomplished through a transfer of the
holding corporation shares to a new cor-
poration, followed by a combination of the
two corporate entities.
A careful review and analysis of the im-
pact of these alternatives would be required
prior to determining the most appropriate
course of action. For example, the first al-
ternative initially appears unattractive be-
cause it effectively converts a capital gain
to a deemed dividend, a form of income
that is presently taxed at a higher rate. How-
ever, if the corporation has significant bal-
ances in its capital dividend account and
refundable dividend tax-on-hand account,
the overall tax situation changes dramati-
cally. The proposed changes to the divi-
dend tax credit announced late in 2005
would also have to be considered, although
this exercise may prove challenging in the
absence of draft legislation.
In light of the young ages of the children,
and subject to applicable legal restrictions,
it may be appropriate to use trusts to hold
the inherited assets. This step is unlikely to
offer significant tax benefits. However, the
appointment of one or more trustees to as-
sist with the control and management of the
settled property and the associated income
would serve a protective function.
Michael McIntoshInvestment Advisor,Philips, Hager & North;Member, STEP Calgary
INVESTMENT ANDFINANCIAL ISSUESby Michael McIntosh
The matter of analyzing investment issues
in this case is somewhat dwarfed by the
overall financial issues that face the three
children and their guardian and trustee.
Specifically, at an already traumatic time in
the lives of the three adolescents, they have
become immersed in an overwhelming set
of decisions relating to the management of
their finances.
Given the monetary amounts stated and
implied in this case, the children should be
able to enjoy an upper-middle-class stand-
ard of living without fear of erosion of capi-
tal. Regardless of whether the amounts
become available immediately (as with
Emily, who has attained the requisite age
under law related to insurance proceeds)
or in a few years (Robert/Laura — once they
attain the age of majority), the children will
quickly learn that they do not have any of
the normal financial limitations typically as-
sociated with starting out as a young adult.
Even if the amounts for each child were
invested solely in a conservative portfolio
consisting of cash and corporate and gov-
ernment bonds, each beneficiary could
expect to enjoy significant income. The big-
gest issue facing the beneficiaries is the ef-
fect that this expected income stream will
have on their motivation in life and on their
future career and family choices. This is-
sue cannot be overstated. It is one of the
primary reasons why many estate lawyers
and financial planners encourage clients to
stagger the estate distribution, so that
amounts are released over several years,
with relatively small amounts at younger
ages, and larger amounts in later years. An-
other option could be distribution at de-
fined milestones, such as at the attainment
of a post-secondary degree, the purchase
of a first home, or other defined criteria.
With regard to investing the funds, Emily
will be permitted to open an investment ac-
count in her own name if she resides in
Ontario, since she has passed the age of
majority for that province. Most banks and
investment counsel firms and or financial
planners will be pleased to help her open
an account and invest the funds. However,
if she remains in Vancouver, her guardian
will need to be included in the account open-
ing process since Emily is a minor under B.C.
law. While any of the beneficiaries is a mi-
nor, the guardian or PGT will be the only
one from whom the bank or investment
counsel firm will accept investment instruc-
tions. An indemnification is normally re-
quired to protect that company from any
possible future claims by the beneficiary as
relates to operation of the account.
There is no hiding from the issue that
the beneficiaries can access 100% of the
capital once they reach the age of majority.
This may or may not be obvious to the ben-
eficiaries, and many guardians or trustees
attempt to protect the children by withhold-
ing this information. However, it will be-
come obvious soon enough since the
normal protocol of most investment man-
agement firms is to contact minors as their
birthday approaches, in the year of attain-
ing age of majority, to collect a revised ac-
count application. This contact typically
conveys that the account will be entirely op-
erable by the beneficiary once such docu-
ments are returned. The investment firm
cannot shelter the beneficiary from knowl-
edge of the account’s existence.
The use of an “investment policy” is a
best practice with dealing with any inves-
tor, and this case-study underscores that
fact. Having an investment policy will allow
the trustee/guardian to demonstrate proper
due diligence in the ultimate selection of
investments, and will allow a proper frame
of reference to be devised to aid in the
evaluation of the investment manager’s per-
formance over time. It should set out invest-
ment objectives and risk tolerance for the
account — with clear statements as to pos-
sible declines in value based on historical
movements of accounts with similar asset
mix — as well as any constraints, such as
liquidity needs, tax or legal constraints etc.
Lastly, an expected rate of return for the
The STEP study continued from page 3
STEP INSIDE • VOLUME 5 • NUMBER 2 • WINTER 2006 5
account as a whole, and the estimated annual fee for man-
aging the account should be set out in this document.
Excess risk or fees could be a matter that will be chal-
lenged by the beneficiary in later years, and would ulti-
mately rest with the trustee or guardian, so prudence
should normally govern. (However, beneficiaries have also
been known to charge trustees that excess prudence
caused their account to under-perform and this risk should
also be addressed.)
The beneficiaries in this case may need to consider
segregation of their inheritances within the investment cor-
poration, since the investment objectives of one may not
align with those of the others. Ideally the liquidation of
the corporation would allow the individuals to each man-
age and control their own inheritance privately.
Kathleen CunninghamSenior Manager,Professional Practice Group,Trust Services, Royal Trust;Chair, STEP Vancouver
NOTES ON JURISDICTIONAL ISSUESby Kathleen Cunningham
An awareness of provincial differences provides an op-
portunity to provide invaluable advice to clients whose
situations encompass multiple jurisdictions. Janet and
Philip’s estate illustrates this point in respect of several
legal issues.
Survivorship law: In Canada, when two spouses die
in a common disaster, one of two outcomes is possible.
In the provinces of British Columbia, Alberta, P.E.I., Nova
Scotia, and Newfoundland and Labrador, the younger is
deemed to have survived the elder. In the remaining prov-
inces, each individual is presumed to have predeceased
the other.
Joint tenancy: All provinces except Quebec recog-
nize the legal concept of joint tenancy with right of survi-
vorship for jointly owned assets in the jurisdiction. In
jurisdictions where each joint owner is deemed to sur-
vive the other, the law also provides that joint tenancies
are severed and the estate will acquire the interest in the
asset. In Quebec, ownership of jointly owned property
generally follows the contribution of each party.
Age of majority: In B.C. (as well as Nova Scotia, New
Brunswick, and Newfoundland and Labrador) the age of
majority is 19. However, in the rest of Canada, the age of
majority is 18.
Dependant relief: In Quebec, a minor is considered
a “creditor of support” and there are limits on the amount
to which he or she will be entitled. In B.C., children who
are independent adults are still entitled to make a claim.
RRSP designation: Generally, all provinces permit
RRSP/RRIF designations in a will or plan documenta-
tion. However, in 2004 the Supreme Court of Canada
found that designations on Quebec plans must be made
in a will. ■
tions made within the 12-month period
prior to bankruptcy — or longer, if a court
orders it — will not be protected. Finally,
the amount of RRSP monies that would
be exempt from creditor attack will be
capped. The cap formula is to be set out
in the regulations.
Neither IFIC nor CLHIA want claw-
back or cap provisions in the legislation.
Both suggest that “fraudulent convey-
ance” provisions in the federal Bank-
ruptcy and Insolvency Act should provide sufficient deterrence for
pending-bankrupts from squirreling funds into their RRSPs before they de-
clare bankruptcy. (The provinces also have separate fraudulent conveyance
statutes.)
One of the common ways this fraudulent conveyance legislation is used
is to undo transfers of property from one spouse to the other spouse, which
are made just prior to the spouse declaring bankruptcy — in an attempt to
keep creditors from making claims against the property.
The suggestion that fraudulent conveyance law would provide sufficient
anti-abuse protection against improper asset transfers into RRSPs “is com-
pletely wrong,” says Klotz.
There are two problems with that approach, he says. To prove fraudulent
conveyance, evidence of an interaction between two parties is required.
However, a transfer to an RRSP only involves one party — the potential bank-
rupt, says Klotz. Therefore, it would be practically impossible to prove fraudu-
lent intent.
Second, litigation is expensive. The cap and clawback provisions will
ensure that taxpayer dollars won’t have to be spent to prove fraudulent con-
veyance, say Klotz. They are “effective anti-abuse measures” that are needed
to make this legislation work, he adds.
The Senate banking committee will have to referee these differing views
on how the new legislation should be amended.
On Nov. 24, 2005, when the legislation was going through third reading
in the Senate, the chairman of the banking committee, Senator Jerahmiel
Grafstein, said, “[T]he committee was confronted with a Solomonic choice
.␣ . . [W]e were told by government officials that the bill was flawed. We were
further told that government officials had prepared amendments, not only
to the legislation itself, but also to the regulations that were to be imple-
mented in the future as they were not satisfied with the bill.”
Graftstein got a letter sent to him by former Liberal Industry Minister,
David Emerson, which stated: “[T]he scrutiny of the detailed provisions of
the bill has raised a number of implementation issues that deserve further
consideration. In this regard, the Government commits not to proceed with
the coming into force of Bill C-55 before June 30, 2006. As soon as possible
in 2006, the government, through the Leader of the Government in the Sen-
ate will refer the matter to the committee for further study.”
Klotz likens Emerson’s comments to an election promise. When the gov-
ernment changes, “all bets are off.” However, he adds, “I presume the hear-
ings will go ahead.” ■
Amendments sought continued from page 1
STEP Canada is beginning its newpromotional campaign. Watch for our first
ad in the March issue of CAmagazine.
6 STEP INSIDE • VOLUME 5 • NUMBER 2 • WINTER 2006
The new dividend rulesby Jamie GolombekVice President, Taxation & Estate Planning, AIM
Trimark Investments; Member, STEP Toronto
Welcome to the new investing landscape.
Under the changes announced last Novem-
ber by the Department of Finance (which
the Conservatives promised they would
adopt) to deal with the income trust di-
lemma, Canadian dividends are poised to
assume the lead in the race for tax-efficient
investment income this year.
Dividends from Canadian companies
have always been tax-attractive due to the
dividend tax credit associated with them.
Note that these “old rules” and rates will
continue to remain in effect for dividends
received from Canadian private companies
that pay tax on their active (i.e., not invest-
ment) income that’s taxed at the preferen-
tial small business tax rate.
That’s because the old rules work very
nicely in most provinces to provide indi-
vidual investors with a dividend tax credit,
when combined with the gross-up described
above. They attempt to compensate the in-
dividual private-company investor for the
corporate tax already paid by the corpora-
tion. It eliminates the “double-tax problem”
and results in nearly perfect integration.
The principle of integration means that
an individual should be able to realize the
same amount of cash after-tax by earning
income personally or through a corporation.
The old “gross-up” and dividend tax
credit system is based on a theoretical in-
tegration model that taxes corporate in-
come at 20%. The old system, while not
perfect, works pretty well in most prov-
inces when it comes to private corpora-
tions that can take advantage of the
small business tax rate, which approxi-
mates 20% on the first $300,000 of “ac-
tive income” (as opposed to passive or
investment income).
If you are in the top bracket and earn
$100 of income personally and pay tax
at the top average tax rate in Canada of
46%, you would have $54 cash left to
spend.
If the same $100 was earned by a
small business corporation eligible for
the preferential corporate tax rate of 20%,
the corporation would have $80 left after
tax to pay to its shareholder as a dividend.
Under the old rules, the $80 of divi-
dends received would be “grossed-up”
by 25% to $100 — the same amount of in-
come the corporation earned pre-tax. The
purpose of the gross-up, therefore, is to put
the shareholder in the same position she
would have been in had she earned the
$100 personally.
To compensate the shareholder for the
corporate tax already paid on the $100 by
the corporation, the shareholder may claim
a federal dividend tax credit of 13.33% of
the grossed-up dividend and a provincial
dividend tax credit, which on average is
worth about half the federal credit or about
6.67%. (Each province’s rate is different.)
The effect of the gross-up and tax credit
is that the shareholder initially pays $46 of
tax on the $100 of grossed-up dividends re-
ceived. She then gets a 20% or $20 combined
federal and provincial dividend tax credit,
which puts her net tax at $26 on an $80 divi-
dend received, netting her after-tax cash of
$54 — the same after-tax proceeds if the $100
was earned directly. The resulting effective
marginal tax rate on dividends is therefore
32.5%. (See column 1 of attached chart.)
This theoretical model fails when it
comes to dividends paid by public compa-
nies, which face a much higher corporate
tax rate than 20%, currently averaging 36.5%.
You can see (column 2) that the same $100
earned by a public company in Canada
only nets the investor about $43 versus the
$54 in the theoretical model.
Income trusts have long ago figured out
a way to escape this double-tax problem
experienced by Canadians on public com-
pany dividends — convert to a trust and
eliminate corporate tax altogether.
To address this issue, last November,
Finance announced changes to the divi-
dend tax rules. Under the new proposed
rules, to be effective in 2006, the gross-up
would be enhanced to 45% (from 25%) and
the federal dividend tax credit would then
be increased to 19%. These rates are based
on a combined average federal-provincial
corporate tax rate of 32% in 2010 — the year
in which the 2005 federal budget corporate
tax reductions will be fully implemented.
Ottawa assumes that the provinces will
also provide an enhanced dividend tax
credit equal to 13%, when combined with
the federal credit would total about 32% —
the corporate tax rate in 2010. This would
achieve full integration and result in the top
marginal tax rate for dividends dropping to
20.3% (column 3).
While this might sound great in theory,
there are two main flaws with the proposal.
The first flaw is the adverse affect the 45%
gross-up will have on income-tested benefits
such as old age security. The second prob-
lem is Ottawa’s assumption that the prov-
inces will adopt the 13% provincial dividend
tax credit needed for perfect integration.
Seniors will still be better off, paying less
tax on dividends under the new rules, even
taking into account a potential clawback of
OAS. Whether the provinces follow Ottawa’s
lead is the big unknown. We should know
more later this spring, once the provinces
have tabled their provincial budgets. ■
Corporate integration modelsCurrent Model New Model
Theoretical Public PublicModel Corporations Corporations
1 2 3
Income earned by corporation A 100.00 100.00 100.00Corporate tax B (20.00) (36.50) (32.00)Amount distributed as dividend C 80.00 63.50 68.00Gross-up 20.00 15.88 30.60Amount included in income 100.00 79.38 98.60Personal tax @ 46% D 46.00 36.51 45.36Dividend tax credit E (20.00) (15.88) (31.55)Net personal tax F 26.00 20.63 13.81Net cash for investor C − F 54.00 42.87 54.19Total tax paid B + F 46.00 57.13 45.81Marginal tax rate F/C 32.5% 32.5% 20.3%
Source: AIM Trimark Investments
STEP INSIDE • VOLUME 5 • NUMBER 2 • WINTER 2006 7
Art-flip tax shelters face court scrutinyby Stewart Lewis
Editor, STEP INSIDE
More than 2,500 participants in “buy-
low, donate-high” art-flip tax shelters
may be reassessed for thousands of
dollars in unpaid taxes, if the Su-
preme Court of Canada doesn’t agree
with their view on determining the
fair market value of donated art.
In late November, the Federal
Court of Appeal rejected appeals in
a trio of cases, known as Canada
v. Nash. They began before the Tax
Court of Canada in 2004 — brought
by Cademon Nash, Barbara Quinn
and Susan Tolley on behalf of 1,850
taxpayers involved in an art-flip donation program run by Tor-
onto-based CVI Art Management Inc.
In May 2005, the FCA also rejected the appeal of Toronto
investment executive, Frank Klotz, who had claimed a tax credit
of $258,400 through another Toronto-based shelter known as
Art for Education.
The lawyers for both cases have applied for leave to ap-
peal to the Supreme Court of Canada.
The key issue in art-flip cases is how the FMV of the art is
arrived at, because that value determines the amount of the
tax credit that a taxpayer can claim for making a charitable
donation of the art.
Typically, art flips involve the tax shelter promoter buying
works of art in bulk at a very low price, for example, $50 each,
and selling them to tax shelter participants for about $300 each.
Then the art is appraised at approximately $1,000 each, and
donated in bulk to a public institution (often an American uni-
versity) that issues a tax receipt for the aggregate appraised value.
The determination of FMV is generally seen to be a “find-
ing of fact,” and appeal courts do not overturn trial courts’
findings of fact unless they have made “a palpable and over-
riding error.” The FCA says in its Nash decision that the TCC
judge made two such errors.
First, it accepted the appraiser’s aggregate valuations, based
on the value that each individual print would get in the retail
market, instead of looking at the market where the prints were
actually sold as a group to each taxpayer (the market created
by the promoter).
Second, the TCC judge agreed that the “fair market value”
of the prints was approximately three times the amount the
taxpayers paid for it “with no credible evidence for the appar-
ent three-fold increase.”
The FCA’s decision accords with the generally accepted state
of present tax law regarding buy-low, donate-high tax shelters.
In December 2003, the Finance Department unveiled Income
Tax Act amendments to shut down
all “buy low, donate high” tax shel-
ters, including art flips. The amend-
ments still haven’t been passed, but
due to the retroactive nature of tax
amendments, they are considered to
be law by the tax community.
Meanwhile, the CRA is going after
almost 10,000 art-flip shelter partici-
pants, whose investments pre-date the
legislative amendments. Taxpayers’ ar-
guments against the CRA attacks have
been two-fold: One, if the appraised
value of the art is fair, they should be
able to claim a tax credit for it. Two,
even if these art flips are now seen as
repugnant by Ottawa, they were permis-
sible under the law that pre-dated the
2003 amendments.
But, so far, the FCA hasn’t agreed. And it remains to be
seen what the SCC will do.
The first art-flip test case to arrive on the Federal Court of
Appeal’s docket was Klotz v. Canada. Klotz made a donation
of 250 prints to a U.S. university in 1999. He was one of 660
participants in a shelter known as “Art for Education.”
“It is one thing to serendipitously pick up for $10 a long lost
masterpiece at a garage sale and and give it to an art gallery
and receive a receipt for its true value,” wrote Judge Donald
Bowman in his March 2004 TCC decision. “It is another for
[the promoter] to buy thousands of prints for $50, create a
market at $300 and then hold out the prospect of a tax write-
off on the basis of a $1,000 valuation . . . [Ultimately, Klotz’s]
case foundered on the shoals of common sense.”
Bowman decided the best evidence of what the art is worth
is what the tax shelter participant paid for it (about $300 each
in Klotz’s case). The FCA agreed.
Bowman made an “error in law” by failing to look at the
market that would yield the highest value, says Klotz’s lawyer,
Doug Mathew, a Vancouver partner with Thorsteinssons LLP.
He applied the wrong FMV test.
Unlike Klotz, however, the Nash plaintiffs won in tax court.
TCC Judge Ronald Bell accepted the appraiser’s opinion re-
garding fair market value.
The appraiser testified that “one does not go to purchase
artwork from one’s financial planner” and used a “market com-
parison approach” — contacting dealers, galleries, publishers,
artists and websites to value each piece of art separately, be-
fore coming up with the aggregate value for each of the three
taxpayers in the Nash trio of cases.
The trial judge did not make any error and the appeal court
should not have substituted its view of the evidence for that of
the trial judge, says Nash, Quinn and Tolley’s lawyer, Cliff Rand,
a Toronto partner with Stikeman Eliott LLP. ■
8 STEP INSIDE • VOLUME 5 • NUMBER 2 • WINTER 2006
IN THE HEADLINES
“Reverse snowbirds” in Nova Scotia,disappearing presumptions inOntario, new evidence rulings inAlberta, and split-receipting in B.C.ESTATE PLANNING FOR“REVERSE SNOWBIRDS” IN N.S.by Catherine CraigAssociate, Baxter Harris Neonakis, Halifax;
Prospective STEP student
Nova Scotia’s population of “reverse snow-
birds” — U.S. residents who summer on
Canada’s east coast — present unique plan-
ning issues for estate practitioners. The typi-
cal client is a high net-worth non-resident who
wishes to avoid the probate process and pro-
bate taxes in Canada on their death, as well
as address custodial issues for Canadian-
situs land in the event of his or her incapacity.
Based on recommendations from their
U.S. advisors, many reverse snowbirds trans-
ferred title to land situs in Nova Scotia to U.S.
tax-planned revocable or grantor trusts. The
U.S. grantor trust will not result in tax conse-
quences under U.S. tax laws, but will result
in a taxable disposition in Canada (as con-
firmed in the Explanatory Notes provided
by the federal Department of Finance ac-
companying Bill C-22, S.C. 201, c. 17, c. 82).
In response, some practitioners in Nova
Scotia are implementing trusts drafted in
accordance with subsection 107.4(3) of the
federal Income Tax Act as a tax-efficient
estate planning strategy for the Canadian-
situs land owned by a non-resident. The
terms of these trusts are similar to the terms
of the “self-benefit” or “protective” trusts
under s. 73(1) of the Act but unlike s. 73(1),
there is no requirement that either the re-
cipient trust or the transferor be resident in
Canada, subject to certain limitations.
Subsection 107.4(3) of the Act provides
for a tax-deferred rollover where there is a
“qualifying disposition” of property to a
trust. “Qualifying disposition” is defined in
subsection 107.4(1) of the Act. Provided the
transferor was not resident in Canada at any
time during the previous 10 years and sub-
ject to other limitations, there is no require-
ment that either the recipient trust or the
transferor be resident in Canada. However,
the definition requires that the disposition
does not result in a change in the benefi-
cial ownership of the property.
The terms of a trust drafted pursuant to
s. 107.4(3) will not result in a change in
beneficial ownership of the property, if,
among other things:
1) The grantor is the sole beneficiary;
2) The grantor is entitled to as much of
the annual income and realized capi-
tal gains as the grantor requests;
3) The property of the trust will revert to
the grantor if the trust is terminated be-
fore the grantor’s death; and
4) The trust will terminate upon the death
of the grantor, if not terminated earlier,
and any property held by the trust will
devolve in accordance with the terms
of the grantor’s will (i.e., the property
reverts to the grantor’s estate).
The last criterion has practitioners ques-
tioning whether the assets held in a grantor
trust would be subject to probate in Nova
Scotia.
Section 87(2) of the Nova Scotia Pro-
bate Act imposes probate taxes “on all as-
sets of the deceased person that pass by a
will . . . or are transferred or will be trans-
ferred to a trust under a will . . . whether or
not the trust is described in the will as be-
ing separate from the estate. . . .”
In attempt to escape the scope of
s.␣ 87(2) of the Probate Act, clients may pro-
vide a general power of appointment
exercizable in his or her last will with re-
spect to the administration of the trust.
The Canada Revenue Agency has stated
that such a general power of appointment
will not alter an owner’s beneficial interest
in property (see Window on Canadian Tax
Commentary 2000-0048735), but there is
no certainty that the Registrar of Probate
will accept that the asset did not pass by
the will. It could, therefore, be subject to
probate fees.
Further, some advisors question whether
such property would be protected from the
creditors of a beneficiary. Likely not.
The terms of your province’s probate
legislation should be reviewed carefully
before implementing probate avoidance
strategies for clients, including non-resi-
dents who have real property in the prov-
ince. If there is uncertainty regarding
whether probate taxes on Nova Scotia-situs
land is effectively avoided, obtaining an
advanced ruling from the Registrar of Pro-
bate may be advisable.
FURTHER DECLINE OF LEGALPRESUMPTIONS IN ONTARIOby Heather EvansPartner, Deloitte & Touche LLP, Toronto;
Member of STEP Toronto
The judicial trend toward a restrictive use
of certain legal presumptions, particularly
the presumption of advancement and pre-
sumption of resulting trust, continues with
the recent decision of the Ontario Court of
Appeal in Saylor v. Brooks, released on
November 1, 2005. The case emphasizes
the importance of examining the surround-
ing evidence and basing a finding on the
relevant facts, rather than the blunt instru-
ment of a legal presumption.
The Saylor case dealt with a situation
commonly encountered by estate practi-
tioners. A father had transferred all of his
bank accounts into the names of himself
and his adult daughter, jointly, seven and a
STEP INSIDE • VOLUME 5 • NUMBER 2 • WINTER 2006 9
half years prior to his death. The daughter,
Ms. Brooks, was also named estate trustee.
Subsequent to father’s death, the sister and
brother of Ms. Brooks commenced legal
action by way of application seeking an
order for accounting of property, a division
of property in accordance with the will and
an injunction requiring payment of all es-
tate monies into court. The application was
subsequently converted into an action.
The trial judge analyzed the issue of the
appropriate legal presumption to apply in
the circumstance, and ultimately con-
cluded that the bank account and invest-
ments held jointly by Brooks and her late
father formed part of the estate. This con-
clusion was based on a resulting trust.
Brooks appealed.
The issue before the Court of Appeal
was whether the father intended to make a
gift to Ms. Brooks of the assets that were
transferred to joint ownership or if he in-
stead intended to remain the beneficial
owner. If it were a gift, Brooks would take
the property outside the will. If not, it would
form part of her father’s estate.
Justice Harry LaForme, speaking for the
majority, canvassed the law surrounding the
presumption of advancement and the law
of resulting trust and concluded that the trial
judge erred. What is of particular interest
in this conclusion is that LaForme indicated
that while the ongoing legal debates sur-
rounding these matters are interesting and
important, they were not necessary to re-
solve the issue. Instead, the intention of the
parties at the time of the transfer, as dem-
onstrated by the evidence, was sufficient
to resolve the issue.
In this regard, the bank documents es-
tablishing the joint accounts were relevant,
but only as part of the totality of all relevant
evidence. It is the whole of the evidence,
including bank accounts, which must be
evaluated to determine if there was a clear
intention to make a gift. Only if the inten-
tion remains unclear after this analysis
should courts have recourse to an analysis
of the application of the presumptions of
advancement or resulting trust.
In this situation there existed sufficient
evidence that the second part of the analy-
sis was not necessary. Brooks had access
to the funds for the purpose of administer-
ing her father’s finances, and not for her
own benefit. Her father reported all the in-
terest income for tax purposes. She never
deposited any of her own funds into these
accounts and she only drew cheques on
her father’s direction. They had also dis-
cussed removing her from the joint ac-
counts in the event that he remarried. As a
result, there was no basis to interfere with
the trial judge’s conclusions that there was
no intention to gift the contents of the joint
accounts to Brooks.
In addition to the judicial trend evi-
denced by the decision, the Saylor case is
also instructive to estate planners on the
importance of carefully documenting the
intentions of a transferor, where property
is conveyed to joint ownership.
NEW EVIDENTIARYCASE LAW FOR ALBERTAESTATE LITIGATIONby Nancy GoldingPartner, Borden Ladner Gervais LLP;
Chair, STEP Calgary
There have been two recent cases in Al-
berta that have considered the obtaining of
evidence for and the admission of evidence
in court on estate litigation files, which are
worthy of review.
Interviewing medicalpractitionersIn Petrowski v. Petrowski (Estate of), 2005
ABQB 909, December 1, 2005, the Court of
Queen’s Bench reviewed the issue of waiver
of doctor–patient confidentiality and who
has the right to waive the same after death.
Nick Petrowski died February 21, 2001
and was survived by his two children, Pe-
ter Petrowski and Joan Petrowski. Peter
claimed that at the time of execution of the
last will, dated August 10, 2000, Nick did not
have mental capacity and that Joan unduly
influenced him. Peter similarly argued that
at the time his father Nick transferred the
ten quarter sections of land which made
up the family farm to Joan on November
18, 2000, he was also not mentally compe-
tent and was unduly influenced by Joan.
Nick named Joan as his sole executrix and
beneficiary in the will.
In the course of the litigation, Peter
wished to interview Nick’s treating physi-
cians. Joan was not prepared to allow Pe-
ter unlimited access to the doctors and their
files. Joan, as the executrix, believed that
only she had the right to waive the doctor–
patient confidentiality privilege and that she
could do this on conditions she chose.
The court, taking guidance from Wig-
more on Evidence, found that the duty of
confidentiality owed to a person survives
that person’s death:
“The object of the privilege is to secure
subjectively the patient’s freedom from ap-
prehension of disclosure. It is therefore to
be preserved even after the death of the
patient,” quoted the Court.
The Court also found that although the
privilege survives death, the duty of confi-
dentiality is not subject to the exclusive
authority of the personal representative
named in the will. It is also subject to be
waived by the heirs of the deceased, which
includes those people who would take on
an intestacy. Either the personal represen-
tative or the heirs may waive the privilege.
This is a useful finding, as other poten-
tial heirs are often believed to be excluded
from obtaining evidence if they are not
named in the will in question as a benefi-
ciary. This case clarifies that anyone who
is a beneficiary, even on intestacy, has this
access.
The Court determined that as Joan had
a very significant personal stake in this liti-
gation, it would be manifestly unfair for her
to have unfettered access to medical infor-
mation, and deny Peter the same access.
The Court also found that Peter as an heir
on intestacy was entitled to the information
and that his access was not subject to any
conditions imposed by Joan.
This decision is useful in clarifying who
has the right to waive privilege. In most cases
counsel for the personal representative is of
the view that they are the only people who
have access to the medical records and to
medical practitioners after death.
Admission of evidenceThe Court of Queen’s Bench looked at the
issue of the corroboration required for evi-
dence provided on an estate litigation file
in Re Fricker (Estate of), 2005 ABQB 972,
December 20, 2006.
This is also one of the first cases in Al-
berta reviewing the status of a claimant as
an “adult interdependent partner” under the
Adult Interdependent Relationships Act.
(This legislation allows a person in an “adult
interdependent relationship” with another
person — not necessarily living together, of
the same sex, or even in a conjugal relation-
ship with that person — to claim against that
person’s estate upon their demise.)
The family of Scott Fricker stated in their
application for Letters of Administration that
Fricker was not married at the time of his
death nor did he have an adult interdepen-
dent partner. However, there was a claim
from a young woman, Cynthia Chatten, that
she was Fricker’s adult interdependent part-
In the headlines, page 10
10 STEP INSIDE • VOLUME 5 • NUMBER 2 • WINTER 2006
ner and as such was entitled to the share
of a spouse pursuant to the Intestate Suc-
cession Act. The Court was asked to decide
if Chatten was the adult interdependent
partner of Fricker.
Numerous affidavits were filed from vari-
ous parties and the Court was asked to de-
cide the case on affidavit evidence including
transcripts of examinations on the affidavits.
In accordance with s. 11 of the Adult In-
terdependent Relationships Act the onus
was on Chatten to prove her case. Also, as
this was a claim against an estate, in accor-
dance with the Alberta Evidence Act her
evidence had to be corroborated. The Al-
berta Evidence Act reads as follows:
“In an action by or against the
heirs, next of kin, executors, admin-
istrators or assigns of a deceased
person, an opposed or interested
part shall not obtain a verdict, judg-
ment or decision of that party’s
own evidence in respect of any
matter occurring before the death
of the Deceased person unless the
evidence is corroborated by other
material evidence.”
The Court determined that they needed
to decide if Chatten had an adult interdepen-
dent relationship with Fricker for a period of
at least three consecutive years. Chatten was
claiming that although they lived apart for a
period of time as they were living in differ-
ent cities, they still had the same relation-
ship and were committed to each other.
Chatten offerred as proof her telephone
records and records showing visits to the
deceased during the eight months they lived
apart. Chatten gave evidence that she and
Fricker had a conjugal relationship and that
it continued even while they were not living
together. There was no independent evi-
dence that they were exclusive to each other
when they did not live together.
There was evidence that Chatten and
Fricker did live together for a period of time
and socialized together. There also was
evidence of the telephone calls between
each other, but no evidence as to the con-
tents of the calls. There was some evidence
that from time to time they operated as an
economic and domestic unit but this evi-
dence showed this only occurred from time
to time and the bank records of Chatten
showed that she paid her own expenses
while she was not living with Fricker.
Fricker’s relatives had evidence Fricker
did not name Chatten as a beneficiary on
his insurance and RRSPs, and had sepa-
rate bank accounts for Fricker that did not
include Chatten. They also had credit card
bills that showed expenses being paid by
Chatten alone. Fricker’s friends and rela-
tives also swore affidavits as to the nature
of the relationship and as to the indepen-
dence of both Chatten and Fricker.
Chatten swore that at the time of
Fricker’s death they had a plan to marry,
but there was no corroboration of this.
There was evidence from Fricker’s mother
as to disputes between Fricker and Chatten
and that her son told her he had no inten-
tion of marrying Chatten.
The Court found that Chatten was not
an adult interdependent partner for the
appropriate period of time. This decision
was based mainly on the lack of corrobo-
rated evidence provided by Chatten. She
did not have any corroboration for a num-
ber of the assertions she made. The Court
reviewed legislation in other provinces to
confirm that corroboration was required as
to Chatten’s evidence in accordance with
s.11 of The Evidence Act.
The Court was asked to determine if
corroboration was required for the evi-
dence of the personal representative. The
Court upon a review of the case law deter-
mined that the personal representative
could not inherit and therefore he was not
an opposite or interested party. No corrobo-
ration was required for his evidence. Al-
though he was a “party” he was not “an
opposite or interested party.”
This case provides some guidance as
to the evidence required when making a
claim against an estate and also as to whom
someone may want to choose as their per-
sonal representative if they believe there will
be litigation after they die. It may be appro-
priate to choose a personal representative
who is not “an opposite or interested party”
to put forward evidence as there appears
to be no requirement for corroboration of
that person’s evidence.
NO FREE LUNCH?:B.C. COURTS DODGE RULINGON SPLIT-RECEIPTING RULESby Genevieve TaylorAssociate, Legacy Tax and Trust Lawyers,
Vancouver; Member, STEP Vancouver
To shamelessly borrow from the Bard,
there has been “much ado about almost
nothing” in our B.C. Courts of late. The case
of Richert v. Stewards’ Charitable Founda-
tion (2006 BCCA 9) has now been decided
by our Court of Appeal. At issue was a
$1,000 gift to charity and a deduction from
the related charitable receipt.
The saga began when Richert donated
$1,000 to the defendant charity. In recogni-
tion of this donation, Richert was invited to
a luncheon (to which he kindly sent his
accountant) and a coffee table book. All
was well until some months later when
Richert was dismayed to discover the char-
itable donation receipt issued to him by the
defendant charity was not for the full $1,000,
but instead for that amount minus the value
of the luncheon and book ($145).
This reduction was made by the charity
on the basis of the Canada Revenue
Agency’s “split-receipting” guidelines (not
yet passed into law), which view dinners
and other complimentary benefits over a
certain amount to be advantages, which
must be deducted from the amount of the
charitable donation receipt. As this reduc-
tion in his receipt was not consistent with
Richert’s expectation, he sued the charity
seeking a declaration that his transfer of
$1,000 to the charity was not a gift, and that
the charity held the funds on resulting trust
for him.
At the trial level Justice Mark McEwan
was presented with a “tour of authorities
back to the earliest years of the nineteenth
century” as to the proper characterization
of the transaction.
Richert’s evidence was that while the
possibility of a nice meal may have been
part of his motivation to make the donation
and attend, in ordinary circumstances he
would not have paid $1,000 “just to listen
to two people talk while [he ate] a meal,
with a book thrown in afterward.” He
claimed that his willingness to make the
donation was on the basis that he was mak-
ing a charitable donation to a good cause
and he would receive a $1,000 receipt for
tax purposes.
Ultimately, Justice McEwan’s conclusion
was that Richert had intended a “gift, not a
quid pro quo.” As such there would be no
consideration due to him. In the Court’s
view, the Income Tax Act treated the gift of
a donation from Richert, and the gift of
lunch and a book from the charity back to
him, as related. Therefore, contrary to the
common law of gifting, the first gift could
not be voided, McEwan decided.
In the headlines continued from page 9
STEP INSIDE • VOLUME 5 • NUMBER 2 • WINTER 2006 11
BRANCHING OUT
Upcoming events across the country
The Court of Appeal held the argument
that the charity had imposed a unilateral
contract upon the unwilling Richert such
that “equity” should set the $1,000 dona-
tion aside could not succeed. And even if
it was not a gift, the Court of Appeal held
that the parties could not be restored to
their original positions (presumably be-
cause the lunch had been consumed). In
such a case, equity could not intervene.
We are left, therefore, with the conclu-
sion that where a donor makes a gift and
receives a token of appreciation in return,
the legal characterization of those transac-
ATLANTIC
MAY 24, 2006TOPIC 2006 STEP Atlantic Branch
AGM and Reception
PLACE Compass Room, Casino
Nova Scotia
SPEAKERS TBA
MONTREAL
FEBRUARY 28, 2006TOPIC Practitioner’s Seminar:
U.S. Estate Planning
Issues for Canadians;
Personal Trusts — An
Update on CRA Positions
PLACE RBC, 41st Floor,
1 Place Ville Marie
SPEAKERS M. Read Moore,
McDermott Will & Emery
LLP; Richard Barbacki,
Braman Barbacki Moreau
OTTAWA
MARCH 29, 2006TOPIC Insurance and
Benefit Plans for
Private Businesses
PLACE 99 Bank St., Rideau Club
SPEAKERS TBA
MAY 17, 2006TOPIC Dealing with the CRA:
Audits, Appeals and
Voluntary Disclosures
PLACE 99 Bank Street,
Rideau Club
SPEAKERS TBA
TORONTO
APRIL 6, 2006TOPIC Domestic and Offshore
Asset Protection
PLACE 130 King St. West,
TSX Broadcast and
Conference Centre
SPEAKERS TBA
JUNE 12, 13, 2006TOPIC The 8th Annual National
Conference
PLACE Metro Toronto
Convention Centre
SPEAKERS TBA
WINNIPEG
MARCH 9, 2006TOPIC Variation of Trusts
PLACE Delta Hotel
SPEAKERS TBA
MAY 11, 2006TOPIC Alberta Trusts
PLACE Delta Hotel
SPEAKERS TBA
tions will be independent of their charac-
terization for tax purposes. The judgment
seems to accept the Income Tax Act as a
world unto itself for these purposes. In the
end, the lesson to be learned is that if you
are looking for a full donation receipt —
beware the offer of a “free lunch.” ■
CALGARY
MARCH 23, 2006TOPIC Top Cases of 2005
PLACE Bankers Hall Auditorium
SPEAKERS Christopher Thomas,
McLeod & Company;
Jane Carstairs,
McKinnon Carstairs;
Shel Laven,
Laven & Company
APRIL 20, 2006TOPIC What’s New in
Charitable Giving
PLACE Bankers Hall Auditorium
SPEAKER Ruth Spetz, Borden
Ladner Gervais LLP
2006 National ConferenceMonday, June12 and Tuesday, June 13
Metro Toronto Convention Centre
SEE YOU THERE!
www.step.caUP-TO-THE-MINUTE
DETAILS ABOUTSTEP PROGRAMS
IN EVERY BRANCH
12 STEP INSIDE • VOLUME 5 • NUMBER 2 • WINTER 2006
EDITORIAL
Elimination ofcapital gainstax for quicklyre-investedassets?In the run-up to the recent election, the Conservatives an-
nounced their now-infamous “capital gains tax elimination”
proposal. If ultimately enacted, it will radically change the
investment, tax and estate planning environment in Canada
for years, and perhaps generations to come.
The Conservatives’ proposal was outlined in three short
sentences in their official party platform. They read as fol-
lows: “Eliminate the capital gains tax for individuals on the
sale of assets when the proceeds are reinvested within six
months. Canadians who invest, or inherit cottages or fam-
ily heirlooms, should be able to sell those assets and plough
their profits back into the economy without taking a tax
hit. It is time government rewarded Canadians who rein-
vest their money and create jobs.”
At the time of writing, no other official information re-
garding the details of the tax proposal are known. As the
saying goes: “The devil is in the details.”
However, if this change is ultimately enacted (especially
if it’s enacted without any strings attached), it would be
welcomed by Canada’s financial, tax and estate planning
communities. From a financial planning perspective, in-
vestors often delay selling an investment because of the
tax that may be owing on such a sale. Yet, from an invest-
ment perspective, it may make perfect sense to sell or at
least to diversify out of a highly concentrated position. This
could lead to the widespread use of equity monetization
strategies to diversify a single holding without paying cur-
rent capital gains tax.
The proposal could also turn traditional estate planning
on its head, depending on whether capital gains tax is ac-
tually eliminated altogether upon a reinvestment, or sim-
ply deferred until death. That would mean the resurrection
of inheritance taxes in Canada.
So while we welcome this proposal and the ability to
rebalance a portfolio without paying tax, whether or not it
ultimately sees the light of day is a question that will be
decided by the opposition parties. ■
Feedback? Your opinion? Please write:[email protected].
CHAIR’S MESSAGE
New formatfor NationalConference
by Paul LeBreux
Chair, STEP Canada
STEP Canada’s 8th National confer-
ence, to be held June 12 and 13 in
Toronto, will offer a new format, de-
signed to bolster STEP’s educational
objectives and international scope.
Input from our members suggests
there is a real opportunity to design
our annual conference to achieve
even broader appeal amongst our multi-disciplinary mem-
bership. A significant percentage of STEP’s membership rely
on STEP to supplement their professional trust, tax and es-
tate planning practice development and are looking to STEP
for more extensive hands-on education that can have an im-
mediate impact on their practice.
We’ve listened. The new conference format, for 2006
and beyond, will include a comprehensive learning mod-
ule on a select topic of current interest to our broad-based
membership. Whether your practice is domestic or inter-
national, there will be something for everyone.
This year, practitioners will have the choice to attend a
dedicated half-day learning module on advanced post-
mortem planning or to attend an international planning
session. Those who opt for the post-mortem planning ses-
sion will receive a comprehensive package of post-mortem
planning course materials that delve into a wide array of
critical issues and topics relevant to senior practitioners
whose practice involves estate and tax planning. During
the seminar, experts from a variety of disciplines will
present a series of related topics and applications.
A concurrent half-day stream is being developed for
those members whose practice is significantly focused on
international planning.
The plenary sessions will offer insights from experts in
their respective fields on the latest developments in trust,
tax, family and commercial issues affecting estate planning.
Feedback on the new format has been incredibly posi-
tive. A Preliminary Program Notice has recently been
mailed to all members along with an “early bird” registra-
tion form that provides conference admission savings for
registrations received up to February 28, 2006.
Be sure to visit our website for more detailed informa-
tion: www.step.ca/2006. ■