In Ontario, the Municipal Property Assessment Corporation (MPAC) is a non-profit corporation created by legislation and is governed mainly by the Assessment Act R.S.O. 1990, although it also governed by other legislation such as the Assessment Review Board Act R.S.O. 1990, and the Municipal Property Assessment Corporation Act, 1997.  MPAC’s main duty is to evaluate properties in Ontario in order to assess their tax liability and to classify them for tax purposes as either residential, commercial, industrial, farm, etc.  MPAC looks at many factors when assessing a property but most importantly the following: Sales of comparable properties; location; lot dimensions; living area; age of the property; and quality of construction.  Other factors may include such things as improvements to the property and unique and key features of the property.  Properties belonging to or being used as churches, cemeteries, public education, public hospitals, some non-profit organizations, conservation lands, and lands owned by governments are exempt from property tax.

Every few years, MPAC will determine a date to do a province wide assessment to reflect changes in the market.  The most recent date was January 1^st, 2008.  All property values are deemed to be assessed as of that date and the date is known as the Current Value Assessment (CVA).  The values are then used to assess the tax liability a municipality can charge for that year and the following years up until 2012 through what is called a phased-in assessment.   Whenever ownership of a property changes; MPAC will send an assessment notice to the property owner notifying them of the January 1, 2008 CVA and the foregoing 2009, 2010, 2011 and 2012 future value assessments.  For example, John buys a property for $645,000.00 in July of 2009.  Near the beginning of 2010, he receives an assessment notice stating that the current value (based on January 1, 2008) is $705,000.00.  While at first John thinks great his property is worth $60,000.00 more than he paid (according only to MPAC), he then realizes that he may be paying taxes on the higher assessed value than what the more accurate value, being the market price he actually paid.  Not only is the current value inaccurate based on what John paid, but because MPAC uses the current value to determine the upcoming values until 2012, John will be paying more tax than he should be until 2012.

When the above scenario occurs, the property owner is entitled to seek a Request for Reconsideration (RfR).  When applying for the RfR, the owner will have to provide supporting documentation in order to justify his/her reasons for a lower tax assessment.  Supporting documentation includes a copy of the agreement of purchase and sale and the statement of adjustments which shows the accurate price that the owner actually paid for the property.  Once submitted, MPAC may revise their assessment and send the owner Minutes of Settlement for their consideration.  If the owner accepts MPAC’s revised assessment, then the matter is finished and the owner will pay taxes based on the revised values.  If MPAC does not revise their assessment or if the owner does not agree to the revised assessment, then the owner can appeal to the Assessment Review Board (ARB).   The deadline to file for an RfR is March 31^stof the taxation year.  The ARB is formal procedure that involves providing statements of issue, pre-hearings and hearings and is governed by the ARB’s rules of practice and procedure.   

If you believe your taxes have been assessed too high and you need guidance on filing an RfR or subsequent appeal, contact one of the lawyers at PLZ Law for a free consultation in order to see whether we can save you money on the taxes you pay for any type of property you own. 

For further information, you can also visit: www.mpac.ca

Under subsection 104(13) of the Canadian Income Tax Act (“ITA”), the income of a trust or estate that is paid or payable to a beneficiary is taxed in the hands of that beneficiary. In order to avoid double taxation, the trust or estate is allowed a deduction for an equivalent amount. This amount is considered to be payable to a beneficiary when the beneficiary is entitled in that year to enforce payment thereof, ITA, subsection 104(24). One reason for not paying is that the beneficiary has not attained a specific age and where the trust is not a discretionary trust. In addition, subsection 104(18) states that the income is to be considered payable to the minor, thereby allowing a deduction to the trust and an income inclusion to the minor.

In view of this, a beneficiary will be required to pay tax on trust income that is not actually received so long as he or she has a legally enforceable right to the income. Of course, no tax should be imposed when he or she actually receives income that has already been notionally included in his or her income in a prior year, since it was payable to him or her. To this effect, subsection 104(13) rules that this income can be subsequently paid to the beneficiary tax free.

If an amount is included in a beneficiary’s income because it was paid or was payable by the trust or estate, the CRA considers the beneficiary to have earned the income on the last day of the taxation year of the trust, ITA, subsection 104(23) and CRA, Interpretation Bulletin IT-342R, “Trusts – Income Payable to Beneficiaries”.  Assuming that a testamentary trust has a taxation year ending on January 31; and on March 1, 2003, the testamentary trust pays the beneficiary $10,000 of trust income. In his or her 2004 taxation year, the beneficiary will include the payment and report the income on his or her 2004 personal tax return that is to be filed on or before April 30, 2005. Thus, the choice of a non-calendar year by a testamentary trust may result in a deferral of the beneficiary’s tax liability for amounts paid or payable to him or her.

There is a distinction between capital and income transactions of a trust. Generally, trusts distinguish between beneficiaries entitled to distributions from the capital of the trust and those entitled to distributions from the income of the trust. Capital gains are not taken as income for trust purposes, but net income for tax purposes includes taxable capital gains. There are instances when a trust has separate capital and income beneficiaries and is required to pay the income out every year. Considering that capital gains are usually not taken as income for trust purposes, the taxable portion of the capital gains cannot be paid out to the income beneficiaries and is to remain behind to be taxed in the trust unless there is a preferred beneficiary election.

Designations

Instead of reporting it in the hands of beneficiaries, a trust can choose to retain income in the trust. To do this, the trust has to be resident in Canada throughout the year. The designation option applies only to income paid or payable to beneficiaries. Subsection 104(13.1) of the ITA authorizes this choice of retaining income in the trust for tax purposes and is commonly referred to as a “104(13.1) designation”. Such designated amount is not deductible by the trust, and is not taxable to the beneficiary. When taxable capital gains are included in the income for retention in the trust, a similar designation can be made under subsection 104(13.2). Taxable capital gains of the beneficiary are reduced by the beneficiary’s proportionate share of taxable capital gains retained in the trust.

The ITA does not permit net capital losses of a trust to be passed through to the beneficiary. Consequently, such losses are likely to remain uncompensated. Under  a subsection 104(13.2) designation, there is a provision to absorb these losses in the trust by allowing the trustee to deduct under subsection 104(6) less than the full amount of taxable capital gains which are payable to the beneficiaries. Such un-deducted capital gains are included in the trust’s income and the allowable capital loss or net capital loss carried forward can be used to offset such gains. Therefore, subsection 104(13.2) designation deems taxable capital gains otherwise included in the beneficiaries’ income under subsection 104(21) not to be payable to the beneficiary.

21-Year Deemed Disposition of Trust Property

A trust is prevented by section 104 of the ITA from holding property for an indefinite period, thereby deferring the taxation of capital gains and recapture. Subject to certain exceptions, there is a deemed disposition and reacquisition by the trust of capital property every 21 years for notional proceeds equal to fair market value. When the property owned by the trust has appreciated in value, it is to be distributed among the beneficiaries before the 21-year period has elapsed. When the trust is a personal trust, this can be done on a tax-free basis. Twenty one years after the creation of the trust, the first deemed realization occurs. Even though there were trusts in existence on January 1, 1972, all such trusts would have their first realization 21 years after that date.

To beat the 21-year deemed disposition rules, the trust instrument should ensure that the trust assets can be distributed to the beneficiaries before the 21-year realization, and can be done on a tax-deferred basis provided the trust qualifies as a “personal trust”.

A “personal trust” according to subsection 248(1) of the ITA means:

1) A testamentary trust; or

 2) An inter vivos trust, where no beneficial interest in which was acquired for consideration payable directly or indirectly to:

a) the trust; or

b) any person who has made a contribution to the trust.

Normally, trusts other than personal trusts are known as “commercial trusts”.

Testamentary/Inter vivos Spousal Trusts

Some spousal trusts, however, dispose of their property at the date of the spouse’s death. These spousal trusts are to satisfy the basic requirements of a spousal trust, that is, the spouse must be entitled to receive all of the income of the trust arising during his or her lifetime and nobody except the spouse can, before the spouse’s death, receive or otherwise use the income or capital of the trust. Besides, these trusts should be created in either of the following manners:

1) By the will of a taxpayer who died after December 31, 1971; or

2) By a taxpayer during his lifetime (other than a pre-June 18, 1971 inter vivos trust taxed at the graduated rates applicable to individuals).

For all your Tax Law matters and how best to resolve your estate and succession issues or that with a spouse and your children contact the lawyers at Porco Levy Zavet LLP (PLZ Law).

The attribution rules for trusts, transferors, and so on are given in Subsections 74.1(1) and 74.2(2) of the Canadian Income Tax Act (“ITA”).  These rules are meant to attribute back to the transferor any income or capital gains generated from property transferred at less than fair market value consideration or for no consideration to a spouse of the transferor, as well as to attribute income, but not capital gains, on similar transfers to a non-arms length minor such as a child. Such rules apply in similar fashion to loans at less than fair market value interest. These rules are not applicable to the transferor to attribute any income, loss, taxable capital gains or allowable capital losses that relate to a period following the death of the transferor. Consequently, these rules are not applicable to a testamentary situation.

Subsections 74.1(1) and (2) of ITA refer especially to trusts. In the context of these provisions, the transfer of property is regarded as occurring not between the settlor/transferor and the trust as an individual, but rather, through the trust to the beneficiaries. In view of this, section 74.5(9) deems a loan or transfer to a trust in which a person is beneficially interested, to be a loan or transfer to that person. A person with a right, immediate or future, absolute or contingent or subject to discretion, to income or capital of the trust, is considered beneficially interested in the trust. If an individual loans or transfers property, for less than fair market value consideration, to a trust in which his or her spouse or a non-arm’s length minor is beneficially interested, attribution will apply unless the income is accumulated in the trust and taxed therein (which is taxed at the highest marginal rate).

The calculation for the amount of trust income that will be subject to attribution for purposes of subsections 74.1 and 74.2 is given in subsection 74.3(1) of the ITA. Usually, the income or loss which a spouse or non-arms length minor actually receives or suffers from the trust or is deemed to acquire from the trust under a preferred beneficiary election in respect of such property and substituted property, is deemed to be received by the individual who made the transfer or loan to the trust in the first place. Likewise, capital gains and capital losses which a spouse receives or is deemed to receive from the trust in respect of such property are deemed to be received by the individual who made the transfer or loan to the trust.

According to subsection 75(2) of the ITA, when a person contributes property to a trust and that property, or substituted property, goes back to that person or passed to persons to be determined by him or her subsequently, it provides that income or capital gains of the trust is to be attributed for tax purposes to the settlor (the original transferor).

This clause is a major tax disadvantage in most cases to the use of revocable inter vivos trusts (while the settlor/transferor is still living). Its terms are so widely drawn that it is not clear what its effective limits are. Consider the proposition of the CRA that subsection 75(2) of the ITA would apply where an individual creates an irrevocable discretionary trust to which he or she contributes property and such individual is the sole trustee, even though the individual is not included in the predetermined list of discretionary beneficiaries, M.N.R. Administrative Interpretation 9202455 (February 27, 1992).

Trust as a Taxable Entity

As a trust or estate is regarded by the ITA to be an individual for tax purposes, it is expected to compute its income under Division B of the ITA and will be allowed a deduction for all expenses incurred for the purpose of gaining or producing income from its business or property. So, if a trust or estate borrows money in order to invest in bonds or shares, any interest paid or payable by the trust in respect of the borrowed funds will be deductible in calculating the income of the trust or estate. It is essential to note that the trust or estate, like any ordinary taxpayer, is only permitted a deduction for expenses incurred for the purpose of gaining or producing income from a business or property. Personal expenses of the beneficiaries from the trust are not deductible.

When a trust or estate suffers a business or property loss, the loss cannot be transferred to the beneficiaries. In that event, the normal rules for carrying such losses backward or forward apply to the trust or estate. Moreover, according to subsection 122(1.1) of the ITA, inter vivos and testamentary trusts cannot claim the personal tax credits available to individuals. Also, if a trust or estate is resident in Canada, it will be taxed on its income for a taxation year from all sources, whether inside or outside Canada.

The exceptions to the rule above are as follows when:

1) The income of the trust or estate for the taxation year is actually paid to its beneficiaries;

2) Its income is payable (although not actually paid) to its beneficiaries, (subsection 104(24) provides that an amount is considered payable when the beneficiary can enforce payment thereof) (CRA, Interpretation Bulletin IT-286R2, “Trusts – Amount Payable”);

3) “Preferred beneficiaries” elect to assume the tax liability for their share of the trust’s income, even though the income remains in the trust; or

4) A taxable benefit (other than a distribution or payment of capital) is conferred by the trust on its beneficiaries because the trust or estate paid for the upkeep, maintenance or taxes on property used by the beneficiary.

These four amounts are treated as deductions from the income of a trust and are required to be included in the income of the beneficiaries concerned.

 In this context, the definition of “preferred beneficiary” in subsection 108(1) of the ITA is important in determining whether any beneficiary can make a preferred beneficiary election so as to include his or her share of the accumulating income of the trust in his or her own personal income and permit the trust to deduct such amount when computing the trust’s taxable income.

A beneficiary is defined as a preferred beneficiary resident in Canada, who is:

1) The settlor of the Trust (i.e. the person who transferred his/her assets to the trust, hence created the trust);

2) The spouse or former spouse of the settlor;

3) A child, grandchild or great grandchild of the settlor or the spouse of any such person; and

4) An individual eligible for a disability tax credit or an adult beneficiary for whom a dependent tax credit can be claimed by another individual because of the beneficiary’s mental or physical infirmity. 

Contact the lawyers at Porco Levy Zavet LLP (PLZ Law), to discuss your estate planning concerns and how best to consider all angles of a tax efficient succession plan.

The requirements to qualify as an inter vivos spousal trust are the following:

1) The transferor and the trust should be resident in Canada when the property is transferred to the trust;
2) the spouse should be entitled to receive all of the income of the trust earned before his or her death; and
3) while the spouse is alive, nobody can receive or use the income or capital of the trust.

Transfers to a Trust

Except for some exceptions given below, a transfer or gift of property to an inter vivos or testamentary trust is a disposition for tax purposes (ITA, s. 54). For details, the deemed disposition at fair market value rules of s. 69 of the ITA are to be considered. Property acquired by a trust from a person, with whom the trust does not deal at arm’s length, for a consideration exceeding the fair market value of the transferred property is deemed acquired by the trust at its fair market value (ITA, s. 69(1)(a)). Usually, the CRA assumes that the relationship between a settlor and a trust is non arm’s length, unless the facts show otherwise (CRA, Interpretation Bulletin IT-419 R-2, “Meaning of Arm’s Length”). Also, s. 251(1) of the ITA states that a taxpayer and a trust are deemed not to deal with each other at arm’s length if the taxpayer, or any person not dealing at arm’s length with the taxpayer, is beneficially interested in the trust. If property is sold to a trust by a non-arms length person at a price less than fair market value or given as a gift to the trust, there is a deemed realization at fair market value to the transferor. If a trust acquires property through a gift, bequest or inheritance, the property acquired is considered to be at its fair market value (ITA, ss. 69(1)(b) and (c)).

No Beneficial Ownership Change

Any transfer of property resulting in a change in legal ownership without any change in beneficial ownership is not a disposition, meaning that it is not taxable (ITA, s. 54).

Testamentary/inter vivos Spousal Trusts

A transfer of property to a qualifying inter vivos or testamentary spousal trust can be done on a tax-free basis with the spousal trust acquiring capital property at the adjusted cost base and depreciable property at the undepreciated capital cost of the transferor (ss. 70(6) and 73).

Alter Ego Trusts and Joint Partner Trusts

Gifts to an alter ego trust will qualify for rollover treatment, thereby avoiding the imposition of tax on accrued gains. An alter ego trust is a trust created after 1999 by an individual of at least 65 years. In such a trust, the individual gifting property to the trust is entitled to receive all the income of the trust prior to the death of the individual and should be the only person to receive income or capital of the trust prior to the death of the individual.

A gift of assets to a joint partner trust is also eligible for rollover treatment, thereby avoiding the imposition of tax on accrued gains. A joint partner trust is also a trust created after 1999 by an individual of at least 65 years. In this type of trust, until the death of the surviving spouse, both spouses in all possible combinations are entitled to receive the entire income of the trust or its capital.

In particular instances, the alter ego and joint partner trusts provide a significant estate planning tool for individuals trying to avoid probate taxes or the public disclosure of assets inherent in the probate process. Like a qualifying spousal trust, alter ego and joint partner trusts also aim to provide for contingent beneficiaries who will be entitled to receive income and capital of the trust after the death of the individual or the surviving spouse, whichever is applicable. Thus, the assets of the trust would effectively bypass probate, provided that the trust is a true inter vivos trust.

Deemed disposition of assets on death is not avoided by the provisions of such trusts; the deemed disposition occurs at the same time as it would have occurred if no trust had been established. The alter ego trust is deemed to dispose of its assets on the death of the individual establishing the trust, while a joint partner trust is deemed to dispose of its assets on the death of the surviving spouse. The 21-year deemed disposition of trust property is not applicable to these trusts created for individuals at 65 and above.

Contact a lawyer from Porco Levy Zavet (PLZ Law) today for help planning and administering an estate.

The problem often arises with commercial properties because sometimes the agreements are prepared on the wrong OREA form and the section for HST is overlooked as a formality.  As stated above, commercial properties and even mixed residential/commercial (although only the commercial part would be subject) are subject to the tax.   A commercial property can be a storefront, an office building, a condominium office or store, etc.  There are ways to off-set the HST payable by the purchaser however it is extremely important to be clear that the purchaser and seller are aware of the tax consequences and therefore understand whether the purchase price is “included in” or “in addition to”.  Having regard to this, if there is any doubt, advice should be sought from professionals with specific knowledge such as lawyers or accountants.

Remember, it is always the sellers responsibility to remit the HST payable, however the purchaser can provide the seller with an undertaking and indemnity to remit the HST directly to the Canada Revenue Agency (CRA) so that the purchaser can use their input tax credits and off-set the amount payable resulting in less tax payable to the CRA.  In this case the purchaser will need to be an HST registrant and provide their HST number in the form undertaking and indemnity.

If you have any questions with regards to either paying or remitting HST on the sale of your property, contact the lawyers at PLZ Law for free consultation.

1. Testamentary Trusts
The Income Tax Act defines a testamentary trust as a trust or estate that is formed consequent to the death of a tax-paying individual (ITA, s. 108(1)). It can also be created under the terms of a will or by an order of a court made pursuant to dependants’ relief legislation. As compared to this, an inter vivos trust is defined in the ITA as a trust other than a testamentary trust.

2. Inter Vivos Trusts
From June 17, 1971, inter vivos trusts are taxed at the highest marginal rate, while testamentary trusts are subject to the graduated rates applicable to individuals. Ideally, it is possible for a taxpayer to establish a testamentary trust, to which property can be contributed after his or her death by someone other than the taxpayer. The testamentary trust so created could then take advantage of the graduated rates of tax. With a view to prevent such abuse, the definition of a testamentary trust was amended. Consequently, for taxation years commencing after November 12, 1981, the following trusts are excluded from qualifying as testamentary trusts, thereby being converted into inter vivos trusts taxable at the highest tax rate:
1) A trust created by a person other than the deceased;
2) A trust created after November 12, 1981 if property has been contributed to the trust, otherwise than by an individual on or after his death and as a consequence thereof; and
3) A trust created before November 13, 1981 if, after June 28, 1982 property has been contributed to the trust otherwise than by an individual on or after his death and as a consequence thereof; or the fair market value of property contributed to the trust by someone other than the deceased exceeds the fair market value of property contributed by the deceased on his death.

3. Qualifying Spousal Trusts

4. Testamentary Spousal Trusts
According to ss. 70(5), (5.1) and (5.2) of the ITA, taxes are due on the death of a taxpayer owning capital property, depreciable property, eligible capital property, resource properties, and land included in the inventory of a business. All these properties are subject to a deemed disposition immediately before death at fair market value. If capital property or depreciable property are willed to the deceased’s spouse, or to a qualifying spousal trust, a deferral of tax is available under s. 70(6) of the ITA, unless the legal representative voluntarily elects, under s. 70(6.2), not to have the rollover. There are situations when a personal representative would prefer to forego the rollover, such as, the deceased had not fully utilized his or her lifetime capital gains exemption and it is available to offset some or all of the forthcoming capital gain, or where the deceased had losses from previous years which could absorb any income arising upon a deemed disposition of his or her property at fair market value. As the legal representative of the deceased preferred not to have the rollover, the beneficiaries would be regarded to have acquired the deceased’s property at its fair market value at the time of the deceased’s death. Due to this, on a subsequent sale by the beneficiaries, they would pay less tax than that required if they were deemed to have acquired the property at the deceased’s original tax cost.

It is essential to know that, excepting rare occasions, each time the ITA deems a disposition to have occurred at a certain value (whether adjusted cost base, undepreciated capital cost, or fair market value) it simultaneously deems the recipient to have acquired the relevant property at the same amount.

Qualification

According to s. 70(6) of the ITA, the requirements of a testamentary spousal trust are:
1) The deceased should have been resident in Canada immediately before death;
2) The trust has to be resident in Canada immediately after the time the property vested indefeasibly in the trust;
3) The spousal trust is to be created by the taxpayer’s will or by an order of a court made pursuant to dependants’ relief legislation;
4) The property should have been transferred or distributed on or after death and as a consequence thereof or as a consequence of a disclaimer, release, or surrender by a person who was a beneficiary under the deceased’s will or intestacy (Subsection 248(8) further explains the meaning of property transferred “as a consequence” of the death of a taxpayer to include a transfer under a will and a transfer as a result of a disclaimer, release or surrender of a beneficiary under a taxpayer’s will.);
5) The surviving spouse should be entitled to receive all of the income of the trust that arises during his or her lifetime. A consequential problem is that while the capital gains of a trust are regarded as “income” for tax purposes, under trust law they are usually treated as “capital”, thereby accruing to the capital and not the income beneficiaries. So, the accrual by the trust of capital gains to someone other than the spouse would prima facie be detrimental to the spousal trust qualifying for the rollover. To avoid this trap for the unwary, s. 108(3) provides that, for such requirement, the income of a trust is to be computed under trust law and without reference to the ITA. In other words, so long as the spouse is entitled to receive all amounts that would otherwise be regarded as income for trust accounting purposes, the trust will qualify as a spousal trust. Considering that the surviving spouse is entitled to receive all the income of the trust for life, a clause in the will terminating the spouse’s entitlement to the income in the event of remarriage will invalidate the trust as a qualifying spousal trust. In addition, the trustees should be prevented from accumulating income or distributing it among other beneficiaries;
6) None but the spouse would, during the surviving spouse’s lifetime, receive, or otherwise obtain, the use of any of the income or capital of the trust. This condition would not be fulfilled when the terms of the spousal trust provide that if the surviving spouse remarries, then the trust property flows to a third party. Such a remarriage clause would prevent the trust from being a qualifying spousal trust; and
7) The property is to vest indefeasibly in the spousal trust within 36 months of the death of the testator.

Call one of the experienced lawyers at Porco Levy Zavet LLP (PLZ Law) today for help with the planning or administration of an estate.

Under s. 117, ITA, a testamentary trust is subject to tax, at the same graduated rates as an individual, while the rate of tax payable by an inter vivos trust depends on the date the trust was established. Such trusts established after June 17, 1971 are subject to a flat rate of tax equal to the highest marginal tax rate applicable to individuals ITA, s. 122(1) and CRA, Interpretation Bulletin IT-406R2, “Tax Payable by an Inter Vivos Trust”.

According to subsection 122(2), ITA, an inter vivos trust is taxed at the regular graduated rates, when the trust (a) was established before June 18, 1971; (b) was resident in Canada on June 18, 1971 and remained so without interruption thereafter until the end of the year; (c) did not carry on any active business in the year; (d) has not received any property by way of gift since June 18, 1971; (e) has not, after June 18, 1971, incurred (i) any debt or (ii) any other obligation to pay an amount, to, or guaranteed by, any person with whom any beneficiary of the trust was not dealing at arm’s length; and (f) has not received any property after December 17, 1999, where (i) the property was received as a result of a transfer from another trust, (ii) subsection (1) applied to a taxation year of the other trust that began before the property was so received, and (iii) no change in the beneficial ownership of the property resulted from the transfer.

Any deviation from the straight and the narrow of these conditions would permanently taint a pre-June 18, 1971 inter vivos trust. As a consequence, it would be subject to the highest marginal tax rate on every dollar of its taxable income. In order to discourage a taxpayer from creating multiple testamentary trusts, each of which would be entitled to the graduated tax rates, s. 104(2) of the ITA provides that when there are multiple trusts, and in effect all of their properties have been received from one person, and the income accrues, or will eventually accrue to the same beneficiary or group or class of beneficiaries, the Minister can combine all the income from all of the trusts and tax the trusts as if the income had been earned by one trust. There is an exception to this in Mitchell v. M.N.R. (more info on Mitchell v. M.N.R. here), where it was ruled that the Minister could not consolidate four trusts, each of which had as its beneficiary a different child of the one settlor.

Filing

Anybody acting in a fiduciary capacity, like an executor, trustee, or administrator, and having ownership or control of property on behalf of some other person, has to file a Trust Information Return and Income Tax Return (T3 Return). The filing of the T3 Return with the Canada Revenue Agency (CRA) should be done within 90 days from the end of the trust’s taxation year ITA, s. 150(1)(c). The CRA gets from the T3 Return reports of the trust’s income and information about its distributions to beneficiaries. Such beneficiaries of the trust or estate, to whom income is paid or payable or who have made a preferred beneficiary election, should be provided with T3 Supplementary Forms stating the income that they are required to report on their own personal tax returns.

Call one of the experienced lawyers at Porco Levy Zavet LLP (PLZ Law) today to help you plan or administer an estate.

The taxation of trusts and their beneficiaries are dealt with under Sections 104 to 108, inclusive, of the ITA. The fundamental principle with respect to taxation of trusts and estates is given in Subsection 104(2) of the ITA, which considers a trust or estate to be an “individual” for tax purposes. A trust (which includes estates) created by a will, also known as a testamentary trust, and the estate of a taxpayer who has died intestate are both treated, for tax purposes, as trusts. Consequently, inter vivos and testamentary trusts and estates are made distinct taxable entities. However, the estate of a deceased is separate and distinct from the deceased for tax purposes. The income of the deceased is taxable until the day of death and any income after that time is taxed separately as the estate’s income. An important and useful exception to this principle is given under ITA, s. 164(6), permitting the estate to transfer capital losses and terminal losses incurred during its first taxation year against the deceased’s income in the year of death. Considering that a trust or estate can own property or even carry on a business, it is subject to income tax on the taxable income derived from the property or earned from the business, including any taxable capital gain and recapture incurred on the sale of its capital or depreciable property.

A trust or estate can also be regarded as a channel for tax purposes because the incomes of the trust flow out to its beneficiaries for them to spend as they like. Naturally, such amounts are regarded as income to the beneficiaries and, in order to ensure that the trust is not taxed on the same income twice, the ITA provides the trust with a deduction for all amounts going out to beneficiaries. There are two situations in which a trust or estate may flow income through to its beneficiaries and claim a deduction:
1) Where the trust or estate actually distributes the income to its beneficiaries; and
2) Where the income is “payable”, although not actually paid, to the beneficiaries.

Residence

Though there are no provisions in the ITA for determining the residence of a trust or estate, subsection 104(1) of the ITA states that a reference to a trust or estate in the ITA is to be read as a reference to the trustee, executor, or other legal representative “having ownership or control of the trust property”. As the clause indicates, the relevance of the residence of the trustees becomes a question of fact to be determined according to the circumstances in each case. In general, a trust is considered to be located where the trustee, executor, administrator, or other legal representative who manages the trust or controls the trust’s assets resides.

Taxation Year

For an inter vivos trust, the taxation year has to always coincide with the calendar year (ITA, ss. 104(2) and 249(1)). The taxation year, for a testamentary trust or estate could (but need not) be the calendar year. Under ITA, s. 104(23) it can be the period for which the accounts of the trust are ordinarily made up, or, in the absence of an established practice, any period adopted by the trustees for that purpose, provided the period does not exceed twelve months. The day after the death of the taxpayer is the beginning of the first taxation period of a testamentary trust, which ends at any time within the next twelve months selected by the trustees. For maximum deferral of tax, usually the fiscal year of a testamentary trust or estate is based on the twelve month period following the day of the taxpayer’s death. However, for convenience of accounting or timing of income, a personal representative would perhaps like to select some other fiscal period. A change in the taxation year of a testamentary trust can only be made with the permission of the Minister of National Revenue.

Call one of the experienced lawyers at Porco Levy Zavet LLP (PLZ Law) today to help you plan or administer an estate.

Extension of Time for Filing Returns

Along with the extended deadline for the filing of the basic terminal return, there is a special deadline with respect to one of the elective T1 returns. This terminal return is needed when a qualifying spousal trust is created. There is no late filing penalty until 18 months after death (interest runs from normal deadlines) (ITA, s. 70(7)(a)). The personal representative is given time to determine whether or not, based on the notice of assessment, any additional tax saving could be introduced by identifying rights and things and declaring them as part of a separate return.

Income Splitting and Non Arm’s Length Dispositions

Though there are statutorily sanctioned breaks, much of estate planning can be regarded as an ongoing battle of wits between estate planners and those drafting tax legislation. There are two techniques, which the former engage in and the latter try to prevent: income splitting and dispositions at less than fair market value. Income splitting is the technique of shifting property from a high income taxpayer to a lower income taxpayer in the hopes of having the lower income taxpayer rather than the high income taxpayer report the income for tax purposes. Income splitting is expressly rendered nugatory in certain circumstances because of the attribution rules. Firstly, where one spouse transfers or loans any property to the other on any basis other than a sale at fair market value, income and capital gains from the property are deemed to be income and capital gains to the transferor. Secondly, where one person transfers or loans any property to a minor person with whom he or she does not deal at arm’s length, or a nephew or niece, any income, but not any capital gains, is deemed to be income of the transferor until the minor attains the age of majority. It is, therefore, possible to freely split income with adult children, but before doing so it is essential to take careful account of the property that is transferred. If it is cash, there should be no problem; but if it is capital property, a “deemed disposition at fair market value” which could have adverse tax consequences will arise.

In view of this, there are rules to prevent indirect income splitting. Payment of income to a trust beneficiary, consequent to a transfer or a loan, is treated as essentially equivalent to a transfer to the beneficiary. However, the main purpose of a transfer or a loan to a corporation (other than a “small business corporation”, which is a private corporation using substantially all its assets to earn active business income primarily in Canada), is to reduce the transferor’s income and to benefit a spouse. Non arms length minor or nephew or niece owning at least 10% of the shares of the corporation results in deemed attribution at a prescribed rate (ITA, s. 74.4).

Moreover, when an individual transfers property to a trust and retains the capacity to benefit from the trust, all of the income and capital gains of the trust are attributed back to him or her (ITA, s. 75(2)). If there is a loan from one individual to any other non arms length individual and one of the main reasons for making the loan is the reduction or avoidance of tax, then income from the loaned property is attributed back to the lender (ITA, s. 56(4.1)). Thus, a parent who lends money to an adult child to pay off a mortgage will not be subject to attribution, because the loan produces no income. However, a parent who lends money to a child, who invests it, could be subject to attribution. Furthermore, if such a loan bears a below market interest rate, that will be of no consequence, and a market interest rate will be deemed to exist.

Transfers at fair market value, or loans at commercial interest rates, or in respect of business income, are not subject to attribution. Also, there are a series of rules that deem dispositions at amounts that the parties would not normally choose to apply. When a transferor either gives property, or sells it at less than fair market value to a person with whom he or she does not deal at arm’s length, he or she is deemed to have disposed of it at fair market value (ITA, s. 69). As regards the recipient, who acquires the property as a gift, is deemed to receive it at fair market value, while the recipient who pays below market consideration for the property is deemed to have acquired the property at that value. As a result, this puts him or her in a worse position than if he or she had received it by gift, because he or she is now stuck with a below market cost base. Between spouses, a presumptive rollover rule applies, but they can elect that the transfer takes place at fair market value.

Contact the lawyers at Porco Levy Zavet LLP (PLZ Law) today to hear more about how we can take care of all of the details so you don’t have to worry.

1) For a death prior to November, the terminal return is due by the following April 30, or June 15th if the deceased had business income. The deadlines are the same for individuals alive throughout the tax year.
2) For a death in November or December, the terminal return is due six months from death (ITA, s. 150(1)). There is also a specific rule in respect of the return for the year preceding the year of death, which the personal representative will often have to file if the deceased has been ill before death or has died early in the year.
3) For a death before May, the prior year’s return is due six months after the death.
4) If the death is in May or thereafter,  the prior year’s return is due on April 30 in the year of death, and no extension is given (ITA, s. 150(1)(b),(d)). An extended deadline is there for the filing of the basic terminal return.

The T3 return is due within 90 days after the expiry of the trust’s year end. The trust is allowed to choose its own first fiscal period. If, however, there is no such election made, it will end on the first anniversary of the taxpayer’s death (ITA, s. 150(1)(c)).

The Principal Residence Exemption

The principal residence exemption permits a taxpayer and his or her immediate family to own and occupy a residence that is capital property. The exemption allows in full any capital gain on the actual or deemed disposition of the property. However, only one residence per family per year can be so designated.

Considering that both a city residence and a cottage property may properly qualify as a principal residence, it is essential to make the most of the exemption so that the greatest benefit is obtained. Since many cottage properties in recent years have appreciated more than city homes, such assets may deserve greater application of the annual designation. You may want to hire a professional to ensure that you are doing so.

Alteration in use of a principal residence, for example from living in it to renting it out, brings about its deemed disposition. This deemed disposition could be deferred for up to four years by election. When the cessation of occupation is on account of employer required relocation, and the taxpayer eventually reoccupies the property, the four-year period continues indefinitely. According to the rules, a building and up to one-half hectare of land forms a principal residence. If the taxpayer shows that the excess is necessary for the use and enjoyment of the residence, such as, the excess is inseparable, then area more than that stipulated is allowed.

Don’t do anything before fully understanding your rights and obligations.  Contact the lawyers at Porco Levy Zavet LLP (PLZ Law) in Toronto for all of your personal and business tax law needs.