We have all heard the saying that there are two things in life that are certain: death and taxes.  For tax and estate professionals, both are always concerns but especially so for clients owning U.S. properties or assets. This is due to the U.S. estate tax. 

Canada does not impose an estate tax upon the death of an individual.  In fact, when Canadians die they are deemed to dispose of all their capital property at fair market value.

The U.S. system works differently: upon the death of a U.S. citizen, a tax is levied on the fair market value of the deceased’s world-wide property.  Furthermore, the U.S. estate tax applies to all property situated in the U.S. including property owned by non-residents of the U.S. (often referred to as “Canadian Snowbirds”).  Consequently, upon death, a Canadian resident who owns U.S. real property or U.S. stocks may be regarded to have a large “deemed” capital gain with respect to such property in addition to a possible U.S. estate tax liability depending on the value of their U.S. properties or assets.

The first $3.5 million USD of a U.S. citizens’ estate is exempt from tax. However, non-residents, including Canadians, are only entitled to a pro-rated exemption under the Canada-U.S. Tax Treaty.  This exemption is equal to $3.5 million USD multiplied by the ratio of U.S. property to your worldwide estate.  Essentially, if your worldwide estate is worth less than $3.5 million, you need not worry about paying U.S. estate tax … at least for now.

In June 2001, the U.S. passed a law that commenced the phasing-out of the estate tax over the following decade.  Essentially, the estate tax rate has been gradually reduced and the exemption amount increased and, based on the legislation, the estate tax will be repealed for the 2010 tax year.  However, this may not be permanent as the legislation contains a “sunset clause” whereby, unless further steps are taken by Congress, the repeal of the estate tax will only last for one year, being 2010.  In 2011, the estate tax rules will revert back to the rules applied before 2001 resulting in the effective exemption of only $1 million USD (compared to $3.5 USD in 2009) and a maximum estate tax rate of 55% (compared to 45% in 2009).

Many U.S. tax experts expect this issue to be addressed by Congress in the near future.  The Senate has already proposed legislation that would cap the top estate tax rate at 35% and maintain the personal exemption at $3.5 million USD.  Nonetheless, Canadians who own U.S. property or assets should consult their tax professionals until Congress legislates on this issue.

Until Congress acts on this issue, Canadian Snowbirds should review the U.S. estate tax with their estate planning advisor.  Canadians who have an estate worth more than $1 million USD may be at risk of having to pay U.S. estate tax.

If you have questions regarding this issue or any other issue pertaining to your estate, please contact Sebastien Desmarais, Associate, Tierney Stauffer LLP at (613) 288-3220 or sdesmarais@tslawyers.ca.

The ability to tax means little without the ability to collect.  As a result, the Income Tax Act (the “ITA”) provides a myriad of ways to collect taxes owed that would otherwise not be obtainable when taxpayers attempt to evade their creditors (Canada v. Livingston).  It should come as no surprise that the Minister of Revenue (the “Minister”) will vigilantly review any transfer of property of a tax debtor at less than fair market value.

Section 160 of the ITA aims at preventing a tax debtor from transferring property to a spouse or a non-arm’s length individual in an attempt to frustrate the Minister’s efforts to collect taxes.  For the Minister to issue a section 160 assessment, the following must have happened:

1. There was a transfer of property;

2. The parties were not be dealing at arm’s length;

3. There was no consideration or there was inadequate consideration flowing from the transferee to the transferor (tax debtor); and

4. The transferor was liable to pay tax under the ITA at the time of the transfer.

If the above criteria are met, the transferee becomes personally liable to pay the lesser of the tax debt of the transferor or the shortfall in the consideration paid for the property.   In such circumstances, the transferee is jointly and severally liable for the tax debtor’s debt and he or she can only discharge the debt by paying or by challenging his or her assessment or the tax debtor’s underlying assessment.

The typical application of section 160 is where a husband transfers his interest in the family home to his wife, leaving himself with no assets that the CRA can seize for his tax debt.  In such a case, the Minister can assess the wife for the value transferred and any of her assets can be seized for this debt - not just the transferred assets. 

The comments we often hear from the transferee is “but we didn’t know there was a tax debt” or “we didn’t want to cheat the Minister.”  Although those may well be the intentions of the parties or ignorance of the tax debt will not prevent the Minister from assessing the transferee; there is no due diligence defense available.

As long as there was a transfer of property for inadequate consideration between non-arm’s length taxpayers, the Minister can assess the transferee under section 160. 

There is significant jurisprudence regarding section 160. Here are scenarios where a Court held that section 160 applied:

1. Where the tax debtor makes contribution to his or her spouse’s RRSP;

2. If a dividend is paid by a corporation to a shareholder with which it does not deal at arm’s length; or

3. To a bequest by a deceased non-resident who left Canada with taxes owing many years ago. 

Furthermore, the Minister is not bound by the normal reassessment period and can assess the transferee for a transfer that occurred years ago.  Also, the tax debt will not be vacated by a transferor’s bankruptcy (which eliminates his or her tax debt) because the transferee’s liability arose at the time of the transfer of property.

If you contemplate transferring property to your spouse or a relative, you should seek legal advice.  If you have questions regarding this issue or any other issue pertaining to tax matters, please contact Sebastien Desmarais, Associate, Tierney Stauffer LLP at (613) 288-3220 or sdesmarais@tslawyers.ca.

A Henson Trust is an excellent way to allow for financial care for disabled children after the death of the parent(s). The terms Henson Trust, Absolute Discretionary Trust and Discretionary Trust are used interchangeably and refer to a very specific type of trust when used in the context of planning for a person with a disability.

The purposes of a Henson Trust are to protect the assets (typically an inheritance) of a disabled person, as well as that person’s rights to collect government benefits and entitlements.

The key provision of a Henson Trust is that the trustee has "absolute discretion" in determining whether to use the trust assets to provide assistance to the beneficiary, and in what quantity. This provision means that the assets do not vest with the beneficiary and thus cannot be used to deny means-tested government benefits.

In addition, the trust may provide income tax relief by being taxed at a lower marginal rate than if the beneficiary's total assets were considered. It can also be used to shield assets from matrimonial division in case of divorce of the beneficiary. In most cases, the trust assets are immune from claims by creditors of the beneficiary.

A Henson Trust can be established either as an Inter Vivos (Living) or a Testamentary Trust (Created by last Will and Testament). The most commonly used type of Henson Trust is the Testamentary Trust established in a parent's or caregiver's Will. 

History of the Henson Trust

Leonard Henson had a daughter named Audrey. Audrey was a person with a developmental disability and she lived in a group home managed by the Guelph Association for Community Living. Leonard knew that if he left his estate directly to his daughter, it would exceed the allowable asset limits as set out by the Family Benefits Allowance (now called the Ontario Disability Support Program). He realized that having assets in the hands of his daughter directly would not be to her advantage and that her benefits would be terminated until the assets were "spent down" to a level below the threshold amount. In addition, Leonard's wife had pre-deceased him and he had no other family.

Leonard discovered a technique that would allow Audrey to retain her government benefits while at the same time allowing her to receive quality of life enhancements from his estate. That technique was the use of the Absolute Discretionary Trust to be created in his Will as a Testamentary Trust. The Will required the creation of an Absolute Discretionary Trust which appointed the Guelph Association for Community Living as Trustee and his daughter Audrey as beneficiary of the trust. Once Audrey died, his Will instructed that the remaining funds in the Trust were to be passed on to the Guelph Association for Community Living.

The Ministry of Community, Family and Children's Services (the ministry which controls the FBA (ODSP)), determined that Audrey had inherited the estate of her father and since it was in excess of the allowable amount of assets, they terminated her benefits. The Guelph Association for Community Living challenged this decision and the Ministry took the trust and the Trustee to court. The first court found that the funds contained in Audrey's trust account did not meet the FBA (ODSP) definition of assets and therefore, it ruled in favour of the Trustees. The Ministry launched an appeal. The appeal reached the Supreme Court of Ontario and in September of 1989 was dismissed. The court allowed the trust to benefit Audrey without affecting her government benefits.

That decision has enabled families who have a son or daughter with a disability and are residents of Ontario with a vehicle in which they can place assets for their children without disqualifying them from receiving the ODSP payments to which they would otherwise be entitled.

For further information or assistance, please contact Douglas Laughton, Partner, Tierney Stauffer LLP at 613-288-3225 or dlaughton@tslawyers.ca.