I INTRODUCTION

i The current Canadian wealth scene

The Canadian economy blew a big hole in 2015 when world oil prices collapsed, veering what had been a stable and modestly growing economy sharply off-course. But matters are slowly on the mend and there is an emerging sense of cautious optimism. There is talk of even lower and possibly negative interest rates in an attempt to pump some air into the economic tyre. The Canadian government has committed to inject stimulus through significant spending on capital infrastructure, as opposed to relying strictly on monetary policy.

A cheaper Canadian dollar has helped the economy gain traction by improving manufacturing exports. But historically low interest rates have caused dislocation and governments are sounding the alarm bells of a pending housing meltdown in the major Canadian urban centres of Vancouver and Toronto.

Foreign investors continue to look to Canada as a safe haven in a world of increasing political unrest and turmoil, adding additional stimulus to the economy. Canada’s competitive business tax environment is a significant factor. A KPMG study, ‘Focus on Tax 2016’, ranks Canada at the top of the list as the most competitive country out of 10 major countries, including the US, UK and Australia, in terms of total business tax costs, which include corporate income taxes, capital taxes, property taxes and statutory labour costs. In addition, Toronto and Vancouver topped the worldwide ranking as having the two lowest total tax indexes of 51 major international cities.

On the private client side, when it comes to saving for the future and retirement, Canadians are having a hard time. The 2016 Global Retirement Index released by Natixis Global Asset Management ranks Canada an unimpressive 10th among other major countries in terms of retirement security, notwithstanding high per capita income in Canada and low levels of income inequality.

Prolonged low interest rates and increased personal taxes have resulted in a continuing and often difficult struggle for those planning for retirement and present retirees.

For the wealth management industry, this presents a challenge, but also an opportunity. Clients are searching hard for good advisers. Those that provide the best, risk-adjusted results and solutions and have reasonable fees and good service will be in great demand in an ageing demographic that is becoming increasingly savvy and looking for real value.

ii Key factors in respect of private clients

Canada’s constitutional system is a federal one, with a clear division of powers between different levels of government. Its primary legal heritage for all provinces and territories, with the exception of Quebec, is based on English common law; Quebec’s is based on civil law. From the private client perspective, Canada offers the stability of a highly developed legal and court system and charter-based human rights protections. Property law, including succession, is a matter of provincial jurisdiction. Many modern and innovative concepts affecting private clients have been pioneered or progressed ahead of other jurisdictions in Canadian law, including equalisation of property between spouses on marital breakdown and death in several Canadian provinces recognising marriage as an equal economic partnership, recognition of common law spouses’ and same-sex spouses’ property and support rights, and same-sex marriage. Many Canadian jurisdictions have modern laws governing incapacity and substitute decision-making to take into account the need for a modern infrastructure to deal with an increasingly ageing population. Canada’s multiculturalism and relatively ‘open-door’ immigration policy, which is required to maintain positive population growth and expand the Canadian economy and is increasingly geared to attracting more entrepreneurs and skilled workers, have together created and contributed to a dynamic, sophisticated, diverse and innovative Canadian culture.

II TAX

i Personal taxation
Federal and provincial income tax

Canada taxes Canadian residents on their worldwide income from all sources, and non-residents on certain Canadian-source income, subject to international tax treaties. Income for Canadian tax purposes includes income from employment, business, property, 50 per cent of capital gains, and various other income sources, less certain deductions.

Canada is a federal state consisting of 10 provinces and three territories. The provinces and territories also tax income generally on the same basis as the federal government, except for Quebec, and increased federal tax applies to certain income not earned in a province. Canadian tax is levied at graduated rates of up to approximately 54 per cent in combined federal and provincial rates on taxable income, less applicable tax credits.

Canada taxes non-residents on income earned in Canada, notably income from business or employment in Canada and from certain taxable Canadian property, including Canadian real estate. A withholding tax of 25 per cent is deducted from certain income relating to non-residents, subject to international tax treaties that reduce the applicable rates.

Capital gains regime

Unlike most jurisdictions, Canada has no gift or inheritance tax. Instead, it levies tax on capital gains. In 2016, 50 per cent of capital gains are included in income upon actual disposition or deemed disposition. There is an exemption for capital gains on a principal residence and a lifetime exemption (C$824,176 in 2016) for capital gains on certain qualified business-use property.

The basic tax unit is the individual. Limited opportunities exist for income splitting, including by the use of trusts. Tax on capital gains may be deferred on certain transfers of property, for example, between spouses.

ii Developments relating to personal taxation
Provincial tax brackets for high earners

The combined provincial and federal tax rates for high earners in 2016 range from 47.7 per cent in British Columbia to 54 per cent in New Brunswick. The highest tax rate in Ontario is 53.53 per cent. In 2015, Alberta introduced graduated tax rates for taxpayers. Prior to the new rates, all Albertans paid tax based on a flat provincial tax rate of 10 per cent. As of 1 October 2015, the new highest combined provincial and federal tax rate for Albertans will be 48 per cent.

Revised federal legislation on the taxation of trusts

Certain estates and testamentary trusts have generally calculated federal tax using the graduated rates applicable to individuals, while trusts established during lifetime have been subject to the top federal marginal rate applicable to individuals. In 2016, graduated rates for certain estates and testamentary trusts were eliminated by the federal government. Now, the top federal marginal rate is applied to testamentary trusts and to certain estates. However, graduated rates will continue to be available to ‘graduated rate estates’ for 36 months and to certain testamentary trusts having disabled beneficiaries who are eligible for the Federal Disability Tax Credit. In addition, the taxation year end for testamentary trusts must now be 31 December and testamentary trusts are now required to make instalment payments of income tax.

Taxation of life interest trusts

In draft legislation released in 2014, which has now been enacted, and which has caused concern in the professional estate planning community, the federal government proposed changes to the taxation of certain life interest trusts, such as ‘alter ego trusts’ and ‘spouse trusts’, on the death of the life interest. A transfer of property to such trusts generally does not result in any taxation. Instead, under the current rules, on the death of the life interest, the trust is deemed to have disposed of all of its capital property for fair market value and any resulting capital gains are taxed in the trust. Commencing in 2016, under the new rules, the estate of the deceased life interest will be primarily liable for any taxes owing on the deemed disposition. This may result in an issue where, for example, the beneficiaries of the relevant estate and trust differ. If the estate of the deceased life interest is unable to pay the taxes owing on death, the trust will then be required to pay any unpaid taxes. However, in January 2016, the federal government proposed further new rules that address the above inequities. These further new rules have not yet been enacted.

Residence of trusts for tax purposes

The Supreme Court of Canada in 2012 clarified the law on the tax residence of a trust in Fundy Settlement v. Canada,2 also known as Garron Family Trust and St Michael’s Trust Corp. The Supreme Court of Canada held that the residence of a trust is where the central management and control of the trust occurs, a significant change from the former focus on a trustee’s residence. Discovery Trust v. Canada3 was the first decision to apply the test that was articulated in Fundy Settlement. In that case, the court held that the beneficiaries’ involvement in the administration of the trust did not result in the trust being resident in the province in which the beneficiaries resided as the trustee still made all decisions with respect to the administration of the trust. Instead, the court held that the trust was resident in the province in which the trustee resided.

General anti-avoidance rule in respect of income tax

There is increasing concern over the application of the general anti-avoidance rule (GAAR) in the Income Tax Act (Canada), which may apply to deny the tax benefit of provisions of the Income Tax Act (Canada) where certain conditions are met. In considering whether the GAAR applies, a court will generally consider whether there was a tax benefit, whether the transaction (or series of transactions) giving rise to the tax benefit was an ‘avoidance transaction’ and whether the avoidance transaction giving rise to the tax benefit was abusive.

Whistle-blower rules, audit initiatives and compliance measures

The CRA has launched the Offshore Tax Informant Program, under which the CRA will enter a contract to provide financial compensation to individuals who provide information that leads to the assessment or reassessment and collection of additional federal taxes in excess of C$100,000, and where the non-compliant activity involves property located outside Canada or certain other foreign elements. Banks and other financial intermediaries are required to report international electronic funds transfers of C$10,000 and over, to the CRA. Such transfers are currently reported to Canada’s Financial Transactions and Reports Analysis Centre of Canada (FINTRAC). The CRA’s Related Party Initiative is ongoing, under which individuals including high net worth individuals (generally over C$50 million) or those with complex planning using many related entities have been asked to provide detailed information and supporting documents about Canadian and foreign interests. Thresholds relating to value and complexity have been relaxed, and individuals not under audit are also being asked for such information. An aggressive tax planning reporting regime generally requires advisers to report to the CRA information concerning certain transactions on Form RC312 by 30 June of the following year. Reportable transactions or a reportable series of transactions will generally include an avoidance transaction or series of transactions for the purposes of GAAR if they feature two of the following: contingent fees, confidentiality protection or contractual protection. Where the form is not filed, denial of tax benefits and possible penalties may result.

iii Cross-border structuring
Immigration to Canada

Canada relies heavily on immigration and offers certain tax concessions to immigrants. These same concessions along with the lack of gift and inheritance tax make Canada an attractive destination. Upon immigration to Canada, an individual receives a ‘step up’ in the tax cost of his or her capital property (excluding taxable Canadian property), which eliminates Canadian tax liability for capital gains accrued to that point.

Non-resident trusts and immigration trusts

Certain non-resident trusts established by non-resident settlors provided various conditions are met are exempt from tax and can distribute trust capital to specified beneficiaries tax-free, which provides tax planning opportunities where a non-resident trust situated in a low-tax jurisdiction has Canadian resident beneficiaries. However, the opportunities for trust planning with non-resident trusts have been significantly curtailed by revised Section 94 of the Income Tax Act (Canada), which prevents the avoidance of Canadian taxes by certain non-resident trusts with Canadian connections where there is a Canadian resident contributor or Canadian resident beneficiary by deeming these trusts to be Canadian resident and taxable on their worldwide income. Where a trust is deemed Canadian resident, Canadian resident beneficiaries can be liable for tax along with the trust.

Previously, an immigration trust could be set up to benefit an immigrant to Canada and his or her family, and the income and capital gains in the immigration trust could accrue tax-free for up to 60 months. If the trust was settled in a foreign jurisdiction (including a low-tax offshore jurisdiction) with foreign trustees who held the foreign investment assets, there could be significant tax savings depending on comparative tax rates. However, this planning opportunity was unexpectedly eliminated as a result of the 2014 federal budget. An immigration trust, including those established prior to the legislative changes, is now subject to tax on its worldwide income, and the 60-month exemption from the deemed residence rule is eliminated.

Emigration from Canada

A taxpayer emigrating from Canada must pay a departure tax, which taxes gains on his or her property that accrued during his or her Canadian residency, subject to exceptions including for certain Canadian situs property and retirement plans. Payment of the departure tax may be deferred upon providing security to the CRA in like amount.

Tax treaties

Canada is a party to many favourable tax treaties, which in part aim to prevent double taxation of income. Due, however, to variations in the internal taxation law of treaty nations, there can be mismatches in tax credits and timing that are not addressed in the treaties. Among other benefits, Canada’s tax treaties include tiebreaker rules relating to tax residency for treaty purposes, and reduce the amount of withholding tax required from income relating to non-residents (often to 15 per cent from 25 per cent and in certain cases to zero per cent). In 2014, Canada ratified an intergovernmental agreement (IGA) relating to the US Foreign Account Tax Compliance Act (FATCA), a US law that imposes strict reporting requirements to the US taxing authority, including on financial institutions located in Canada. Canada has also agreed to implement the Organisation for Economic Cooperation and Development’s Common Reporting Standard (CRS), which is based on FATCA. As of 1 July 2017, financial institutions located in Canada will be subject to the CRS and will be required to provide the CRA with certain information pertaining to accounts and account holders.

Foreign investment entity and foreign trust rules

Foreign trust rules designed to more effectively tax Canadian residents’ passive investment, including in non-resident trusts, have been enacted, following numerous amendments to draft legislation over a protracted period. The non-resident trust rules deem a trust Canadian resident based on the presence of a Canadian-resident contributor, broadly defined, or a Canadian-resident beneficiary, and require tax to be withheld on distributions from trusts deemed Canadian resident, subject to exceptions. An election may be made to treat a portion of the trust as non-resident that will not generally be taxable in Canada. New provisions for taxing offshore investment funds have also been enacted, along with transitional provisions for those who filed under proposed foreign investment entity rules that were never enacted.

Canadian taxpayers holding specified foreign property outside Canada with a cost amount of C$100,000 or more, will be required to provide more detailed information about such property on a revised Form T1135, Foreign Income Verification Statement, including names of the countries and institutions where assets are held, foreign income earned on the assets, and a maximum cost amount of the assets in the year. If Form T1135 is filed late or contains certain errors or omissions, the normal reassessment period is extended for three years, and severe penalties apply for failure to file.

iv Regulatory issues
Regulation of banking and related industries

A significant portion of Canada’s private wealth services are highly concentrated in the hands of six major Canadian national banks. In 2015, Bloomberg Markets magazine ranked two Canadian banks (Canadian Imperial Bank of Commerce and Desjardins Group) among the world’s top 20 strongest banks with US$100 billion or more of assets. Banking is federally regulated by the Office of the Superintendent of Financial Institutions Canada, while the related investment industry, trust companies and insurance firms are regulated both federally and provincially. Canada’s major banks are strongly capitalised, and tend to have conservative lending policies relative to other banking institutions.

In 1986, the federal government began to eliminate the four pillars of Canadian finance: Canada’s traditional regulatory separation between banks, trust companies, insurance companies and investment companies. Numerous acquisitions of investment firms and trust companies by the six largest Canadian banks followed. In 1998, the proposed merger of two of the largest major Canadian banks was rejected by the federal government. In the past decade, Canada’s major banks have expanded significantly into the United States. Canada’s major banks offer an increasing array of services including daily banking, investment services, financial planning and insurance, and wealth management, which tend to be fairly uniform among the banks.

For Canada, deregulation resulted in a flurry of mergers and acquisitions in the 1990s leading to consolidation and the three largest insurance companies controlling about two-thirds of the domestic market.

v Issues affecting holders of active business interests
Corporate taxation

Canada’s favourable business environment includes low corporate taxes levied at flat rates, which have been reduced aggressively between 2007 and 2012. For active businesses, combined net federal and provincial corporate tax rates range between 21.5 per cent and 26.5 per cent, and a similar rate applies to income not earned in a province.

Preferential tax treatment is offered to a ‘small business corporation’, a defined term, which receives typical combined federal rates between 10.5 per cent to 15 per cent in the provinces, except Quebec, on the first C$350,000 to C$500,000 of active business income. A small business corporation includes a Canadian-controlled private corporation carrying on active businesses in Canada (depending on the province, there may also be a requirement that the taxable capital of the corporation be less than C$15 million). Shares of a small business corporation are eligible for a lifetime capital gains exemption of C$800,000 in total indexed for inflation from 2014 (C$824,176 in 2016), as are certain qualified farm and fishing properties.

Investment income earned in a corporation is taxed at approximately the highest personal income tax rate (approximately 48 to 54 per cent in the various provinces). A gross-up and dividend tax credit mechanism is designed to avoid double taxation of dividends earned in a corporation that are subsequently paid to an individual. In 2016, dividends paid by a small business corporation (in respect of income taxed at the small business tax rate) will be grossed up by 17 per cent and the dividend tax credit will be equal to 21/29 multiplied by the amount of the dividend that was grossed-up.

A tax-deferred transfer or rollover of certain eligible property to a taxable Canadian corporation for consideration, which must include shares of the corporation, is available subject to conditions. The property may retain its tax cost or receive a higher tax cost within limits. Among other results, the corporation assumes tax liability relating to gains in the property, payment of which is deferred to a later date.

Goods and services tax or harmonised sales tax

Canada levies a 5 per cent supply-side tax on most services and goods, including those made in Canada and imported, and certain property. The goods and services tax applies at all stages of production, subject to an input tax credit for tax paid at an earlier stage, and businesses are responsible for collecting and remitting the tax. In five provinces, the tax has been harmonised with the provincial sales tax and is known as harmonised sales tax, with combined rates between 13 and 15 per cent.

III SUCCESSION

i Overview of succession in Canada
Provincial and territorial jurisdiction

In Canada, succession to property on death is generally a matter within the jurisdiction of the provinces and territories. Of Canada’s 10 provinces and three territories, 12 are governed under common law, and one – the province of Quebec – under civil law. With respect to aboriginal Canadians who are subject to the Indian Act, succession to property on death falls within the jurisdiction of the federal government. Certain First Nations, however, have entered into self-government agreements that permit enactment of individualised laws including those that relate to succession. These two latter scenarios are beyond the scope of this chapter.

Conflicts of laws

With regard to determining the applicable law, the law governing succession to moveables is generally that of the testator’s domicile and the law governing succession to immoveables typically the jurisdiction where the property is located. Formal validity, which includes such matters as execution requirements for a will, is determined by conflicts of laws principles (and in respect of succession to moveables is also generally that of the testator’s domicile at date of death and in respect of succession to immoveables is typically the jurisdiction where the property is located), and in several provinces has been expanded by statute.

For clients with certain connections to both Canada and a participating EU Member State, it is important to consider the impact of the EU Succession Regulation (Regulation (EU) No. 650/2012), which is in effect for deaths post 17 August 2015, including as it relates to a client’s ability to choose the law of his or her nationality to govern certain succession issues.

Probate or equivalent court process

The common law principle of testamentary freedom is the general rule in Canadian succession law, as modified by contract or legislation. After the testator’s death, a will is typically submitted to probate or equivalent court process, whereby it is validated and the executors’ appointment as legal representatives confirmed. In this process, the will and supporting documents, which may include a detailed asset listing, become public. Probate fees are typically levied in the form of a flat fee, or tax based on a percentage of estate assets (e.g., approximately 1.5 per cent in Ontario). In some provinces, in particular those with a high rate structure to probate a will, the option of creating a second, non-probate will that governs private company shares and other assets that do not require a court grant of probate to administer is often used to minimise probate fees and tax. A Quebec notarial will need not be submitted to probate in that province.

Once probate has been granted, the resulting certificate, grant or other like document is used by the personal representative to deal with third-party institutions and entities in the process of transferring title to the personal representative and gathering in the assets.

Legislative provisions for succession on intestacy

In an event of intestacy, each province and territory provides for a scheme of property division: typically between the testator’s surviving spouse and children – if any – failing which to other relatives as specified. Some provinces allocate the spouse a preferential share prior to dividing the estate between spouse and children. In this context, spouses are married spouses, including same-sex married spouses and, in some provinces and two territories, de facto spouses, providing certain conditions are met. A court process for letters of administration or equivalent provides for the appointment of estate trustees on intestacy.

Legislative provisions for dependants’ support

In all provinces, a dependant can claim support from the deceased’s estate, provided he or she stands in a certain relationship with the deceased (typically including a spouse, de facto spouse or minor child) and the deceased was providing him or her with support or had a support obligation at the time of death. The quantum of support is determined circumstantially and with judicial discretion, usually taking into account needs and means, and in some cases, the dependant’s accustomed standard of living.4 Some provinces recognise a moral entitlement to share in a deceased’s estate and will vary the distribution in a will or award support on this basis.5 Recent decisions have also shown that support may be awarded to a dependant in spite of an existing domestic contract if its terms have become unfair with the passage of time.6

Within Canada, it appears that cases involving entitlement to support in modern ‘non-traditional’ relationships (usually involving de facto spouses) are on the rise, including recent decisions in Alberta7 and British Columbia.8

The Nova Scotia Supreme Court recently held that even though eight adult children of a deceased were found to be his dependants under that province’s legislation, in the circumstances of the estate (including its size and nature – essentially consisting of the deceased’s home valued at roughly C$46,000), the deceased’s gift of his entire estate to his adult grandson (who was not a dependant, but who had grown up in the home, assisted in maintaining it and had assisted the deceased over the years) was upheld given the testator had chosen a distribution that fell within the range of appropriate options and in light of his grandson’s strong moral claim to the estate in the circumstances.9

Legislative provisions for matrimonial property rights on death

Property law in Canada falls under the jurisdiction of the provinces and territories; thus the availability and scheme of statutory property division claims by surviving spouses upon death of a spouse vary throughout Canada. The matrimonial property regimes of most provinces and territories provide a surviving spouse with property rights on a first spouse’s death. For example, in Ontario, a surviving spouse has a right to elect to claim against the deceased spouse’s estate to notionally equalise the property acquired during marriage as between the two of them. If such an equalisation claim is made, he or she thereby loses entitlements, if any, under the deceased spouse’s will and to certain other benefits. In New Brunswick, Newfoundland and Labrador, Ontario and Quebec, claims for division of property on death of a spouse are available to legally married spouses only as well as, in the case of Quebec, the survivor of a couple who have entered into a civil union. Currently, in British Columbia, Prince Edward Island and the Yukon, death does not trigger a statutory property claim for the surviving spouse. This is generally also the case in Alberta for the time being; however, under pending amendments to the Matrimonial Property Act death will be a triggering event for a marital property claim, but only for legally married spouses. All other provinces and territories provide a statutory claim to division of property on death and extend its availability to surviving de facto spouses provided the specific requirements of the governing legislation have been met.

ii Key legislative or case law changes affecting succession
British Columbia’s consolidated Wills, Estates and Succession Act
Increased Ontario compliance to probate a will

In Ontario in 2011, legislative measures were enacted under the Estate Administration Tax Act permitting the Minister of Finance to assess estates for payment of additional Estate Administration Tax. No practical means or process for determining which estates to assess was put in place until 1 January 2015 when with little forewarning, a new regulation under the Act came into effect. The changes usher in a new reporting regime that is triggered by applying for and receiving a certificate of appointment of estate trustee. Estate representatives must now, in addition to the paperwork relating to the certificate, provide an estate information return to the Ministry of Finance within 90 calendar days of the court issuing the certificate of appointment. Most significantly, the return (an approved form of which is available from the Ministry) requires detailed information about each estate asset and its fair market date of death value. The estate representative must be able to corroborate the reported asset values. Penalties include fines and even imprisonment for failing to file a return or where the information filed was false or misleading. Amending returns must be filed within 30 days of discovering a prior return was incorrect or incomplete, except where the value previously provided for an estate asset has been determined to be incorrect and more than four years have passed since the issuance of the certificate of appointment. The Ministry has broad audit powers in conducting its review of the returns, including assessment of further tax if the estate date of death value is determined to be higher than originally reported.

Gifts in wills altered for public policy reasons

Recent Canadian lower court decisions (one decision from New Brunswick and another from an Ontario court) had limited testamentary freedom by altering gifts in wills for public policy reasons. The New Brunswick decision of McCorkill v. Streed10 had the effect of striking an unconditional bequest to a racist corporation on the basis of public policy. This decision was upheld on appeal and an application for leave to appeal to the Supreme Court of Canada was dismissed.11 In the Ontario decision of Spence v. BMO Trust Co,12 a court struck the entire will of a testator who was survived by two adult daughters (neither of whom qualified as dependants) where one daughter was entirely left out of the distribution of the estate. The will stated the testator had excluded the daughter because she had not communicated with him for years. Based on affidavit evidence, however, the court concluded that the real reason for the daughter’s exclusion was that she had had a child with a man of a different race. Again the doctrine of public policy was employed and the entire will was struck down with the result that both daughters shared in the estate equally on intestacy. The Ontario Court of Appeal recently reversed the decision, thereby confirming in this instance that testators do not have any obligation to benefit persons who they have no legal obligation to support or otherwise benefit (e.g., non-dependant adult children).13

Mutual wills

In a recent Ontario lower court decision, two spouses executed wills simultaneously leaving everything to the survivor of them, followed by an identical gift over to their four children (each spouse having two children from a prior marriage). After the husband’s death, the wife made a new will and gifted her estate to her two adult children and she subsequently died. On an application commenced by the husband’s two adult children, the court found that while there was not a direct written or oral agreement that the spouses’ original wills were mutual wills, as a result of the extrinsic evidence presented – including with respect to the family context – an oral contract had existed between the spouses and by virtue of it, neither spouse was entitled to vary his or her will without the consent of the other spouse. The court held that the estate of the surviving spouse was to be divided among all four children.14

iii Cross-border developments
Changes to US transfer tax

Canada is home to many dual citizens including US–Canadian citizens and many Canadians own holiday property in the United States or other US real or personal property, or spend significant time in the United States. A number of Canadians are, as a result, subject to the US transfer tax regime and attentive to any changes in it. Following the American Taxpayer Relief Act of 2012, which became law on 2 January 2013, the US exemption from estate tax remains US$5 million indexed for inflation from 2011 (US$5.45 million for 2016) and the maximum rate of US estate tax increased from 35 per cent to 40 per cent, both permanently subject to future legislation. Where applicable, the US estate and gift tax exemption remains unified.

Income tax-related reporting requirements

FATCA, introduced to combat offshore tax evasion, will affect Canadians with US connections and Canadian financial institutions. Final regulations under FATCA set out detailed reporting and withholding requirements for non-US financial institutions with respect to accounts with certain US connections including those beneficially owned by US citizens. The requirements under FATCA will be phased in generally ending in 2017. Information to be reported includes identifying information, information about the values of the accounts, and transaction amounts. Other non-US entities (and it is expected certain Canadian trusts) will also be required to report the ownership or beneficial interests of US citizens.

Under FATCA, such information is generally required to be provided directly to the US Internal Revenue Service (IRS) by non-US financial institutions and entities. Canada has ratified a Model 1 type IGA with the United States and passed legislation that aims to implement the IGA. Designed to ease compliance with FATCA, the IGA modifies FATCA’s provisions in respect of Canadian financial institutions and other Canadian entities, and expands the tax information exchange provisions between Canada and the United States. Pursuant to the IGA, Canadian financial institutions will generally report information to the Canada Revenue Agency rather than directly to the IRS, although they are generally required to register with the IRS to obtain an identification number. It is intended that by complying with the IGA, Canadian financial institutions will avoid a 30 per cent withholding requirement under FATCA on certain payments to them. Also, certain Canadian-registered plans are exempt from reporting under the IGA, and local financial institutions may be entitled to additional relief.

A self-reporting scheme applies to US persons (including US citizens, green card holders and certain persons who spend a substantial amount of time in the United States) in Canada and elsewhere that may require reporting of non-US bank and financial accounts on a Report of Foreign Bank and Financial Accounts. Under FATCA, US persons must generally also report certain non-US financial assets exceeding threshold values on a Statement of Specified Foreign Financial Assets (Form 8938), filed with their tax returns.

In June 2015, Canada signed the Multilateral Competent Authority Agreement (MCAA), which provides for a coordinated arrangement for the automatic exchange of financial account information among various countries. As of July 2016, over 80 countries have signed the MCAA.

Under the MCAA, Canada agreed to implement the Organisation for Economic Cooperation and Development’s Common Reporting Standard (CRS). As of 1 July 2017, financial institutions located in Canada will be subject to the CRS and will be required to provide the CRA with certain information pertaining to accounts and account holders. The first information exchanges are set to take place in 2018. The CRS is based on FATCA and is similar in effect.

United States income tax penalties for Canadian residents

The Canadian government has expressed its concern to the US authorities and certain concessions have been granted to Canadian residents who are dual citizens of Canada and the United States. The US Internal Revenue Service has provided measures to assist such persons to fulfil their filing and reporting obligations. In June 2014, the IRS announced streamlined filing compliance procedures for certain US taxpayers who non-wilfully failed to disclose offshore assets, eliminating former requirements that taxpayers owe US$1,500 or less per taxation year and a former risk questionnaire, and requiring a certification regarding the taxpayer’s non-wilful conduct. Certain penalties or enforcement actions may be avoided, and taxpayers may claim retroactive deferral of income earned in Canadian retirement plans. The IRS also announced its intention in June 2014 to modify the 2012 offshore voluntary disclosure programme.

Uniform Substitute Decision-Making Legislation

The Uniform Law Conference of Canada (ULCC) is working towards the final adoption of the Recognition of Substitute Decision-Making Documents Act (Uniform Act). The Uniform Act is a joint project of the ULCC and the Uniform Law Commission of the United States (ULC), which was undertaken to promote cross-border portability and utility of substitute decision-making documents for property and personal care. The ULC adopted its version of the Uniform Act in July 2014 and US states may now consider enacting it internally. To date, only Idaho has enacted it. Once adopted by the ULCC, it will be up to each Canadian province and territory to consider adopting and implementing the Uniform Act. This new uniform legislation in each jurisdiction marks a significant step forward in promoting cross-border effectiveness of powers of attorney.

Under the ULCC Uniform Act, which differs from the ULC one, a ‘substitute decision-making document’ will be formally valid if it complies with any of: (1) the law indicated in the document, or if none, (2) the law of the jurisdiction in which it was executed, (3) the jurisdiction in which the individual was habitually resident or (4) the law of the place it is to be used. In the Canadian Uniform Act, the application of the governing law can only be refused if its application would be manifestly contrary to the public policy of the enacting province or territory, which the notes to the Uniform Act indicate in matters relating to personal care, including specific medical procedures. The Uniform Acts provide for the ability of a third party to rely on a document as well as, subject to certain exceptions, the obligation of third parties within a reasonable time to accept a substitute decision-making document and not require an additional or different form of authority. It also provides for a court order mandating acceptance and liability for legal costs for refusal to accept a substitute decision-making document in violation of each Uniform Act.

iv Applicable changes affecting personal property
Same-sex marriage and Quebec civil unions

In 2005, Canada legalised same-sex marriage and, as a result, a broad array of statutory and common law rights have been available to same-sex married spouses for over a decade, including rights to share in an estate upon intestacy and any rights to property division under provincial family law statutes. Quebec also solemnises a civil union for same-sex or opposite-sex couples, which confers similar rights to marriage.

Rights of de facto spouses

For unmarried de facto spouses Canada recognises a limited subset of legal rights. De facto spouses are treated similarly to married spouses for various purposes, including taxation and certain government benefits, but significant gaps remain in respect of property rights on relationship breakdown and death, although this varies by province and territory.

Spousal support provisions for de facto spouses in Quebec

In early 2013, the Supreme Court of Canada delivered its decision in Quebec (Attorney General) v. A,15 also known as Lola v. Eric. Lola (not her real name) claimed spousal support and property rights from her billionaire de facto spouse Eric. The province of Quebec has a greater percentage of de facto spouses than any other province (approximately 32 per cent in 2011, with the national average being 16.7 per cent) and there are few legal rights provided to these spouses on relationship breakdown.16 While a majority of the Supreme Court agreed with the Quebec Court of Appeal in finding that Article 585 of the Quebec Civil Code, which does not provide spousal support for de facto spouses although it provides for support among married or civil union spouses, discriminates against de facto spouses on equality grounds, the discrimination is justified on the principle of respecting individual couples’ choice and autonomy.

Common law property division for de facto spouses

In Kerr v. Baranow and Vanasse v. Seguin,17 the Supreme Court reviewed the principles of unjust enrichment and resulting trust applicable to de facto spouses on relationship breakdown. After a relationship of over 25 years, Ms Kerr claimed property and support entitlements. Both parties had worked and Mr Baranow had cared for Ms Kerr after she had suffered a stroke. The court reviewed the law of unjust enrichment applicable to de facto spouses not included in most provincial statutory property division schemes. The elements of the claim are enrichment of one spouse, the corresponding deprivation of another and absence of juristic reason (such as a contract), and remedies have included a constructive trust and monetary amounts, including amounts relating to value received. Where appropriate, the claimant should be treated as a co-venturer in a joint family venture and should share the couple’s mutual gains. Indicia of a joint family venture include mutual effort, economic integration, intention and priority to the family, and there must also be a link between the contribution and wealth accumulated. A new trial was ordered in Kerr regarding unjust enrichment. A monetary remedy is not limited to a value-received approach, and in Vanasse, the Supreme Court upheld a monetary award granted at trial to a partner who had cared for a young family and given up career opportunities during a 12-year relationship.

Discretionary trust interests as matrimonial property

British Columbia’s Family Law Act is the first Canadian family law statute to expressly address discretionary trust interests in the division of family property by categorising certain beneficial interests in property held in discretionary trusts as excluded property. Problems with the original wording of the Act have been rectified by amendments that came into force on 26 May 2014, thereby clarifying that only the increase in value of the spouse’s beneficial interest in a discretionary trust will be subject to division on separation (rather than the increase in value of all of the property in the trust, as originally drafted). Valuation of these interests on separation will continue to remain a live and litigious issue in this province and throughout Canada, as evidenced by recent reported decisions in Saskatchewan,18 Alberta19 and Ontario20 with relatively little valuation analyses having been reported to date.

Legal presumptions relating to jointly held personal property clarified and effect of transfer examined

In two companion cases, Pecore v. Pecore21 and Madsen Estate v. Saylor,22 the Supreme Court of Canada clarified the common-law presumptions of resulting trust and advancement, which are legal presumptions subject to being rebutted on the civil standard of proof. The Court clarified that a recipient of gratuitously transferred personal property is generally presumed to hold it on resulting trust for the donor. The presumption that the property so transferred is advanced to the donee that has historically applied to certain family relationships, now applies only to transfers between a parent and minor child (not from husband to wife or from parent to adult child). The Court also canvassed issues of evidence. In Pecore, the Court found that a father who had placed financial accounts into joint names with his daughter had an actual intention to gift these, whereas in Madsen the opposite result prevailed. In Bradford v. Lyell,23 a Saskatchewan court held that if an inter vivos transfer of a condo property into joint ownership by a grandmother to her granddaughter was found to be intended as a gift of the right of survivorship at the time of the transfer, both the legal and equitable title vested when the joint title was created such that gift was complete at that time and the grandmother could not later change her mind in her will, thereby entitling the granddaughter to the beneficial ownership of the property upon the grandmother’s death.

Joint ownership continues to be a legal minefield in the context of estates and estate planning. Two subsequent Ontario Court of Appeal decisions have added further outcomes to gratuitous transfers of property into joint ownership. In Sawdon Estate v. Sawdon, the court found that evidence of intention regarding the transfer may not only show that the presumption of resulting trust has been rebutted, but also that a transfer of personal property into joint names created a trust of the beneficial right of survivorship for certain beneficiaries in addition to the surviving joint owners (two of the deceased’s children) such that the property passed outside the deceased’s estate and was divided equally among all five of the deceased’s children.24 In Mroz v. Mroz25 the Ontario Court of Appeal reviewed a mother’s transfer of her home into joint ownership with her daughter where the mother’s will directed that the proceeds of sale from the home be used to fund two legacies to her grandchildren. In this instance and based on the findings of the trial judge regarding the mother’s intentions at the time of the transfer, the Court held that the daughter had not rebutted the presumption of resulting trust, held the property as trustee and the property was to be dealt with in accordance with her mother’s will. Mroz was distinguished from Sawdon given that the trust obligation in Sawdon arose at the time of the transfer (it was inter vivos) and in Mroz the trust obligation was not to arise until after the mother’s death. In other words, it would appear from these two decisions that trust obligations must take effect prior to a joint owner’s death for the result in Sawdon to occur.

Even more recently in Ontario, the Court of Appeal in Andrade v. Andrade26 found that the presumption of resulting trust applied where a mother purchased a property using funds provided to her by her children who lived in the home with her, which were applied to the down payment, mortgage and expenses, but the property was held in the names of two of her seven adult children at any given time. The court indicated that the trial judge had erred in finding that the mother had not contributed any of her own funds to the home, and that once her children had provided funds to their mother, the funds became hers. The court also noted that while the tax treatment of the asset post-transfer is one factor to be considered in determining intention at the time of a transfer of a property (in this case, units in the home had been rented out to third parties over the years and the title-holders had reported the rental income on their returns, while their mother had actually received the rent), but it is not determinative of the transferor’s intention.

Adding a further dimension to the presumption of resulting trust, a 2015 Alberta Queen’s Bench decision considered, among other matters, whether the presumption applies when a person designates a beneficiary of a retirement plan (or other financial products capable of being designated).27 The judge ultimately avoided deciding the issue by finding evidence of the deceased’s intention on a balance of probabilities to gift the retirement plans proceeds to his son as the named beneficiary, leaving the question open for future judicial determination.

Legal presumption of advancement as between spouses in BC

In VJF v. SKW, the British Columbia Court of Appeal recently confirmed the common law presumption of advancement between spouses was not abolished by the enactment of that province’s new Family Law Act28 in 2011, and noted that a BC statute contained no express provision altering the impact of or abolishing the presumption as was the case in the family law statutes of other Canadian jurisdictions such as Alberta, Saskatchewan and Ontario.

Exempting certain matrimonial property from the equalisation regime

The 2012 Ontario Court of Appeal decision in Spencer v. Riesberry29 held that in the circumstances, a matrimonial property held by a family trust where one of the beneficiaries resided did not qualify as a matrimonial home for the purposes of Ontario’s Family Law Act and excluded it from the equalisation calculation as the beneficiary in question did not have an ‘interest’ in the property within the meaning of the Act (although the value of the interest in the trust was still included for the purposes of the calculation). This case represents a frustration of the matrimonial home protection contained in the Act, as well as a potential circumvention of the usual requirements for the spouse’s consent on the sale or encumbrance of a matrimonial home and the right of possession for the non-titled spouse.

Proprietary estoppel

The equitable claim of proprietary estoppel has been successfully used in two recent Ontario cases as the basis for a cause of action in respect of an unfulfilled or reneged promise or assurance relating to a cottage property.30 In both Clarke v. Johnson and Love v. Schumacher, the equity resulted in the appropriate remedy being, based on the facts and the exercise of judicial discretion, a proprietary one in the form of a an exclusive, irrevocable and time-specific licence (as a monetary award was found in both instances to be inappropriate or insufficient). In both decisions, the courts followed the so-called modern UK test to establish proprietary estoppel, being the establishment of three criteria:

a encouragement or acquiescence in respect of land;

b detrimental reliance; and

c unconscionability.

A third case arising in BC, resulting in a successful proprietary estoppel claim involving a horse farm that saw the trial judge award the entire horse farm to the applicant, has been remitted back to the trial judge to assess the outstanding claims of unjust enrichment and express or implied trust, as well as the proportionality of the trial judge’s remedy to the proprietary estoppel claim.31 An application for leave to appeal this decision was recently dismissed by the Supreme Court of Canada.32 Cowper-Smith v. Morgan33 is a recent BC Appellate Court decision in which the proprietary estoppel claim was unsuccessful as the person against whom the claim was advanced did not own the property in question at the time the assurance or representation was made.

IV WEALTH STRUCTURING & REGULATION

i Common vehicles for wealth structuring

Trusts and holding companies are perhaps two of the most common vehicles used in wealth structuring.

Trusts
Income splitting

Trusts can be established inter vivos or by will. Inter vivos trusts are often used to split income between family members who have lower tax rates, where the trust earns income and acts as a conduit to allocate income, including taxable capital gains, among lower rate taxpayers. Effective planning involves careful attention to the possible application of the attribution rules, which can attribute income back to a high tax rate taxpayer.

Trusts used in conjunction with an ‘estate freeze’

Trusts are also commonly used in conjunction with an estate freeze to hold growth property, such as common shares of a private holding company, which reflect the future growth of appreciating assets to defer taxation of capital gains to the next generation, as opposed to on death of a founder, thereby achieving significant tax savings. Use of a trust can allow for control of the timing of distribution of property and selection of beneficiaries, and for general wealth protection purposes, and a fully discretionary trust is often used for such purpose.

Trusts as will substitutes

Trusts are also increasingly used as will substitutes, in particular ‘alter ego’ and ‘joint partner’ trusts that are specifically defined under Canadian income tax legislation and allow persons aged 65 and over, provided certain conditions are met, to roll over capital property on a tax-deferred basis, as opposed to triggering capital gains. The alter ego and joint partner trusts are often used to provide for primary succession to property on death as a substitute to a will. They offer several perceived benefits, including (1) avoiding expensive court fees and tax paid to probate a will, as well as the attendant court process, which can be protracted; (2) more privacy than a will; (3) ensuring capital succession to property on death; and (4) protection against estate litigation, including will challenges and other claims arising on death, and they are also an effective and sophisticated vehicle to manage assets on incapacity in contrast to a power of attorney.

Use of testamentary trusts for income splitting and other benefits

Testamentary trusts, that is those created by will, have been used to provide for income splitting on death. Generally, certain estates and testamentary trusts calculate federal tax using the graduated rates applicable to individuals, whereas trusts established during lifetime are subject to the top federal tax rate applicable to individuals. Prior to 2016, testamentary trusts allowed for income splitting between the trust and one or more beneficiaries, which resulted in significant tax savings. However, commencing in 2016, testamentary trusts are now subject to the top federal tax rate applicable to individuals and, consequently, the above tax benefit has been eliminated, but it will still be possible to ‘sprinkle’ income among a group of beneficiaries of a discretionary testamentary trust if the trust terms permit. Also, use of a testamentary trust provides for probate fee minimisation, capital succession planning and can safeguard against beneficiaries’ matrimonial and possible creditor claims, among other benefits.

Multiple wills used to minimise probate fees

Multiple wills are increasingly used in certain provinces to minimise estate administration tax and probate fees. For example, in Ontario, estate administration tax is approximately 1.5 per cent of the value of estate assets. Assets are often segregated under two wills: a primary will and a secondary will. Assets that generally do not require a probated will to administer by way of proof of executors’ authority to third parties, such as financial institutions and others, are segregated under a secondary will, including private company shares, family loans, tangible personal property, and beneficial trust interests. Only the primary will is typically probated, and applicable tax or court fees are then based on a more modest asset base.

Holding companies

Holding companies are a common feature of Canadian estate planning. They are commonly used to hold US securities and certain other US situs assets to protect against exposure to US estate tax, to defer tax on active business income where shares of an active business are held by the holding company, to split income, including in conjunction with use of a family trust, and for asset protection and retirement planning.

Potential tax advantages of holding companies

The utility of an investment holding company to earn investment income at a lower tax rate than if earned personally will depend on changing tax rates, which historically have at certain times offered tax advantages and at other times are neutral and less advantageous.

Holding companies also are used in conjunction with probate fee and estate tax minimisation strategies as outlined above. Private company shares can pass under a secondary will, which typically may not need to be probated, thereby saving fees and tax, which can be significant where the shares have a high value. There is potential for double taxation on death where assets are held in a holding company, since a deceased person will be subject to personal taxation on the deemed disposition of the shares of the holding company giving rise to possible taxable capital gains, and also the same gains may be reflected in the holding companies’ underlying assets, on which tax will be paid at the corporate level on sale of the assets or wind-up of the company. It is therefore necessary to implement proper post-mortem tax planning to avoid potential double taxation on death.

ii Anti-money laundering regime

The federal Proceeds of Crime (Money Laundering) and Terrorist Financing Act came into effect in 2001. It introduced requirements for a compliance regime, record-keeping, client identification and reporting. Reporting entities must implement a compliance regime, keep certain records, obtain certain client identification and report suspicious transactions to an independent agency, the Financial Transactions and Report Analysis Centre of Canada (FINTRAC). Certain other financial transactions, as well as terrorist property must also be reported. Reporting entities include financial institutions, such as banks, trust companies, loan companies, life insurance companies, brokers and agents, securities dealers, accountants and accounting firms carrying out certain transactions, real estate brokers, and certain others. The legislation imposes harsh financial and criminal penalties, including imprisonment for failure to report. Reporting entities have to send large-cash-transaction reports to FINTRAC when they receive an amount of C$10,000 or more in cash in the course of a single transaction and financial entities, money service businesses and casinos have to report incoming and outgoing international electronic funds transfers of C$10,000 or more in a single transaction.

V CONCLUSIONS & OUTLOOK

A new majority government elected in the fall of 2015 with an outward, optimistic approach and a strong mandate has created political stability for the next few years and has generated a sense of optimism. In a world of increasing political and economic instability, divisiveness, and unprecedented uncertainty, Canada again is looked on as a calming force and safe haven, notwithstanding the recent challenges and rapid readjustments arising from the collapse of the Canadian petro-economy.

Our newly elected prime minister, Justin Trudeau, proclaimed ‘sunny days’ on his swearing-in. While some may have discounted that statement as Pollyanna in the extreme, everything is relative, and in relation to other major developed countries, the Canadian economic, political, business and cultural climate is one to be thankful for. While it may be a little too early to don our Ray-Bans and high-SPF suntan lotion yet, in terms of wealth management and private client work, growth prospects are shiny – sunny days, indeed.

Footnotes

1 Margaret R O’Sullivan is principal, Jenny K Hughes is a researcher and social media coordinator and Christopher Kostoff is an associate lawyer at O’Sullivan Estate Lawyers Professional Corporation. The authors would like to thank Claudia A Sgro, formerly of O’Sullivan Estate Lawyers Professional Corporation, for her past assistance with this chapter.

2 Fundy Settlement v. Canada, 2012 SCC 14, [2012] 1 SCR 520.

3 Discovery Trust v. Canada, 2015 NLTD(G)86.

4 See, for example, McKenna Estate (Re), 2015 ABQB 37; Morassut v. Jaczynski, 2015 ONSC 502.

5 See, for example Tippett v. Tippett Estate, 2015 BCSC 291.

6 See, for example McKenna Estate (Re), 2015 ABQB 37.

7 Riley Estate (Re), 2014 ABQB 725.

8 Coombes Estate (Re), 2015 BCSC 2050; Re Richardson Estate, 2014 BCSC 2162; Kish v. Sobchak Estate, 2016 BCCA 65.

9 David v. Beals Estate, 2015 NSSC 288.

10 McCorkill v. Streed, 2014 NBQB 148.

11 Canadian Association for Free Expression v. Streed et al, (2015), 9 ETR ( 4th) 203 (NBCA); CanLII 34017 (SCC).

12 Spence v. BMO Trust Co, 2015 ONSC 615.

13 Spence Estate (Re) 2016 ONCA 196, application to the Supreme Court of Canada for leave to appeal dismissed 2016 CanLII 34005.

14 Rammage v. Estate of Roussel, 2016 ONSC 1857.

15 Ford v. Quebec (Attorney General) [1988] 2 SCR 712.

16 Statistics Canada, ‘Portrait of Families and Living Arrangements in Canada: Families, households and marital status, 2011 Census of Population’, September 2012, p. 6.

17 [2011] SCJ No. 10.

18 Grosse v. Grosse, 2012 SKQB 464 (CanLII).

19 Shopik v. Shopik, 2014 ABQB 41 (CanLII).

20 Mudronja v. Mudronja 2014 ONSC 6217; Tremblay v. Tremplay, 2016 ONSC 588 (currently under appeal).

21 Pecore v. Pecore, 2007 SCC 17.

22 Madsen Estate v. Saylor, 2007 SCC 18.

23 Bradford v. Lyell, 2013 SKQB 330 (CanLII).

24 Sawdon Estate, 2014 ONCA 101 (CanLII).

25 Mroz v. Mroz, 2015 ONCA 171.

26 Andrade v. Andrade, 2016 ONCA 368.

27 Morrison Estate (Re), 2015 ABQB 769

28 SBC 2011, c.25.

29 Spencer v. Riesberry, 2012 ONCA 418.

30 Clarke v. Johnson, 2014 ONCA 237 and Love v. Schumacher Estate, 2014 ONSC 4080.

31 Sabey v. Rommel, 2014 BCCA 360.

32 Jesse Sabey v. Warren Scott Beardsley as executor of the will of Kim Louise von Hopffgarten, deceased, et al. 2015 CanLII 16734.

33 2016 BCCA 200.