Making tax rules for charities more flexible
By Wendy D. Templeton, Templeton Law, Toronto
Chair of the CBA National Wills, Estates and Trusts Section
The tax rules governing charitable donations can be surprisingly complicated. While this is not unusual whenever the Income Tax Act governs a matter, some of the charitable giving rules can catch a non-tax specialist unaware and produce unintended results.

Probate planning using bare trusts
By Richard Niedermayer, TEP, Stewart McKelvey, Halifax
Many people are concerned about transferring their assets upon death in the most efficient manner without extra costs or delays. They are also concerned about protecting privacy. The probate planning technique discussed here can help to achieve both those goals.

Extra-jurisdictional validity and B.C.'s new Power of Attorney Act: Can a B.C. EPA be created outside of B.C.?
By Kimberly Wallis, Tinker Churchill Wallis, Kelowna
Prior to September 1, 2011, "enduring powers of attorney" in British Columbia were governed by only one section, s. 8 of the Power of Attorney Act [R.S.B.C. 1996 Chapter 370].

British Columbia Law Institute's Recommended Practices for Wills Practitioners Relating to Potential Undue Influence: A Guide
Stanley Rule, Sabey Rule LLP, Kelowna
The British Columbia Law Institute is publishing “Recommended Practices for Wills Practitioners Relating to Potential Undue Influence: A Guide.”

Making tax rules for charities more flexible

By Wendy D. Templeton

The tax rules governing charitable donations can be surprisingly complicated. While this is not unusual whenever the Income Tax Act (ITA) governs a matter, some of the charitable giving rules can catch a non-tax specialist unaware and produce unintended results. The CBA National Wills Estates and Trust Section has made a number of proposals in a submission to the Department of Finance to address some of the problems which are highlighted here.

Gifts to Charity on Death

The ITA permits a gift made in a Will to be treated as if made by the deceased in the year of death. In most cases this is a good result, matching the donation credit with the additional income triggered on death. However there is no ability to use the donation in the estate, even when this might be the better option.

The submission recommends permitting all or part of the donation to be available to the estate or any testamentary trust at the election of the personal representative with the ability to carryforward unused amounts. It also proposes to extend the donation credit on death beyond a gift by will, to a “transfer” to charity that is made “as a consequence of death.” This would address contributions to charity made by an estate as the result of a settlement or litigation, or under a document falling short of a legal Will but given effect under substantial compliance legislation in some provinces.

Gifts Subject to an Intervening Life Interest

Where there is a required payment to charity in an inter vivos or testamentary trust upon the termination of the trust, usually upon the termination of a life interest, a donation credit may not be available. The problem lies in the nature of a gift. CRA takes the position that the contribution to charity made under the terms of the trust is a distribution to a beneficiary in satisfaction of a capital interest in a trust. As such, this is not a voluntary act, and hence does not qualify as a gift. An exception is made only if the trustees have some discretion regarding the contribution. The requirement for discretion can be arbitrary. What constitutes an adequate “discretion” to qualify for the donation credit has been the subject of a number of CRA interpretations. It has also led to discretion being crafted into the trust document solely to obtain the donation credit and not to reflect the intentions of the donor.

While the technical arguments for CRA’s position to deny the contribution as a “gift” have legal merit, the result is not intuitive, nor does it seem policy based. Why should a requirement to make a contribution to charity in a Will make a donation credit available if there is no intervening interest, but not otherwise? The proposal would permit a donation credit for a charitable contribution by a trust upon the termination of a life interest even where it may not qualify as a gift because it is considered a distribution in satisfaction of a capital interest in a trust.

Gifts to Charitable Remainder Trusts

Where the contribution to charity is deferred by an intervening interest, a donation credit may be available if the trust is considered a charitable remainder trust (CRT), but the timing of the tax credit is different. The present value of the donation may be available for a tax credit at the time the trust is created, provided there is no right to encroach on capital and certain other of CRA’s administrative requirements for CRT’s are met. There are two problems with this result. The trust may not qualify as a CRT (if for example there is a right to encroach on capital), and/or the donation credit may not match the timing of the tax liability. A mismatch would occur for example, in the case of a spousal trust, alter ego trust, or joint partner trust where a rollover is available when property is contributed to the trust, but there is a deemed disposition when the life tenant (or surviving life tenant) dies.

The submission proposes that a required contribution to charity that is subject to an intervening life interest in a trust qualify for a donation credit at the time the life interest ends whether or not the trust qualifies as a CRT. In the case of a trust that is a CRT, the option to use the donation credit at the time the trust is created would remain available at the option of the trustee.

For full details, see the CBA’s letter to the Minister of Finance dated December 19, 2011, which is accessible from the Wills Estates and Trusts Section page of the CBA website.

Editor's note: This article will also be published in an upcoming edition of Charity Talk, the newsletter of the CBA National Charities and Not-for-Profit Law Section.

Wendy D. Templeton is the Chair of the CBA National Wills, Estates and Trusts Section. She practices tax, trusts and estates in Toronto at Templeton Law.

TOP

Probate planning using bare trusts

By Richard Niedermayer

Many people are concerned about transferring their assets upon death in the most efficient manner without extra costs or delays. They are also concerned about protecting privacy. The probate planning technique discussed here can help to achieve both those goals.

Why plan for probate?

There are four main reasons to plan for probate. First, probate tax is payable on the fair market value all of the assets passing through an estate. Although probate tax varies from provinces to province, in Nova Scotia where I live and practice, probate tax is approximately 1.55%. As such, on an estate worth $3,000,000, probate tax of approximately $45,000 would be payable.

Second, there are delays built into the probate process.

Third, planning for probate may provide some additional measure of creditor protection with respect to dependant relief claims.

Fourth, and perhaps most importantly, the probate process is public. Planning for probate preserves confidentiality. All documents filed in the probate courts are publicly available. This includes the will and an inventory of the estate assets. Planning for probate keeps the deceased's affairs private.

How can a bare trust help?

A bare trust is a simple form of legal arrangement where a person holds assets in trust for another person during that person's lifetime or until they direct the termination of the trust. A bare trust involves transfer of legal title of assets from one person (the “owner”) to another person or persons (the “trustee”) while retaining beneficial interest in the assets. In fact, a bare trust is technically not a trust – it is a relationship between the owner and the trustee governed by the law of agency. Bare trusts can also arise in the context of placing assets into joint tenancy between the owner and the trustee.

For probate purposes, legal title in the assets is transferred to the trustee and it is therefore not probateable in the owner's estate upon the owner's death. The trustee signs a declaration of bare trust confirming her intention not to obtain any beneficial interest in the assets. The trustee is holding the assets in trust for the owner during the owner's lifetime and then for the owner’s personal representatives after death.

In a typical bare trust structure, the trustee is usually the personal representative of the owner’s estate as well. The terms of the owner's will govern the disposition of the assets after the owner’s death. Because the same person is the executor of the will and the trustee of the bare trust, she will be able to deal with the estate and administer the scheme of distribution in the will without the need for probate. This is the case not only if the executor is also the beneficiary, but also if an independent executor (such as a trust company or other professional executor) is involved.

The bare trust can be unwound at any time by the owner and the trustee compelled to re-convey full legal title to the assets back to the owner, the owner does not lose any control over the assets during her lifetime in terms of decision-making about the assets generally and investment or sale decisions specifically, and the assets do not get exposed to the trustee's creditors.

In more complex planning, a nominee holding company can be used as the bare trustee to provide ease of ownership, enhanced confidentiality and continuity of administration. In this variant, the owner transfers legal title to the assets to the holding company which in turn signs a declaration of bare trust for the assets, and legal title to the shares of the holding company is also held in bare trust by the ultimate executors (usually jointly with the owner).

Bare trusts can be used for investment accounts, bank accounts, private company shares, personal and household articles, art work, vehicles and real estate. The goal from a planning perspective is to get all assets into the bare trust structure so that probate is not necessary for any of them. Registered assets (RRSPs, RRIFs, TFSAs etc.) cannot be held in a bare trust, but an alternate succession option by way of a beneficiary designation is available for those assets.

For income tax purposes, a bare trust is transparent and therefore has no immediate advantages or disadvantages. Because there is no transfer of any beneficial interest to the trustee during the owner's lifetime, a bare trust does not trigger a taxable disposition in the owner's hands until the owner's death. Taxes are reported at that time based on the deemed disposition at fair market value in the owner's estate on the terminal tax return. The owner continues to report income and gains from the assets during her lifetime.

What are the compliance issues with a bare trust?

Proper documentation of both the transfer of legal (but not beneficial) title by the owner to the trustee and of the declaration of bare trust by the trustee confirming the agency arrangement should be put in place. This ensures that the transfer of legal title to the assets will not be treated as a taxable disposition and that full control of the assets remains with the owner during her lifetime.

However, there is one significant drawback to a bare trust. Because there is no transfer of beneficial ownership to the trustee, if any of the owner's assets needs to be probated, then generally all assets beneficially owned by the deceased owner will need to be probated notwithstanding those assets may be held in the bare trust. In other words, if the estate must be probated to deal with one asset, then the entire value of all assets (including those held in the bare trust) must be included in probate. Accordingly, extreme caution must be used to ensure all assets are outside of probate one way or another.

Why a bare trust?

Bare trusts are attractive primarily because assets held in a bare trust can fund testamentary trusts created in a will notwithstanding that will is not probated. This can be a significant benefit for the owner's estate planning as it allows the assets to pass into such trusts (which can have significant tax and estate planning benefits for the owner and her beneficiaries) in the same way as if they were owned outright by the owner at death, but with the added benefit of passing outside of the probate process. This access to testamentary trusts is one of the main reasons bare trusts are attractive compared to other succession planning structures for income-producing assets.

Conclusion

A well thought out probate plan can provide significant estate and tax planning benefits. The key is to use the tools available to create a customized solution that takes into account the specific goals of each client.

Richard Niedermayer, TEP, practises in the Halifax office of Stewart McKelvey. He is an Executive Member of the CBA National Wills, Estates and Trusts Section.

TOP

Extra-jurisdictional validity and B.C.'s new Power of Attorney Act: Can a B.C. EPA be created outside of B.C.?

By Kimberly Wallis

Prior to September 1, 2011, Enduring Powers of Attorney in British Columbia were governed by only one section, s. 8 of the Power of Attorney Act (R.S.B.C. 1996 Chapter 370). This section simply stated that powers of attorney (“POAs”) were not to terminate on the subsequent incapacity of the donor, so long as the POA stated that its authority was to continue during any such subsequent mental infirmity. There was a further requirement, that the document be witnessed by someone other than the attorney or the spouse of the attorney. Short and sweet, the section had been effective for many years, but the time had come to provide B.C. lawyers with a new and improved version. And so we welcomed the introduction of the Adult Guardianship and Planning Statues Amendment Act (SBC 2007 Chapter 34 – Bill 29, 2007) on September 1, 2011, which increased the number of sections governing enduring powers of attorney (“EPAs”) in British Columbia from one to thirty.

The enduring power of attorney is thus firmly entrenched as the planning document of choice for most people with regard to the management of their financial affairs during any subsequent mental decline. In this article, I will address the question of the validity of EPAs that have been made elsewhere but need to be used in British Columbia. The new legislation attempts to deal with this question in s. 38, which states that, subject to any limitations set out in the regulations, a power of attorney that (a) applies or continues to apply when an adult is incapable, (b) was made in a jurisdiction outside British Columbia, and (c) complies with any “prescribed requirements,” is deemed to be an EPA in British Columbia.

The “prescribed requirements” are detailed in B.C. Reg 20/2011 s. 4(2). The section states that for a power of attorney made in a jurisdiction other than B.C. to be deemed an enduring power of attorney in B.C., it must: 1) state that it is to continue to have effect while the adult is incapable of managing their financial affairs, 2) be made by a person who is ordinarily resident in either Canada, the U.S., the U.K., Australia or New Zealand, 3) be validly made according to the laws of the jurisdiction in which the person is ordinarily resident, and in which the instrument was made, and 4) continue to be effective in that jurisdiction. In addition, the deemed enduring power of attorney (“DEPA”) must be accompanied by a certificate, as set out in the Schedule, from a solicitor permitted to practice in the jurisdiction in which the power of attorney was made, indicating that the DEPA meets the requirement that it was validly made according to the laws of their jurisdiction and continues to be effective. The Regulations further inform us that the attorney appointed under a DEPA must not exercise any powers that they could not perform lawfully either in British Columbia or in the jurisdiction in which the DEPA was made, and that both they and the donor must be at least 19 years of age.

The interesting question that arises out of these new rules has been identified by a number of B.C. practitioners: what is meant by the term “made,” as used in s. 38 (b)? Suppose I create an EPA and email it to a lawyer in Winnipeg, who prints it for signing by a client of mine; a client who is ordinarily resident in British Columbia but who happens to be visiting her grandchildren just when we need her signature on an EPA, in order to sell a rental property jointly owned with her son. In this scenario, was the EPA “made” in Kelowna, where I practise, or in Winnipeg? I think the fact that in this scenario my client is ordinarily resident in British Columbia tells us that the document signed in Winnipeg is not, in fact, a DEPA under the regulations. I would hazard a guess that it is an EPA “made” in British Columbia, albeit executed in Winnipeg, and not subject to the rules with regard to extra-jurisdictional Powers of Attorney.

Now, to twist the facts, let us suppose that my client’s elderly mother is ordinarily resident in Winnipeg. In this scenario, it seems that the lawyer in Winnipeg will have to use their own form of POA that is valid in Manitoba, and attach the required certificate, and I will file a DEPA with the Land and Title Survey Authority of British Columbia. Is there an argument that I could send the British Columbia form of EPA to the lawyer in Winnipeg for signing by my client’s elderly mother? To make this argument, we could take the view that, when I drafted the EPA on my computer, I “made” it in British Columbia. This made-in-B.C. EPA was then executed in Manitoba, but the locus of the execution is not sufficient, under this analysis, to bring the document under the regulations with regard to extra-jurisdictional powers of attorney.

At this point, we have no court decisions to help guide us in understanding what was meant by the term “made.” As such, if a Power of Attorney is to be used in British Columbia but must be signed elsewhere, the safe course – unless the client is ordinarily resident in B.C. – is to use the Power of Attorney normally used in that jurisdiction, and attach the required solicitor's certificate. You can find the form to be used for the Certificate in the Schedule to B.C. Reg 20/2011.

Kimberly Wallis practises at Tinker Churchill Wallis in Kelowna, British Columbia. She is the Co-Chair of the Okanagan Wills and Trusts subsection, B.C. Branch.

TOP

British Columbia Law Institute’s Recommended Practices for Wills Practitioners Relating to Potential Undue Influence: A Guide

By Stanley Rule

The British Columbia Law Institute has published Recommended Practices for Wills Practitioners Relating to Potential Undue Influence: A Guide.

The impetus for this guide is a change to the legislation in British Columbia that will come into effect when the new Wills, Estates and Succession Act is brought into force. Section 52 of the new Act will shift the burden of proof when a claim is made that a will has been procured by undue influence in some circumstances. Under the common law in British Columbia, the burden of proof was on the person alleging that the will was procured by undue influence. When the new legislation comes into effect, if the challenger can establish that the person whom is alleged to have procured the will or a provision in the will by undue influence was in “a position where the potential for dependence or domination of the will-maker was present,” then the onus will be on the person defending the will from the allegation of undue influence to establish “that the person in the position where the potential for dependence or domination of the will-maker was present did not exercise undue influence over the will-maker with respect to the will or the provision of it that is challenged.”

While the impetus may have come from British Columbia, the guide will be of use to practitioners throughout Canada, undue influence being a concern irrespective of where the burden of proof lay. Additionally, section 52 will apply to wills drafted and executed outside of British Columbia if undue influence is alleged in a proof in solemn form proceeding in British Columbia.

As set out in the executive summary, the aim of the guide is to:

• raise awareness of undue influence as a potential cause of estate litigation and invalidity of a will;
• assist will drafters to recognize red flags of undue influence;
• enable will drafters to interact tactfully but effectively with will-makers to elicit information necessary for them to properly assess the will-makers’ individual situations and ability to act independently; and
• insulate wills against successful challenges based on undue influence.

The guide is divided into five chapters. Chapter I sets out the background including a discussion of practitioners’ responsibilities of vigilance in respect of undue influence. Chapter II contains a summary of the law of undue influence, including leading authorities in British Columbia as well as other jurisdictions. Chapter III has a discussion of how undue influence operates in fact, and includes models developed by psychologists and other researchers to describe the dynamics of undue influence. Chapter III also sets out three undue influence scenarios as illustrations of the kinds of fact patterns practitioners may encounter. Chapter IV outlines various “red flags” to assist practitioners in identifying when further inquiry into the potential for undue influence may be warranted. Chapter V provides recommended practices in screening for undue influence.

Chapter IV of the Guide identifies an extensive list of “red flags,” which are subdivided into categories relating to:

“Someone in whom the will-maker invests significant trust and confidence is – or is connected to – a beneficiary”

"Physical, psychological and behavioural characteristics of the will-maker”

“Isolation resulting in dependence on another person to meet physical, emotional, financial, and other needs”

“Circumstances relating to the making of the will and the terms of the will”

“Characteristics of influencer in testator’s family or circle of acquaintances”

“One’s ‘gut feeling’ that undue influence is going on.”

The authors of the guide indicate that a single “red flag,” may not be significant. The likelihood of undue influence increases with the number of risk factors.

Chapter V sets out the basic rule that the will-maker should be interviewed alone, without any interested parties present, and explanations that a practitioner may give to a person who accompanies the will-maker to the appointment on why the practitioner needs to meet alone with the will-maker. This is followed by a discussion of open-ended questions the practitioner may ask if “red flags” are present, as well as some specific questions probing the relationship between the will-maker and others who may be in a position where there is the potential for dependence or dominance, and probing whether the will-maker may be a victim in other contexts. The report contains a discussion of obtaining information from third parties, including the will-maker’s physician, and the types of notes and records the practitioner should make and keep irrespective of whether the practitioner drafts a will, or declines to do so.

The guide concludes that if the index of suspicion of undue influence remains high after the practitioner has done a reasonable investigation, the practitioner should decline to draft the will.

The guide was prepared by a multi-disciplinary project committee comprised of professionals from the fields of medicine and social work, as well as notaries public and lawyers. The project committee was chaired by D. Peter Ramsay, Q.C. and the project manager was Greg Blue, Q.C.

You can access the guide on the British Columbia Law Institute’s website.

Stanley Rule practises at the firm of Sabey Rule LLP, in Kelowna, British Columbia. He is an Executive Member of the National Wills, Estates and Trusts Section.

TOP

FEBRUARY 2012

Editor:
Stanley Rule
E-Publications Editor:
Rose Steele
Production:
Rose Steele
Staff Liaison:
Norma Pugliese

Contributors:
Richard Niedermayer
Stanley Rule
Wendy D. Templeton
Kimberly Wallis

Published by the Canadian Bar Association's National Wills, Estates and Trusts Section.

The views expressed in the articles contained herein are solely the views of the authors, and do not necessarily represent the views of the Canadian Bar Association.

THE CANADIAN BAR ASSOCIATION:

500-865 Carling Avenue
Ottawa, ON K1S 5S8

Tel: 613-237-2925
Toll-free: 1-800-267-8860
Fax: 613-237-0185

E-mail: cbanews@cba.org

© 2012 Canadian Bar Association. All rights reserved.