Canadian Wealth Management GuideExcerpt: [¶2538] Tax Planning the Will

A PRACTICAL

APPROACHTO MAXIMIZING

CLIENT WEALTH

EXCERPT #2

A REAL LIFE EXAMPLEDetermine for yourself whether or not the Canadian Wealth Management Guide is worth the investment.

Check out the following pages that have been reproduced in their entirety from the Guide. You’ll be

impressed by their thoroughness and applicability.

CANADIAN WEALTH MANAGEMENT GUIDE

Updated bi-monthly, the Canadian Wealth Management Guide is yours for

$361 a year on CD-ROM (single-user license)$351 a year over the Internet (single-user license)

Written by ExpertsThe Canadian Wealth Management Guide is the collaborative product of some of Canada’s leading tax

experts. David Louis JD, CA and Samantha Prasad Weiss BA, LLB, both with the law firm Minden Gross

LLP, along with Robert Spenceley BA, MA, LLB, analyst with CCH Canadian, and Joseph Frankovic LLB, LLM,

PhD, CFA, tax lawyer and member of the adjunct faculty of Osgoode Hall Law School, lead a host of contributors

whose expertise make this Guide truly indispensable.

David Louis JD, CA

Samantha Prasad WeissBA, LLB

Robert SpenceleyBA, MA, LLB

Joseph FrankovicLLB, LLM, PhD, CFA

TRY BEFORE YOU BUYTake advantage of our free trial offer, available on CD-ROM or over the Internet. For more information

or to place an order, simply call the appropriate toll-free number below.Alberta: 1-866-470-1124

British Columbia: 1-866-894-5105Ontario, Saskatchewan, Manitoba, Atlantic Canada, and Territories: 1-800-996-9914

Toronto: 416-228-6175Quebec: 1-800-363-8304, ext. 267

Please quote Promo Code TA04078.

2

[¶2538] Tax Planning the Will

While the importance of a will may be widely understood,countless thousands of wills overlook critical tax-planningopportunities.Why? For one thing, lawyers who preparewills are not necessarily tax experts. And because ofincreasing price competition, most people expect topay only a few hundred dollars for a will.

This means that there may be too little time spentunderstanding the family's financial structure. Thereare various ways that a will can impact on post-mortemtax planning, such as the provision of a “laggeddistribution” on the death of the surviving spouse.Accordingly,a properly-designed will is a vital componentof succession planning.

The following are some suggestions for tax planninga will. To repeat, it should not be assumed that thesewill be fully considered by the person drafting the will.

The importance of the spouse as beneficiary

To the extent that assets have appreciated in value –that is, so that there is untaxed capital gains – theseassets should generally be left to the spouse, or aqualifying spouse trust. That way, the property “rollsover”to the spouse (or spouse trust) without immediatetax. Otherwise, the assets will usually be treated as ifthey had been liquidated at current market values (anexception arises where qualifying farm property passesto children, grandchildren, and so on).

Obvious candidates include real estate, shares of a corporation, investments which have gone up invalue, and so on. Accordingly, in order to defer “deathtax”, shares of a family business are usually left to aspouse, or more likely, a spouse trust. However, therecan be tax exposure even if the asset has not actuallyappreciated in value. An example of this would be a rental or other property on which depreciationclaims have been made. Also, many older tax-shelterinvestments, even if virtually worthless, may attracttax if they are in what is known as a “negative costbase”position; generally, where the personal cost of an investment is less than the overall tax losses claimedand cash or other distributions from the partnership.If so, these too should be left to the spouse.

Don’t forget that a second home may no longer becovered by the principal residence exemption so thatif this is not left to a spouse, there could be capitalgains tax on its appreciation as well.

If qualifying small business corporation shares or farmproperty which is eligible for the enhanced capitalgains exemption of up to $500,000 are held, a numberof options will be available. If the exemption is available,the individual will generally want to use it up by thetime he or she passes away. This can be done even ifthe shares are left to a spouse, because of Subsection70(6.2) which allows an individual to “elect into”a capitalgain on a property-by-property basis (e.g., one or moreshares of a corporation). Also, the surviving spouse ispotentially eligible for his or her own capital gains

CANADIAN WEALTH MANAGEMENT GUIDE

Virtually all professional advisors recognize that a properly-designed will is a vital

component of estate and succession planning. While the importance of a will may be

widely understood, vital and lucrative tax-planning opportunities are often missed.

Your subscription to Canadian Wealth Management Guide will ensure that this doesn’t

happen - and that your clients’ wills are part of an integrated estate plan that minimizes

the family’s taxes. Canadian Wealth Management Guide reveals key strategies designed to

ensure that you have covered the bases when it comes to crafting a tax-planned will for

your clients. The strategies are described in a way that is easy to understand, so that they

can be incorporated into correspondence and understood by your clients.

The following excerpt shows specific examples.

3

exemption. If it is expected that, after death, there willbe future appreciation in the shares which will morethan fully utilize the surviving spouse's capital gainsexemption, it may be a good idea to leave at least someshares to children (or grandchildren) if it is intendedthat they remain within the family. This could be donebefore death through an “estate freeze” reorganization,to meet the family's financial needs. Note: For therollover in Subsection 70(6) to apply, capital propertytransferred or distributed to a spouse or spouse trustmust vest indefeasibly in the spouse or spouse trustwithin 36 months of the taxpayer's death or, uponwritten application to the Minister within that period,within such longer period as the Minister considersreasonable in the circumstances.

See further Interpretation Bulletins IT-120R5 “PrincipalResidence”and IT-449R “Meaning of vested indefeasibly”.

The residence

Consideration should be given to leaving a residenceto a beneficiary who will be eligible to claim the principalresidence exemption on it. Remember, married couples,together with unmarried children under the age of18, are generally entitled to only one principal residenceexemption among them. However, the principalresidence exemption might be maximized, for example,by leaving the residence to an adult child who doesnot already have a principal residence.

See further Interpretation Bulletins IT-120R5 “PrincipalResidence”.

Low-bracket beneficiaries

Consideration should be given to leaving income-earning assets to beneficiaries who are in low taxbrackets, such as grandchildren, a low-income child(or his or her spouse) and so on.This is because incomefrom bequests to high-income individuals will, ofcourse, be added to their other taxable income, thusresulting in a significant tax exposure.

See further IT-510 “Transfers and loans of property madeafter May 22, 1985 to a related minor” and IT-511R“Interspousal and certain other transfers and loans ofproperty”.

The estate split

An estate is treated as a separate taxpayer; therefore, itcan take advantage of low-tax brackets, just like an

individual. This means that, in effect, beneficiaries can“income split” with the estate. This opportunity hasbeen made even more effective, due to a rule that anestate can choose to pay tax on income even thoughit is actually payable or distributed to beneficiaries.

To take advantage of this rule, it is recommended thatthe will make it clear that the estate can continue for a number of years at least. For example, if the willsimply leaves assets to beneficiaries “outright”, someestate planning practitioners question whether thisfavourable tax effect can continue longer than oneyear after death (after which the beneficiaries arenormally entitled to a distribution of the propertyfrom the estate).

In fact, the estate-split concept can be taken a giantstep further by establishing several different “trusts”in a will. Each of these trusts can potentially be taxedseparately so that the income-splitting advantagesmentioned above can be multiplied. One word ofwarning, though: the CRA has the power underSubsection 104(2) to “lump”the trusts together wherethey ultimately accrue to the same beneficiary or“group or class” of beneficiaries. However, there arefew reported cases where the CRA has successfullytaken this position. Subsection 104(2) has noapplication to separate trusts each of which havedifferent beneficiaries. The CRA, for instance, has confirmed that in its view, Subsection 104(2) wouldnot apply where a testator creates separate trusts foreach of his or her children.

Under Regulation 900(2), the authority to make adesignation under Subsection 104(2) is theresponsibility of the Director of the relevant TaxServices Office. Factors that would be considered in making a determination include:

Footnote

See Technical Interpretation 9812985, January 14,1999.

• whether or not there was a clear intent by the testator, as evidenced by the terms of the will, to create separate trusts;

• whether or not the trusts had commonbeneficiaries;

• whether or not the assets of each trust weresegregated and accounted for separately (e.g.,separate bank accounts, no undivided interests in

4

property, separate accounting. records for incomereceived and capital and/or income disbursements);and;

• the conduct and powers of the trustees. The taxadvantage of having multiple trusts with differentbeneficiaries is most apparent in the case of testamentary trusts. Since testamentary trusts are taxed at graduated tax rates, there will be a tax saving where a deceased's will creates a separate trust for each of his or her children.

For example, an owner-manager's will might leave the shares of his or her corporation in a spouse trust,followed by the creation of multiple testamentarytrusts for children/ grandchildren, in order to gain lowtax rates on dividends paid on the shares. However,consideration should be given to whether post-mortem planning procedures would be advisableafter the death of the surviving spouse, and if so, theimpact on the plan.

Where trusts are set up in a will, and the trusts make a distribution of income, including capital gains, to a beneficiary, the trustee can elect that any portionthereof remain taxable to the trust rather than thebeneficiary (Subsections 104(13.1) and 104(13.2)).Thiselection would normally be made by the trusteeswhere the trust has sufficient losses to shelter theincome, as well as to obtain income splittingadvantages mentioned above.

See further Interpretation Bulletins IT-342R “Trusts –Income payable to beneficiaries”, IT-381R2 "Trusts –Deduction of amounts paid or payable to beneficiariesand flow-through of taxable capital gains to beneficiaries”,and IT-406R2 “Tax payable by an inter vivos trust”.

RRSPs and RRIFs

Generally, a spouse should be designated as beneficiaryof an RRSP (or RRIF). Otherwise, the entire balance orvalue may be included as taxable income in thedecedent’s final (terminal period) return.

In fact, it is best to do this directly in the RRSP contractitself, rather than a will. In Ontario and elsewhere, thisprobably avoids probate fees by excluding the RRSPfrom the decedent’s estate. In Ontario, for example,the probate fee on an RRSP will be 1.5% of the valueof the plan, for larger estates. Of course, it is possible

that a spouse will pass away before the testator orthat the latter is divorced. If so, there is another tax-reducing opportunity: if a child or grandchild who is“financially dependent” is designated, special rules taxthe RRSP inheritance in the hands of the child orgrandchild – who will probably be in a lower taxbracket than the decedent –instead of being addedto the decedent's income in the year that he or shepasses away.

Furthermore, financially dependent children or grand-children are able to purchase a special annuity whichwill enable them to defer this tax while minors(indefinitely if dependent because of mental orphysical illness).

This special rule has often been overlooked because,until recently, there were a number of other restrictions,which have now been removed: there is no longer anage limit for the beneficiary, the RRSP may pass to achild or grandchild even if there is a surviving spouse,and it is no longer necessary to show the child orgrandchild was claimed by the testator as a dependentfor tax purposes.

But what does “financially dependent” mean?

The CRA's policy seems to be that if the individual'sincome does not exceed the basic personal amount,he or she is considered to be financially dependent.If the individual’s income exceeds this amount, he orshe is presumed not to be financially dependent unlesshe or she demonstrates otherwise (the Income Tax Actitself reflects only the latter statement — see “refundof premiums” definition in Subsection 146(1)). In IT-500R,“RRSP — Death of an Annuitant”, the CRA statesthat:“Under the definition of refund of premiums, it isassumed, unless the contrary is established, that a childor grandchild is not financially dependent on theannuitant for support at the time of the annuitant’sdeath if the income of the child or grandchild for theyear preceding the year of death exceeded the basicpersonal amount under paragraph (c) of the descriptionof B in Subsection 118)(1) for that preceding year.”

Under Subsection 146(5.1), a contribution can be madeon behalf of the deceased taxpayer to a spousal RRSPwithin 60 days of the calendar year of death. See furtherInterpretation Bulletin IT-307R3 “Spousal RegisteredRetirement Savings Plans”.

5

2003 Federal Budget Proposal

The 2003 Federal Budget proposed that, for deathsoccurring after 2002, the income threshold used fordetermining financial dependency of a mentally orphysically infirm child or grandchild increase to $13,814,indexed for deaths occurring after 2003. (The incomethreshold for non-infirm children and grandchildrenwas not changed by this proposal.)

Debt forgiveness

If someone is financially indebted to an individual and the individual wishes to forgive the debt, it is bestto do this in the will. If the individual forgives the debtbefore he or she dies, there will be adverse taxconsequences to the debtor if a debt was investment-or business-related (that is, the interest was potentiallydeductible to the debtor).

FootnoteSee paragraph 80(2)(a).

Association rules

When leaving the shares of a corporation to beneficiaries,consider carefully the impact of the “association rules”,if the beneficiary and/or family members are alsoshareholders in an incorporated business. Unless careis taken, the result may be that,after death, the corporationmay have to share its entitlement to the “small businessdeduction”(the low rate of tax for business corporations)and certain other tax benefits with that of thebeneficiary's corporation.

Alternatives may be to leave the shares to grand children,or a son or daughter-in-law (although the family lawaspects of such a course of action must also be takeninto account).

See further Interpretation Bulletin IT-64R3 “Corporations:Association and control — After 1988”.

Corporations and partnerships

If shares of a corporation or an interest in a partnership,whose value has appreciated are held, and these assetsare to be left to someone other than a spouse, it shouldbe remembered that, in many cases, it will be advisableto undertake some rather complex tax manoeuvreswithin the first year of the estate; otherwise, therecould be “double-tax” exposure when the underlyingcorporation/ partnership assets are sold off.

Unfortunately, many executors are not aware of thesemanoeuvres until it is too late – as stated, the deadlinemay be one year after the individual passes away. Inthis situation, it should be ensured that executors areadvised to seek professional tax advice. This shouldgenerally be done whenever shares or partnershipinterests are left to someone other than a spouse, andthey have appreciated in value. (A similar situation mayarise when the surviving spouse who is the beneficiaryunder a spouse trust passes away.) In addition, the willshould give executors and trustees authority to makethe various tax elections and designations that are required.

Charities

If the testator plans to make large charitable donationsfrom his or her estate, it may be advisable to receiveprofessional advice beforehand, as there are a numberof tax-planning opportunities and pitfalls here.Subsection118.1(4) provides that a gift made in the year in whichthe individual dies is deemed to have been made inthe preceding year, to the extent that it was not deductedin the year of death.

Subsection 118.1(5) deems gifts made by an individualby will to have been made in the year of the individual'sdeath, including eligibility for Subsection 118.1(4).Accordingly, the donation can be claimed on the terminalyear return, even though the transfer is made by thedeceased’s representatives rather than the deceased,and might not be made until a subsequent taxation year.

As of 1996, qualifying donations (including carryforwardsfrom the preceding five years) up to 100% of net incomeare eligible for credit in the year of death; as well, thereturn for the year preceding death may be reopened(or filed, if it has not been) to treat donations made inor carried forward to that preceding year as eligiblefor credit to the extent of 100% of net income. Nodoubt, while most of the gifts that will qualify for the100% limitation will be made in a will, the Act is notworded so as to require that the gift be testamentaryin nature. Estate planners utilizing life insurance tofund charitable gifts will want to carefully considerwhether the estate should be made the beneficiaryof the policy so that the donor can take full advantageof the 100% limit in the year of death.

Previously, when drafting a will, care was to be takenthat both the specific charity and the specific bequestwere specified. If the choice of the charity or the valueof the bequest was left to the discretion of the executor

6

of the will, the CRA took the position that Subsection118.1(5) did not apply. To quote:“[i]n the absence ofeach qualified donee being named in the will alongwith the amount each such donee is to receive, it isour general view that the gift will not be consideredto have been made by an individual in the individual’swill”. See Technical Interpretation Document No.9730365, February 25, 1998.

However, in that Technical Interpretation, it wasconceded that, in some circumstances, the residuewould be accepted as a specified amount so long as aspecified charity were to receive a specified amount.

In Technical Interpretation (Document No. 2000-0055825, March 8, 2001), the CRA softened the aboveopinion (but did not reverse it) when it held thatwhere the will stipulates that a specific amount is tobe gifted to charity and provides a list of charities towhich donations should be made but discretion isleft to the executor to determine the amount to begiven to each named charity, it is now its view thatthe donation would nevertheless qualify as a gift bywill if the actions taken by the executor are reasonableand in accordance with the terms of the will and thedonation is made to a charity that is a qualified donee(see Document No. 2000-0055825, March 8, 2001). In arecent technical interpretation released on April 11,2002 (Document No. 2001-0090205), the CRAannounced its full reversal of its 1998 position. TheCRA now takes the position that as long as the amountof the gift can be determined (whether it is specificor determinable) and it is clear that it must be putto a charitable use, the gift will be considered to havebeen “made by will”. Therefore, the fact that a trustee,under the terms of the will, has full discretion to selecta charity to whom the donation is to be made “wouldnot necessarily preclude the donation from otherwisequalifying as a gift by will given the broad wording ofSubsection 118.1(5)”.

It may be possible to gain substantial tax benefitsbefore an individual passes away, by leaving thecharity a residual interest in the property, while theindividual retains the use and possession of theproperty during his or her lifetime.

Planning Points:

• As discussed above, a donation to a charity under awill, even if left to the discretion of a trustee, shouldqualify as a charitable bequest provided that anamount can be determined (whether specific or a

percentage of the residual of the individual's estate),and it is clear from the terms of the will that thetrustee is required to make the donation and thedonation is made to a qualified donee. Likewise, agift of a residual interest in a testamentary trust willqualify under Subsection 118.1(5) if the trustees cannot encroach on the capital of the trust for the benefitof another beneficiary.

• The Act has been amended so that RRSP, RRIF, andinsurance proceeds donated to a charity by meansof direct beneficiary designations will qualify for thecharitable donations tax credit, in the year of death.This amendment is to apply in respect of anindividual’s death that occurs after 1998.

For further Interpretation Bulletins IT-111R2 “Annuitiespurchased from charitable organizations”, IT-226R “Giftto a charity of a residual interest in real property or anequitable interest in a trust”, IT-244R "Gifts by individualsof life insurance policies as charitable donations”, IT-288R2 “Gifts of capital property to charity and others”,and IT-297R2 “Gifts in kind to charity and others”.

Spouse trusts

A spouse trust can be a very effective succession andestate planning vehicle. It combines the tax-deferraladvantages of leaving assets to a spouse, with theability to protect family interests. Where a successfulbusiness is involved, it is more usual to use a spousetrust rather than leaving the shares and other assetsoutright, in order to preclude the possibility of thesurviving spouse changing the terms of his or herwill, e.g., in the event of a remarriage. In addition, theappointment of suitable trustees may protect againstmismanagement of the business or distributionswhich could jeopardize financially the viability of theongoing business.

Spouse trusts may be used for inter vivos (lifetime)gifts, or testamentary bequests. In order to qualify forrollover treatment, the trust must provide that:

(i) the spouse is entitled to receive all of the incomeof the trust that arises before the spouse's death;

Footnote

However, a trust that retains income at the discretionof the spousal beneficiary does not lose its status as aspouse trust, since the spouse beneficiary nonethelesshas a legal right to enforce payment of all of theincome while the spouse is alive. See Document No.

7

2003-001451, June 2nd, 2003. Subsection 108(3) providesthat, for these purposes, income of the trust is calculatedunder trust rules, with adjustments for certaindividends. And;

(ii) no person except the spouse may, before thespouse’s death, receive or otherwise obtain theuse of any of the income or capital of the trust.

Footnote

In addition, the capital property transferred or distributedto the spouse or spouse trust must vest indefeasiblyin the spouse trust within 36 months of the taxpayer’sdeath or, upon written application to the Ministerwithin that period, within such longer period as theMinister considers reasonable in the circumstances.Several comments can be made in respect of theserequirements:

(1) As noted above, the spouse must be entitled toobtain all of the income of the trust during his orher lifetime. However, if the trust is combined witha corporation or other vehicle held by the trust, itis possible to effectively control the amount ofincome received by the trust and consequently,the amount to which the spouse is entitled.

For example, where a corporation is held by a trust, thedividends paid on the shares may be “regulated” bythe directors of the corporation. (In such circumstances,it may be prudent to ensure that control of thecorporation is not held by the trustees themselves;otherwise, the spouse might assert that distributionsshould have been made by the corporation as aconsequence of the duties of the trustees.)

(2) The requirement that no other person can receiveor obtain the use of capital does not mean that thespouse is entitled to receive the capital. In otherwords, as long as no one else may receive or obtainthe use of the capital, the trust will not be disqualified.

(3) In respect of the “use of capital” requirement, carefuldrafting is required in order to ensure that thisrequirement is not violated. For example, a loan toa relative might be interpreted as allowing someoneother than the spouse to obtain the use of capital.Provisions in a trust that allow this could throw thetrust offside. Although, CRA Document No. 962734,November 14, 1996 and paragraph 16 of IT-305R4indicate stated that a loan to a non-spouse oncommercial terms (e.g., commercial interest rates)would not taint a spouse trust. Document No.

2003-0019235, July 17, 2003, indicates that wherethe trust permits funds to be loaned (or any otherform of assistance to be provided) to anyone otherthan the spouse for inadequate consideration, thiswould disqualify the trust, whether or not such aloan was actually made.The document appears toindicate that the will in question authorized thetrustee to lend funds or provide any other financialassistance to any beneficiary with or withoutconsideration.

One problem arises where the trust provides for thepayment of debt that does not exclusively relate tothe surviving spouse. This may taint the spouse trustand therefore destroy the tax deferral that is potentiallyavailable. Note, however, that Subsection 70(7) andrelated provisions allow a “tainted” spouse trust to bepurified, in respect of particular testamentary debts:certain debts that would otherwise taint the trust —because someone other than the spouse is entitledto the trust's capital — may be satisfied by specifiedassets, with the remaining assets qualifying for rollovertreatment. For these purposes,“eligible testamentarydebt”means any debt owing by the deceased taxpayerimmediately before death and any amount payable inconsequence of the taxpayer's death (other than anyamount payable to any person as a beneficiary of thetaxpayer's estate). Typical eligible testamentary debtsinclude funeral expenses and income taxes payablefor the terminal year and prior years.

In general terms, the provision deems properties topass to the trust at fair market value to the extent ofthe value of testamentary debts that are “non-qualifyingdebts” (generally, the deceased's testamentary debtsother than estate or succession taxes, or debts securedby a mortgage). All other properties passing to thespousal trust will remain subject to rollover treatment.

In particular, Subsection 70(7) permits the personalrepresentative to designate one or more properties(including any money) to which Subsection 70(6)does not apply, with the result that such propertiesare deemed to have been disposed of for proceedsequal to their fair market value at the time of thedeceased’s death. Property which is not so designatedis eligible for the tax-free rollover to a qualifying spousetrust.The properties so designated (or listed) must havean aggregate fair market value at least equal to thenon-qualifying debts to be paid out of the trust property.Although these special rules may effectively “untaint”a spouse trust, care should be taken in this area.

8

Footnote

For example, per paragraph 19 of Interpretation BulletinIT-449, some debts may taint the trust in a manner thatcannot be remedied by Subsection 70(7), for example,a contingent liability to make good any deficiency thatmay arise in another trust created under the same will.

One solution is to draft the will so as to allow theexecutors to split assets into two trusts, one whichqualifies as a spouse trust and another which doesn't.Appreciated and other assets that would otherwiseresult in a tax liability would go to the spouse trust.Liabilities, bequests to other parties, and so on can bepaid out of a second trust. (See further InterpretationBulletin IT-305R4.)

While spouse trusts are a preferred succession planningprovision, care should be taken. Under Ontario familylaw at least, an equalization right is available,notwithstanding the terms of the will. Where sharesof a family business are left in a spouse trust, theowner-manager will want to attempt to ensure thatthe surviving spouse does not opt for this right, thusundermining the succession plan. In the absence of adomestic contract, perhaps this is best done by anopen discussion of the terms of the will, includingwhether the spouse trust will provide for adequatedistributions. In addition, where freeze shares or otherequity are left in the spouse trust, the directors of thecorporation might attempt to “turn off the tap” ondividends so that, in extreme situations, no incomecan be received by the spouse trust. Accordingly, thechoice of directors may be important.

See further Interpretation Bulletins IT-120R5 “PrincipalResidence”, IT-305R4 “Testamentary Spouse Trusts”, andIT-449R “Meaning of ‘vested indefeasibly’”.

Rights and things

By virtue of Subsection 70(2) , where a deceased atthe time of death has “rights or things” which, if theyhad been realized or disposed of during the taxpayer’slifetime, would have been included in computingincome, the value of such rights or things must beincluded in the final return of the deceased. Althoughthe phrase “rights or things” is not defined in the Act,examples may include work-in-progress of a sole-practice professional, dividends that have been declaredbut not paid, unused vacation leave credits, unmaturedbond bonus coupons, and so on.

The CRA has indicated that a bonus which is payable to an owner-manager of the corporation qualifies asa "right or thing" provided that it was declared beforedeath. Where, however, the employer has a contractualobligation to pay a bonus annually or on some otherperiodic basis, but the bonus for the period has notbeen declared as at the date of death, the amount isconsidered to be a periodic payment of remunerationtaxable under Subsection 70(1).

FootnoteSee 1991 RCRT, Q. 27.

In simple terms, rights or things can be thought of as amounts to which the taxpayer became entitledbefore the taxpayer’s death and which, if collected orotherwise realized, would have formed part of thedeceased’s income.“Normal” accounts receivable fromthe business or property of the deceased are notconsidered rights or things; however, they are includedin the deceased's income in the terminal year eitherin the computation of profit from the business orproperty under Section 9, or by virtue of paragraph12(1)(b). Where there is doubt whether the nature ofincome is a periodic payment subject to Subsection70(1) or a right or thing under Subsection 70(2), it isthe CRA's policy to generally resolve the issue infavour of the taxpayer (see IT-210R, paragraph 2). As a general rule, it is preferable to have the amountsconsidered rights or things because the amounts canbe taxable to the deceased's beneficiaries (and notthe deceased) in the circumstances described below.

Subsection 70(3) provides that where rights or things of a deceased taxpayer are distributed or transferredto beneficiaries within one-year or within 90 days ofthe mailing of the notice of assessment in respect ofthe final return, whichever is later, the value of suchrights or things may be excluded from the deceased’sfinal return. Instead, the value of such rights or thingsmay be included in computing the beneficiaries'income at the time those rights or things are realized.(Given the tax burden involved, the personalrepresentative should not make the Subsection 70(3)election without the beneficiary's consent; thepersonal representative should also verify that he orshe has the power under the will to make the election.)There are two principal advantages in using Subsection70(3) in this manner. Firstly, the rate of tax payable onrights or things may be lower if they are transferredto the beneficiaries of an estate; that is, the total incomemay be spread over several beneficiaries resulting in alower rate of tax. Secondly, the tax burden attached to

9

the rights or things can be deferred until they are“realized” by the beneficiary. A dividend is “realized”when it is received by the beneficiary. Unpaid salary,vacation pay, commissions, etc., are realized when thebeneficiary receives the amount from the deceased'semployer.

If the rights or things are not transferred to a beneficiaryas described above, the rights or things can be includedin a separate return under Subsection 70(2).The separatereturn includes only the value of the rights or thingsand assumes that the taxpayer was another person. Inother words, income splitting is allowed to the extentof the value of the rights or things because they arenot included in the regular terminal return with thedeceased's other income. This is beneficial becausethe marginal tax rate which will apply to the rights orthings will normally be lower than the tax rate applicableto the other income in the regular terminal return.Additionally, most personal tax credits may be claimedin the separate return, including the basic personalcredit, the married person’s credit, the dependentperson credit and the age credit, notwithstandingthat the full amount of such credits can also be usedin the regular terminal return. Note that, because it isthe “value” of the right or thing that is included inincome, certain expenses may be deducted by thepersonal representative. For instance, the personalrepresentative may be entitled to deduct, from theinterest received on a bond, interest paid on a loantaken out by the deceased to buy the bond.

In order to file the separate return, the deceased’spersonal representative must elect to do so by thelater of (1) one-year after the day of death, and (2) 90days of the mailing of the notice of assessment forthe terminal year. As noted, the separate return is notapplicable where the rights or things were transferredto the deceased's beneficiaries in the circumstancesoutlined above.

The rights or things election can be revoked in writingby the personal representative within the time allowedfor the filing of the election as noted above (Subsection70(4)).

See further Interpretation Bulletin IT-212R3 “Income ofdeceased persons — Rights or things”.

The commentary on this topic is current as of January 2nd, 2005.

Feature:Focus on investors.

Benefit:The information is aimed to give advice ongenerating and maximizing one’s wealth,for individuals, private corporations, andpublic corporations.

Feature:Written in a non-technical manner.

Benefit:Information in the service can be trans-mitted directly to clients or incorporatedinto correspondence.

Feature:Practical rather than theoretical.

Benefit:Readers can see how the law applies tothem currently in any given situation.

Just some of the reasons for making this Guide your planning partner.

10

CCH Canadian is one of Canada’s largest and most

respected business-to-business information services

and application software providers for professionals

in Canada.

Since 1946, CCH Canadian has produced information

products that help customers take command of complex

regulatory issues in tax, accounting, financial planning,

human resources and legal.

Please visit us at www.cch.ca

ABOUT CCH CANADIAN

11

97M3

CANADIAN WEALTH MANAGEMENT GUIDESee inside for excerpt: [¶2538] Tax Planning the Will

The Canadian Wealth Management Guide is available in CD-ROM and online formats.

Other tax planning guides available from CCH Canadian Limited:

Tax Planning for Small Business Guide

Canadian Estate Planning Guide

@

The CCH design is a registered trademark of CCH Incorporated.