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.


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


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.


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


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. ■


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


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


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


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


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. ■

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