2016 - 2017 Estate Planning Guide for Ontarians - “Completing the Puzzle”

By Phelim L. O'Malley, MBA, CFP

Estate Planning

The legislation covering Estate Planning and distribution falls under provincial jurisdiction, with the exception of the Federal Income Tax Act. There are a number of Provincial Acts that directly or indirectly influence how an effective Estate Plan can be designed. The impacts of the Provincial legislation and Income Tax Act must be correctly understood and properly applied to your Estate Plan.

The Estate Planning Guide for Ontarians — "Completing the Puzzle" has been written to integrate the various areas of legislation that are relevant to developing a comprehensive estate plan. The guide is focussed on Ontario legislation but with legal advice can be applied to other common law provinces and territories, excluding Quebec. Quebec's legal system is based on civil law and it is has significant differences from common law.

The guide includes true life examples of where simple errors can have devastating effects on your Estate Plan.

This guide illustrates how an experienced Certified Financial Planner (CFP) can help you Complete the Puzzle.

• Language: English
• Publisher: Xlibris US
• Release date: Jun 24, 2014
• ISBN: 9781499040333

Phelim L. O'Malley, MBA, CFP

Phelim L. O'Malley received his Master of Business Administration (MBA) degree from York University's Shulich School of Business in 1997. Phelim has been a Certified Financial Planner (CFP) since 1999. He has also completed numerous additional industry designations in his more than 15 years in the estate and financial planning industry. The most recent position held was Director, Estate and Financial Planning, with a major life insurance company. Contact: [e-mail]

Book preview

2016 - 2017

Estate Planning Guide

for Ontarians

Completing the Puzzle

Phelim L. O’Malley, MBA, CFP

Copyright © 2014, 2016 by Phelim L. O’Malley, MBA, CFP.

All rights reserved. No part of this book may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or by any information storage and retrieval system, without permission in writing from the copyright owner.

Any people depicted in stock imagery provided by Thinkstock are models, and such images are being used for illustrative purposes only.

Certain stock imagery © Thinkstock.

Rev. date: 02/23/2016

Xlibris

1-888-795-4274

www.Xlibris.com

635343

CONTENTS

Introduction

Disclaimer:

Chapter One: Powers of Attorney

Chapter Two: Intestacy

Basic Distribution Rules for an Intestacy

Chapter Three: Estate Administration Tax,: formerly known as Probate Fees

Estate Information Return

Joint Ownership

Chapter Four: Wills - Life after Death

Types of Wills

Holographic Will

Will Kit

Formal Will

Multiple Wills

Mutual Wills

Mirror or Reciprocal Wills

Clauses to Review for Inclusion in Your Will

Estate Trustee (Estate Representative)

Common Disaster

Declaration of Beneficiary Change

Life Insurance Trust or Springing Trust

Guardianship

per stirpes and per capita

Holding Assets in Trust for Children beyond Age 18

Trustee Powers

Ademption

Life Interest Trust

Spousal Trust

Election under the Family Law Act

Disabled Children

Chapter Five: Trusts

Trust Residency for Tax Purposes

The 21 Year Tax Rule

Trust Taxation

Graduated Rate Estate

Qualified Disability Trust

Inter vivos Trust Taxation

T3 Tax Filing Due Dates

Alter ego and Joint Partner Trusts

The Henson Trust

Trusts and Life Insurance

Estate Freeze and the Family Trust

Cottage and the Family Trust

Canadian Resident Trusts with American Beneficiaries

U.S. Resident Alien Substantial Presence Test

Chapter Six: Taxation at Death

Income

RSP Roll-over to Financially Dependent Children

RSP Roll-over to a Registered Disability Savings Plan

Outstanding RSP Home Buyer Plan (HBP) and Lifetime Learning Plan (LLP) Balances.

Interest Income

Dividend Income

Capital Gains

Superficial Loss Rule

Personal-use and Listed Personal Property

Personal-use Property - (Line 158 of Schedule 3)

Listed Personal Property - (Line 159 of Schedule 3)

The Principal Residence Exemption

The Ordinarily Inhabited Rule

Farm Principal Residence

Change of Use of a Residence

Principal Residence to Income Producing Property

Four (4) Year Rule

Income Producing Property to Principal Residence

Partial Changes in Use

The Lifetime Capital Gains Exemption

Qualified Small Business Corporation (QSBC)

Qualified Farm Property

Qualified Fishing Property

Charitable Giving Tax Credit

Charitable Giving of Publically Traded Securities

Charitable Gift Planning using Life Insurance

Chapter Seven: Life Insurance

Term Life Insurance

Group Life Insurance

Permanent or Whole Life Insurance

Universal Life or Variable Universal Life Insurance

Additional Retirement Savings

Taxable (Policy) Gain in a Life Insurance Policy

Conclusion

Appendix A: Trustee Duties and Fees

Trustee Duties

Trustee Fees

Appendix B: Sample Estate Calculation

Glossary of Acronyms

INTRODUCTION

With the coming into force of the new Federal estate and testamentary trust taxation rules on January 1, 2016, the role of the experienced Certified Financial Planner (CFP) has become even more important in the increasingly complex world of Estate and Financial Planning. A CFP can weave together all the elements involved in crafting a solid estate plan.

"Completing the Puzzle" has been written to provide Estate Planning guidance to Canadians, specifically those who are resident in Ontario. It is also intended to clarify and fill-in the information provided by many of the publications currently available online and on bookstore shelves.

Many people maintain the belief that when they die, their estates will take care of themselves. In the case of those Ontarians with a spouse, they also believe that their spouse will be the sole beneficiary of their estate assets. This is definitely NOT the case!

This guide has been designed to provide direction to all Ontarians in the arrangement of their estates to maximize the distribution of their estate assets to meet their wishes and minimize the taxes on the distribution of those assets to their beneficiaries.

There are a number of Acts that provide the legislative framework for the legal and tax issues involved in estate distribution. The province has the pre-eminent jurisdiction in regards to estate distribution legislation. The federal government’s jurisdiction is primarily limited to income taxation. This guide will review the Government of Canada’s (Federal) and Province of Ontario’s (Provincial) legislations and how they are applied to estate distribution.

The Federal government’s legislation of concern is the Income Tax Act (ITA); R.S.C. 1985 and regulations. Unlike many other countries that have Estate Tax, such as the United Kingdom (U.K.), Republic of South Korea and the United States of America (U.S.A.), Canada does not have an Estate Tax, per se. Estate tax is a single tax based on the total value of the deceased’s estate. This should not be confused with Ontario’s Estate Administration Tax (EAT), see Chapter Three - Estate Administration Tax.

Canada does NOT have this type of estate tax. Canada also does NOT have a gift tax, as they do in the U.S.A. However, a gift could have income tax implications as it would be a disposition for tax purposes.

That said: Canada’s ITA does provide for the collection of ALL unpaid income tax accrued up to the date of death, unless there are roll-over provisions available to a surviving spouse, or in some cases to financially dependent children, to defer the accrued income tax. At the date of death, the ITA bases the calculation of income tax due on a deemed disposition of all assets immediately prior to death. It is also possible that a continuing estate receives income after the date of death; additional income tax could be due from the estate.

Income taxed at death includes income earned to the date of death, the market value of registered plans, accrued interest, taxable dividends and capital gains. Registered plans include; Registered Retirement Savings Plans (RRSPs), Life Income Funds (LIFs) and variations thereof. The effects of the ITA on estate distribution will be highlighted for selected situations, including the taxation of Trusts. Taxation can have unintended results on the distribution of your estate to your beneficiaries.

The ITA does include specific exemptions and elections for a roll-over of assets and for the deferral of the tax due at death. The main provisions are for tax deferral on a transfer of assets to a surviving spouse. These provisions are not available during a couple’s lifetime, due to the ITA’s income attribution rules.

There are also limited roll-over provisions and tax deferral available for registered plans to financially dependent minor children and to disabled financially dependent adult children. The ITA also includes income attribution rules. These rules play a role in estate planning when "inter vivos" (created during a settlor’s lifetime) trusts are included in the estate plan. The various uses of trusts in estate distribution planning will be explored in Chapter Five - Trusts.

For Canadians, in particular Snowbirds, those with a Green Card, those with dual Canadian/U.S. citizenship, and those with U.S. assets, the application of the U.S. Internal Revenue Code (IRC) can play a significant role in estate planning. This area of taxation is complex and requires the advice of an expert in cross-border