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Testamentary Trusts After the 2014 Budget: The Final Chapter? – 0

2 STEP Inside • MAY 2014 • VOLUME 13 NO. 2

STEP Inside

EDITORIAL BOARD

Christine Van Cauwenberghe,Chair

Bernadette DietrichPaul FesterygaElena Hoffstein

Joyce LeeBarbara Novek

Shamim PanchbhayaMarina Panourgias

STEP Inside is published threetimes a year by the Society of Trustand Estate Practitioners (Canada),an organization of individuals fromthe legal, accounting, corporatetrust and related professions whoare involved, at a specialist level,with the planning, creation, man-agement of and accounting fortrusts and estates, executorshipadministration and related taxes.STEP Canada has branches in theAtlantic region, Montreal. Ottawa,Toronto, Winnipeg, Edmonton, Cal-gary, and Vancouver; and twonewly formed chapters in Londonand Southwestern Ontario and theOkanagan Valley.

Articles appearing in STEP Insidedo not necessarily represent thepolicies of STEP Canada and read-ers should seek the advice of asuitably qualified professionalbefore taking any action in relianceupon the information contained inthis publication.

All enquiries, comments and cor-respondence may be directed to:

STEP CanadaOne Richmond Street West,

Suite 700Toronto, ON, M5H 3W4

www.step.ca

Tel 416-491-4949 Fax 416-491-9499

E-mail [email protected]

Copyright © 2014 Society ofTrust and Estate Practitioners

(Canada)

ISSN: 14960737

2013 Student Award Winners Each year, STEP Canada recognizes the four students who achieve thehighest marks in the STEP Canada diploma courses, the student whoachieves the highest mark for a qualified practitioner essay, and the recip-ient of the Gerald W. Owen Book Prize. Awards are presented to these stu-dents during the national conference in June. Please join us incongratulating them on their accomplishments in 2013.

2013 Highest Mark, Law of Trusts CourseJustin Hoffman, CA, CFP: Davis Martindale LLP, LondonJustin joined Davis Martindale after working for several yearsas a senior tax analyst for an international public account-ing firm. He practises primarily in the areas of Canadian andAmerican tax compliance as well as domestic and cross-border tax and estate planning.

2013 Highest Mark, Taxation of Trusts and Estates CourseKaty Basi, LLB: Barrister and Solicitor, TorontoKaty’s practice focuses on wills, trusts, estate planning, andestate administration. Before opening her own office, sheworked for many years with a large firm specializing inincome tax and probate tax. She also regularly writes andmakes presentations on estate-planning topics.

2013 Highest Mark, Wills, Trust and Estate Administration CourseClaudia Sgro, JD: O’Sullivan Estate Lawyers, TorontoClaudia practices at O’Sullivan Estate Lawyers exclusivelyin the areas of estate planning, administration, and litiga-tion. She works with clients on will, trust, and incapacityplanning; provides advice and support to executors andtrustees; and assists clients with estate litigation.

2013 Highest Mark, Trust and Estate Planning CoursePaul van Galder, CFP, FCSI, TEP: RBC Wealth Management, Toronto Paul specializes in national trust distributions and theiradministration. Prior to joining RBC’s estate and trust serv-ices team, he worked for another Canadian trust companyand was a full service investment adviser and a nationalaward-winning stock broker.

2013 Highest Mark, Qualified Practitioner Essay Jagruti Gandhi, LLB, TEP: Wilson Vukelich LLP, MarkhamJag’s practice focuses primarily on wills, trusts, and estateplanning. As an associate at Wilson Vukelich LLP, Jag assistsclients with a wide range of matters, including wills, trusts,powers of attorney, business succession planning, estateand trust taxation, and estate administration.

2013 Gerald W. Owen Book Prize, Sponsored by Scotiatrust: Highest overall average in all four diploma courses.

Rishma Jessa, MTax, CGA, TEP: Richter LLP, TorontoRishma is a tax manager at Richter LLP, where she providestax-consulting services to owner-managed businesses andtheir shareholders. Rishma advises both corporations andindividuals on a wide variety of tax issues and all aspectsrelated to owner-managed businesses.

New Education Offering:Certificate in Estate and TrustAdministration

Estimates show that many seniortrust administrators and officerswill be retiring within the next

decade. In response to this increasingneed for administration training andto requests from employers, STEPCanada is pleased to announce thatour Certificate in Estate and TrustAdministration (CETA) will be launchedin the fall of 2014, with enrolmentbeginning in November.

CETA will be geared to individualswho are contemplating a career intrust and estate administration or whohave already secured employment inthis field and want to deepen orrefresh their knowledge and expert-ise. The certificate will be of value toestate administration staff in trustcompanies, law firms, and retail bank-ing as well as to paralegals and com-munity college graduates.

The program offers flexibility. Indi-viduals can earn a stand-alone certifi-cate or can continue on to theCanadian diploma program and earnthe TEP designation. CETA also pro-vides standardized learning thatemployers can use to measure the per-formance of their employees.

As in the diploma program, stu-dents in the CETA program must com-plete four segments to earn thecertificate.

If you have any questions, pleasecontact Lisa Lue at [email protected] forfurther details.

E-Learning Students and examination markersalike will soon be rejoicing! No more

writer’s cramp, and no more decipher-ing penmanship. The days of thehandwritten examination are num-bered.

STEP Canada has partnered with aproudly Canadian company to developvirtual classrooms that will provideour students with a dynamic learningexperience. The creation of e-class-rooms will be staggered, allowing cur-rent diploma students to complete thecompilation of their reference materi-als in paper-based binders. During thetransition period, select students inthe diploma program will have theoption of taking paper-based or e-examinations. In the future, however,all course content, resources, discus-sion boards, and examinations willbecome electronic, and the currentpaper-based methods and resourceswill be eliminated.

As our student population hasgrown, the need for a more stream-lined and flexible learning environ-ment has increased. Students havebeen asking for online testing and forelectronic versions of study materi-als that they can access on theirmobile devices or tablets. By allow-ing students to write their examina-tions electronically, students maywrite examinations from virtually any-where.

E-learning also benefits employersbecause it means that student employ-ees will be out of the office less fre-quently, thereby reducing travel costsand increasing productivity. Studentswill progress quickly because expertscan mark their work and commentdirectly, creating a faster turnaroundtime. Students will also be able to reg-ister for their courses more efficiently.

The doors to the first e-classroomwill open in November 2014 to coin-cide with the launch of the CETA pro-gram, and these certificate studentswill write their e-examinations in May2015.

STEP Inside • MAY 2014 • VOLUME 13 NO. 2 3

What’s Happening in Canadian Education? Big Steps

COURSE 1e-learning segment

and e-exam


and e-exam


and e-exam

CAPSTONE EXAMe-exam tests components

from courses 1 to 3

CERTIFICATE INESTATE AND TRUST ADMINISTRATION

+

+

+

=

THE PATH TO CETA CERTIFICATE

2013 Graduates

Please join us in congratulating thefollowing graduates for 2013:

Peggy Adlington, TEP, London, ONCarolyn Bassinder, TEP, Toronto, ON Robert Brown, TEP, Halifax, NSTanya Butler, TEP, Halifax, NSColleen Ciccozzi, TEP, Vancouver, BCRicardo Cosentino, Calgary, ABStella Craveiro, TEP, Toronto, ONLino De Souza, TEP, Toronto, ONMichelle Desrosiers, TEP, Winnipeg, MBSarah Dykema, TEP, Halifax, NSJessica Feldman, TEP, Toronto, ONTim Friesen, TEP, Edmonton, ABJagruti Gandhi, TEP, Toronto, ONBrendan Garboll, TEP, Edmonton, AB

Rebecca Henri, TEP, Toronto, ONDavid Hood, TEP, St. John’s, NFJohn Hsu, TEP, Calgary, ABRishma Jessa, TEP, Toronto, ONSara Johnson, TEP, Kelowna, BCAndrea Kleinschmidt, TEP,

Vancouver, BCAndreas Komitas, TEP, Toronto, ONTerry Koo, TEP, Toronto, ONAndrea Love, TEP, Toronto, ONLucinda Main, TEP, Toronto, ONKate Marples, TEP, Vancouver, BCKathleen McDormand, TEP,

Ottawa, ONGordon McNeice, TEP, Toronto, ONAlexander Morsink, TEP, Ottawa, ONJason Nagel, TEP, Calgary, ABKazuyuki (Joe) Nakai, TEP,

Vancouver, BC

Katrina Ocampo, TEP, Toronto, ONCarlo Palazzo, TEP, Toronto, ONChristopher Pickett, TEP, Toronto, ONClaudio Piron, TEP, Toronto, ONJacek (Jack) Polanica, TEP,

Vancouver, BCIan Pryor, TEP, Toronto, ONLes Scholly, TEP, Calgary, ABKaren Sparks, TEP, Toronto, ONPaul Taylor, TEP, Ottawa, ONJoshua Thorne, TEP, Toronto, ONPaul van Galder, TEP, Toronto, ONTracy VanPuymbroeck,

Tillsonburg, ONChristopher Vaughan, TEP,

Paradise, NFDawn Watters, TEP, Truro, NSWilliam Yeung, TEP, Toronto, ONGodfrey Yu, TEP, Toronto, ON n


“I initially chose the TEP [trust and estate practitioner] program out of aninterest in estates and trusts and a desire to become more knowledgeablein the field. I had previously been successful in obtaining my CFP [certifiedfinancial planner] designation and saw the TEP program as a natural nextstep. In my current position, I deal with high net worth clients who have avariety of estate-planning needs. I am responsible for identifying planningopportunities for my clients and helping them structure their estate planto ensure optimal results.

The TEP program delivers the highest standard of learning in the field ofestates and trusts. It not only allows students to go on to work withindustry professionals but also equips them to become one of thoseprofessionals themselves. I recommend the program to anyone who isinterested in pursuing a career in estates and trusts or who simply wantsa well-rounded financial background. Joining STEP will benefit you nomatter what road you choose to take, and you will never regret theexperience.”

– TEP practitioner, diploma graduate

ROY A. BERG, TEPManaging Director, US Tax, MoodysGartner Tax Law LLPMember, STEP Calgary

When Alice found herself inWonderland, she observed arecognizable world that had

been turned on its head. And so dowe when we find ourselves in FATCA-IGA-Land: logic and proportion, whilerecognizable, are unfamiliar. In Won-derland, clocks run backward, and ani-mals can talk; in FATCA-IGA-Land,virtually all Canadian private trustsare treated as banks. Yet, confound-ing as it may be, FATCA-IGA-Land isless insane and less onerous thanFATCA-Land.

The US Foreign Account Tax Com-pliance Act (FATCA) is stunning in itsreach and complexity. If Canada hadnot entered into an intergovernmen-tal agreement (IGA) with the UnitedStates, FATCA would have applied uni-laterally, and all Canadian entitieswould have found themselves inFATCA-Land. There, Canadian finan-cial institutions would have faced thedilemma of complying with Canadianlaw (and suffering the consequencesunder FATCA) or complying withFATCA (and suffering the conse-quences under Canadian law).

However, Canada’s implementinglegislation in Bill C-31, which wastabled in Canada’s Parliament onMarch 28, 2014, threatens to invali-date the IGA and cast Canadian pri-vate trusts out of the walled gardenof FATCA-IGA-Land and into the jungleof FATCA-Land.

Canadian Legislation ExemptsPrivate Trusts from theDefinition of FinancialInstitution

Whether US Congress intended to clas-sify trusts as foreign financial institu-tions (FFIs) when it enacted FATCA in2010 is unclear: the term “trust” ismentioned only six times in the statuteand never in the context of an FFI.What is clear, however, is that the Inter-nal Revenue Service (IRS), whichdrafted the regulations, and Treasury,which drafted the IGA, certainly didintend to classify private trusts as FFIs.Further, every country that has exe-cuted an IGA and that has issued guid-ance notes or legislation has reacheda similar conclusion.

In summary, the IGA classifies a pri-vate trust (or any other entity for thatmatter) as an FFI if:1) it either has a professional

trustee or its assets are managed

by a professional asset manager,and

2) the professional trustee or assetmanager is not a flesh-and-bloodperson.

This conclusion is supported by sec-tion 2.36 of the UK guidance notesregarding the US-UK IGA, which wererevised on August 14, 2013, to pro-

vide that a trust will be a financialinstitution subject to FATCA if the trustor trustee engages another financialinstitution to manage the trust orfinancial assets on its behalf.

The Canadian implementing leg-islation, however, takes a differentapproach. Tabled subsection 263(2)of the Canadian Income Tax Act limits


In FATCA-IGA-Land, a Canadian Trust Is a Bank

…logic and proportion,while recognizable, are

unfamiliar.

the definition of a financial institutionto one of 13 entity types, excludingCanadian private trusts and other enti-ties that would otherwise be included.The result is that some Canadian enti-ties (including private trusts) are clas-sified differently under Canadian lawthan under FATCA.

While a reasonable reaction to thisresult might be positive, as explainedbelow, this development is problem-atic for Canadian businesses in gen-eral and Canadian private trusts inparticular.

Narrow Canadian Definition ofFinancial Institution Will CauseProblems

Passage of the implementing legisla-tion in Bill C-31 into law will resultin three undesirable consequences.

First, the US Department of theTreasury could conclude that the leg-islation has failed to validly implementthe IGA, which would nullify the IGAand subject Canadian entities to thefull force of FATCA.

Second, if the legislation doesbring the IGA into force (which isunlikely), a Canadian entity that is notclassified as a financial institutionunder domestic law (such as privatetrust) but that would be classified asan FFI under the Treasury regulationsor other IGAs will likely face unnec-essary withholdings and the concomi-tant obligation to seek a refunddirectly from the IRS.

Third, inconsistent definitions offinancial institution in jurisdictionsthat have executed IGAs will causeincreased compliance costs and uncer-tainty in the marketplace. The UnitedKingdom recognized this risk early onand has taken the lead in developingdomestic legislation that provides amodel for the consistent applicationof definitions and resulting entity clas-sification.

How FATCA Withholding WorksPundits and commentators that eitheradmonish Canada for entering into theIGA or encourage Canada to take astand against the United States do notunderstand how FATCA withholdingworks. FATCA is not enforced by a sov-ereign, but by the rational economicdecisions made by market participants.In this sense, FATCA works like a salestax. If a merchant (or a US financialinstitution in FATCA-Land) fails to with-hold sales tax (the FATCA withhold-ing), then the merchant is liable to thegovernment for the amount of the tax.If the customer claims to be exemptfrom sales tax, the merchant has achoice: either it does not withhold (andis liable for the tax if it has made thewrong decision), or it makes a conser-vative choice, withholds, and advisesthe customer to apply to the govern-ment for a refund.

Further, if a customer presents amerchant with an exemption certifi-cate that the merchant thinks is faultyfor whatever reason, the merchantmust either withhold or risk liabilityfor the non-withheld amount.

This will be the position of Cana-dian private trusts that have interna-tional accounts: these trusts will claimone status for their financial institu-tion in the United States (or UnitedKingdom or other jurisdiction with anIGA in place). This institution will notrecognize the Canadian classificationunder either FATCA or the domesticIGA, and the result will be that thefinancial institution will withhold andthe Canadian trust will be obliged toseek a refund directly from the IRS.

ConclusionIn the words of Lewis Carroll, “I can’tgo back to yesterday because I wasa different person then.”

Private Canadian trusts occupy anunenviable position in FATCA-IGA-Land. Most will be classified as finan-cial institutions and therefore will haveto navigate the vagaries of domesticand international law to avoid the con-sequences of inadvertent non-compli-ance. The Canada-US IGA goes a longway to mitigating the compliance costand consequences of non-compliance.However, the Canadian legislationthreatens to derail the benefits other-wise conferred in FATCA-IGA-Land andforce all Canadian institutions intoFATCA-Land.

Just as Alice could not revert tobeing the person she once was, nei-ther can we retrace our steps. FATCAhas changed the global banking, busi-ness, and tax landscape, and morechanges will follow. n


Pundits andcommentators that

either admonishCanada for entering

into the IGA orencourage Canada totake a stand againstthe United States donot understand how

FATCA withholdingworks. FATCA is not

enforced by asovereign, but by the

rational economicdecisions made by

market participants.

KIMBERLY A. WHALEY, TEPPrincipal, Whaley Estate LitigationChair, STEP TorontoHEATHER B. HOGANAssociate, Whaley Estate Litigation

Background

Canada’s Proceeds of Crime(Money Laundering) and Ter-rorist Financing Act (PCMLTFA)

was enacted in 2000 and is the basisof Canada’s anti-money-laundering andanti-terrorist-funding (AML/ATF)regime. The PCMLTFA applies to finan-cial institutions and intermediaries setout in section 5 of the Act, which

include banks and trust companies.Accordingly, banks and trust compa-nies must meet PCMLTFA require-ments, which include keepingprescribed client records, establish-ing internal anti-money-launderingand anti-terrorist-financing programs,and reporting prescribed transactionsto the Financial Transactions andReports Analysis Centre of Canada(FINTRAC) and relevant law enforce-ment agencies.

Lawyers may be familiar with thePCMLTFA by virtue of its long and con-

tentious history of Charter challengesand injunctions; the Supreme Court ofCanada recently granted leave to appealthe 2013 British Columbia Court ofAppeal’s decision to uphold the find-ing that impugned sections of the Actviolate section 7 of the Charter in itsapplication to lawyers and law firms.The attorney general of Canada hasagreed that lawyers and law firms areexempt from these sections, pendingthe Supreme Court’s decision.

Nevertheless, the Act is applicableto trust companies, and, on February1, 2014, amendments to the Proceedsof Crime (Money Laundering) and Ter-

rorist Financing Regulations came intoforce. These legislative developmentsare consistent with a growing inter-national interest in the particulars oftrusts and corporations.

Increasing Global Interest in theIdentities of Trust BeneficiariesCanada’s amended regulations reflectan increasing interest on the part ofG-8 nations in identifying the benefi-cial ownership of trusts and corpora-tions. At the June 2013 G-8 summit,Prime Minister Stephen Harper

announced that the amended regula-tions reflect Canada’s commitment tofurther improving its AML/ATF regime.

Canada is a founding member ofthe Financial Action Task Force (FATF),the international standard-setting bodyfor AML/ATF activities. Canada istherefore under pressure to show lead-ership in combating money launder-ing and terrorist funding. Yet, in June2007, the FATF found a number ofdeficiencies in Canada’s compliancewith FATF recommendations. As aresult, Canada is on the FATF’s regu-lar follow-up process, which is con-sidered the first step in a graduated

process of disciplinary action toencourage countries to improve theircompliance with the FATF standards.

In 2012, the FATF published newrecommendations that require membernations to increase the transparencyof trusts and corporations by obtain-ing information about the beneficialownership of these investment vehi-cles. The new recommendations didnot include the establishment of publicregisters of information pertaining tothe beneficial owners of trusts and cor-porations, but some G-8 nations have


Trust Companies and Lawyers: What You Should Know About Recent Amendments to Regulations Under theProceeds of Crime (Money Laundering) and Terrorist Financing Act

attempted to establish these registers.At the recent G-8 summit, for exam-ple, the United Kingdom pledged toestablish a register of beneficial own-ership of corporations and trusts,which generated strong oppositionfrom offshore lawyers and trust com-panies. Similar proposals in Irelandwere opposed by the Law Society ofIreland and STEP Ireland.

Canada’s Responses to theFinancial Action Task Force’sRecommendationsCanada’s amended regulations cameinto force on February 1, 2014. Theyrequire trust companies that act astrustees or co-trustees of inter vivostrusts to take additional customer duediligence measures. The followingsummary is not a comprehensivereview of the legislation; trust officersshould consult their counsel in respectof their compliance with the Act, theamended regulations, and the Per-sonal Information Protection and Elec-tronic Documents Act.

Inter vivos trusts are defined in the

regulations as personal trusts otherthan trusts created by a will. The reg-ulations have always provided thatwhen trust companies act as trusteesor co-trustees of inter vivos trusts,they must collect prescribed informa-tion regarding the identity of the set-tlors of these trusts.

As of February 1, 2014, in additionto the requirements set out above,trust companies must also collect infor-mation about the beneficial ownershipof inter vivos trusts. Specifically, whentrust companies are required by theregulations to maintain records inrespect of inter vivos trusts as set outabove, they must also include thename and address of each of the ben-eficiaries known at the time that theybecome a trustee. In addition, theymust collect the following particulars:1) if the beneficiary is a person, the

person’s date of birth and thenature of his or her principalbusiness or occupation, asapplicable; and

2) if the beneficiary is an entity, thenature of its principal business.

Additional information on the record-keeping and customer due diligencemeasures required of trust companiescan be found online at the websitemaintained by FINTRAC (www.fintrac-canafe.gc.ca). In particular, see FIN-TRAC’s Guideline 6G: Record Keepingand Client Identification for FinancialEntities.

ConclusionCanada has not yet signalled an inten-tion to legislate a public register ofthe identities and particulars of trustbeneficiaries. Time will tell whetherCanada will take additional steps tocomply with the FATF recommenda-tions regarding beneficial ownershipof trusts and corporations, andwhether lawyers and law firms willone day be subject to the PCMLTFA asreporting entities. In the meantime,trust companies and their employeesare required by the amended regula-tions to collect the particulars of intervivos trust beneficiaries. n


The 2014 Federal Budget and Changes to Testamentary Charitable Giving

ELENA HOFFSTEIN, TEPPartner, Fasken MartineauMember, STEP TorontoLAURA WESTPartner, Fasken Martineau

The 2014 federal budget intro-duced changes to the mannerin which testamentary charita-

ble gifts will be dealt with under theIncome Tax Act. Although thesechanges were not accompanied bydetailed legislative proposals, they dointroduce interesting issues that arerelevant to estate advisers.

Current RegimeCurrently, subsection 118.1(5) of theIncome Tax Act provides that a char-itable gift made by will is deemed tohave been made immediately beforethe donor’s death. This is advanta-geous because it ensures that thecharitable tax credits arising from thegift may be used in the donor’s termi-nal return to offset tax liability arisingfrom the deemed disposition of his orher capital assets immediately beforedeath. To the extent that these char-itable tax credits are not exhausted inthe donor’s terminal return, a one-yearcarryback of the credits to the year

preceding the year of death is permit-ted. Similar rules apply when a donordesignates a charity as a beneficiaryunder an insurance policy, a registeredretirement savings plan (RRSP), a reg-istered retirement income fund (RRIF),or a tax-free savings account (TFSA).

The Canada Revenue Agency (CRA)has issued many publications outlin-ing its position about what constitutesa gift by will. In general, the CRArequires that (1) the terms of the willprovide for a donation of a specificproperty, a specific amount, or a spe-cific percentage of the residue of theestate; (2) it is clear from the terms of


the will that the executors are requiredto make the donation; (3) the estateis in a position to make the donationafter the payment of debts; and (4)the donation is actually made.

Currently, the value of a gift by willfor charitable receipting purposes isdetermined on the date of the donor’s

death, regardless of when the charityactually receives property from theestate.

A gift that does not qualify as a giftby will may qualify as a charitable giftmade by an estate or testamentarytrust. In other cases, a distribution madeto a charity from a testamentary trustis not considered to be a charitable gifteligible for charitable tax credits;instead, it is considered to be a distri-bution made in satisfaction of the char-ity’s interest in the testamentary trust.

Changes Introduced by the 2014BudgetThe 2014 budget introduces changesto this testamentary charitable giftregime for the 2016 and subsequenttaxation years. Testamentary charita-ble gifts will be deemed to have beenmade by a donor’s estate at the timethat the donated property is trans-ferred to the charity by the estate. Theestate will have the ability to allocatethe charitable tax credits arising fromthe testamentary charitable gift among(1) the estate’s taxation year in whichthe donation was made, (2) an earliertaxation year of the estate, and (3) thelast two taxation years of the donor.

To qualify, the gifted property mustbe transferred to the charity within 36months of the donor’s death and musthave been received by the estate onand as a consequence of the donor’sdeath or have been substituted for thisproperty. (When a charity is designated

as a beneficiary of an insurance policy,RRSP, RRIF, or TFSA, the existing rulesfor determining the eligibility of thedonated property will apply.)

The current carryforward period offive years will continue to apply toother charitable gifts made by anestate.

Some Implications The regime introduced by the 2014budget appears to provide more flex-ibility for testamentary charitable giftplanning.

It will allow executors to claim char-itable tax credits for testamentary char-itable gifts for five different tax periods(the year before death, the year ofdeath, and three years of the estate),as opposed to just two tax periods(the year before death and the year ofdeath). The regime may also createmore flexibility by eliminating theneed for testamentary donations toqualify as gifts by will as long as thedonation of estate property to thecharity takes place within three yearsof death. However, a question thatremains unanswered is whether theflexibility of the new regime is meantto apply only to testamentary dona-tions that already qualify as gifts bywill under the existing regime. If so,then the existing distinctions betweengifts by will and other distributionsmade by estates to charities will con-tinue to apply.

The new regime also provides cer-tainty concerning when to value tes-tamentary charitable gifts for charitablereceipting purposes – namely, on thedate of receipt by the charity withinthe three-year period following thedonor’s death. This should eliminatethe current divergence of positionstaken by charities about whether thevalue of the charitable receipt is the

value of the donated property on thedate of death or the value of thedonated property at the time that thecharity receives it.

Although this flexibility and clarityare in large part welcome, they willincrease the pressure on executors ofestates. Executors will need to ensure

that estate property is transferred tocharities within three years of deathin order to qualify for charitable taxcredits. If an estate is involved in lit-igation or if there are other complex-ities, the three-year period may proveto be challenging. Moreover, even inordinary circumstances, if the valueof estate property increases ordecreases following death, thendepending on the tax outcomes,executors could be criticized for eithermoving too quickly or waiting too longto transfer estate property to charitieswithin the three-year period.

Finally, the new regime does notappear to deal with the treatment ofgifts to a charity on the death of anintervening life interest (commonlyreferred to as “a charitable remaindertrust”). These trusts can qualify as agift by will under the current regime,provided that the trustees have noright to encroach on the capital infavour of the life tenant. The 2014budget contemplates that all testa-mentary charitable gifts must be com-pleted within three years of a death,but a gift of a residual interest in acharitable remainder trust is not onethat can be completed within thattime. As a result, the budget leavesthe future tax treatment of testamen-tary charitable remainder trusts anopen question. n

Testamentary charitable gifts will be deemed to have been made by a donor’s estate at the time that the donated property is transferred

to the charity by the estate.

HENRY VISSER, TEPPartner, McInnes CooperMember, STEP Atlantic

The 2013 federal budget pro-posed consultations aboutsweeping changes to the

income tax rules applicable to testa-mentary trusts. On June 3, 2013, theDepartment of Finance released a con-sultation paper, setting out proposedamendments to the Income Tax Actand requesting submissions byDecember 2, 2013. The consultationpaper and the 2013 proposed amend-ments were summarized and dis-cussed in a previous STEP Inside articleby David Stevens and Henry Visser,co-chairs of the STEP Canada commit-tee struck to prepare STEP Canada’ssubmission to the minister of financein response to the consultation paper(see STEP Inside, October 2013, vol.12, no. 3, at pp. 5-6).

STEP Canada’s Response to “Con-sultation on Eliminating GraduatedRate Taxation of Trusts and CertainEstates,” was submitted to the min-ister on December 2, 2013 and isposted on STEP Canada’s website:http://www.step.ca/pdf/TTC122013_TestamentaryTrustSubmissionSTEP-CANADA.pdf. The submission pro-vided a brief introduction and

• a summary and critique of the con-sultation paper,

• a description of the historical andconceptual context of the pro-posed reforms,

• responses to specific proposals,and

• suggestions concerning otherrules.

Highlights of the submission includedthe following positions adopted bySTEP Canada:1) The consultation paper failed to

adequately establish a reasonfor the 2013 proposedamendments to the taxation oftestamentary trusts and estates.

2) As observed in the Cartercommission report, individuals(not trusts or other entities)should ultimately bear theburden of taxation, althoughthe taxation of trusts and otherentities may be required toavoid the deferral of taxation.Any such taxation, however,should be integrated to avoiddouble taxation and distortionsthat result from over- or under-integration.

3) The Income Tax Act seeks toachieve integration for intervivos trusts through a trustdeduction and beneficiaryinclusion mechanism thatincludes character preservationrules. However, other than thepreferred beneficiary electionand the age 40 trust rules, theAct does not provide any mecha-nism to effectively provide forthe integration of incomeaccumulated in an inter vivostrust; this distorts legitimatetrust planning. A similar problemexists in relation to income accu-mulated in testamentary trusts.The 1995 amendments to thepreferred beneficiary electionand the 2013 proposedamendments establish a taxsystem that is biased against thelegitimate accumulation ofincome and capital in trusts.

4) If there is a sufficient basis foramending the taxation oftestamentary trusts, thesolution proposed by theminister is inadequate. Insteadof simply treating testamentaryand inter vivos trustsidentically, a thorough review ofthe tax treatment of all trusts

should be conducted, takinginto consideration modern trustplanning and sound tax policy,such as that advanced by theCarter commission. The focusof any tax reform should be theappropriate level of taxation ofaccumulated trust income in alltypes of trusts, taking intoaccount provincial rules(concerning social assistance,for example) as well as the taxintegration of accumulated trustincome (recognizing that over-integration is better thandouble taxation if compromisesmust be made).

5) Income is legitimatelyaccumulated in many trusts,including trusts fordisadvantaged individuals,minors, young adults, seniors,spendthrifts, spouses, andindividuals who require


Testamentary Trusts After the 2014 Budget: The Final Chapter?

The 2013 federalbudget proposed

consultations aboutsweeping changes tothe income tax rules

applicable totestamentary trusts.

protection from potentialcreditors. For example, Hensontrusts assist disadvantaged indi-viduals in maximizing theiraccess to provincial assistanceprograms. The accumulation ofincome in an estate may also berequired because of the natureof the estate’s assets or ongoingtrust or tax litigation.

6) There are at least six methods of achieving tax integrationbetween trusts and theirbeneficiaries, and each has itsstrengths and weaknesses. Ofthe six, the minister has chosena method in which accumulatedtrust income is taxed at the high-est marginal rate and integrationexists only whentrust income istaxable tobeneficiaries;this methoddoes notworkwell

when trusts should legitimatelybe accumulating income for theirbeneficiaries.

7) Both testamentary and intervivos trusts for disadvantagedindividuals (Henson trusts inparticular) should benefit fromgraduated tax rates under theAct, taking into particularconsideration provincial socialassistance rules for theseindividuals.

8) Both testamentary and intervivos spousal trusts should ben-efit from graduated rate taxrules under the Act.

9) The 2013 proposedamendments provide estateswith graduated rates for 36

months, following which theyare subjected to flat high-ratetaxation. In many cases, 36months is insufficient time toadminister an estate. Therefore,in preference to the 2013proposals, it is desirable eitherto maintain the status quo or toprovide an option for executorsto apply for an extension of the36 months.

10) Considering the financialhardship that will result fromthe 2013 proposedamendments, grandfathering orspecial transitional relief shouldbe provided for existingtestamentary trusts, estates, and grandfathered inter vivos

trusts. There shouldalso be grandfathering

or specialtransitional rules

for testamentarytrusts created

under willsthat have


already been made, particularlywhen a will cannot be altered asa result of the mental incapacityof the testator.

11) If the 2013 proposedamendments are adopted intheir current form, subsection249(6) (which triggers a year-end when a testamentary trustis tainted) should be repealed,and the definition of “preferredbeneficiary” should beexpanded.

12) There are a number of technicalconcerns relating to theimposition of December 31year-ends for testamentarytrusts, including increased costsand burdens for tax preparersand corporate trustees, as wellas timing issues relating to theT3 filing deadline.

13) It will be difficult for trustees todetermine the amount of taxinstalments required fordiscretionary testamentarytrusts, particularly if trustincome and distributions tobeneficiaries fluctuate annually.

14) As part of a large and principledreview of the taxation of trustsand estates, the minister shouldconsider reviewing the followingprovisions and amendments:a) the subsection 164(6) loss

carryback provisions;b) subsections 75(2) and

107(4.1);c) the stop-loss and bump rules

applicable on the death of aspouse in a spousal trust, thesecond partner in a joint part-ner trust, and the alter ego inan alter ego trust;

d) the application of total returninvesting in a spousal trust(as is being contemplatedunder provincial legislation);

e) subsection 118.1(5) andother rules that may comeinto play when transferring afarm or fishing business on arollover basis to subsequentgenerations;

f) the rules regardingacquisition of control of a cor-poration to ensure that thereis no such acquisition in theevent of a change in thetrustee of a trust or theexecutor of an estate;

g) tax credits for gifts made in awill that are available to eitherthe estate or the testator atthe option of the executors;and

h) the rules for tax creditsavailable to alter ego or jointpartner trusts for donations,particularly when theprincipal or surviving spouseor partner dies late in theyear.

The overall thrust of STEP Canada’s sub-mission was to advise the minister thatif changes in the taxation of testamen-tary trusts, estates, and grandfatheredinter vivos trusts are required, a com-prehensive review of trust taxation iswarranted, taking into considerationthe objective of tax integration andfacilitating legitimate trust planning.

Following the consultation period,the 2014 federal budget, released bythe minister on February 11, 2014,proposed to enact virtually all of thesweeping measures proposed in the

consultation paper, thus rejecting mostof the serious concerns and recom-mendations raised by STEP Canadaand others. Considering the magni-tude of these changes, it is unfortu-nate that the minister did not take theopportunity to undertake a compre-hensive review and to implement onlythose amendments that improve thetax integration of trusts and estatesand their beneficiaries and that pro-mote tax neutrality.

The key change that the minsterdid make in response to the submis-sions of STEP Canada and others wascontinuing to apply graduated ratesto testamentary trusts whose bene-ficiaries are eligible for the federal dis-ability tax credit. While this changewas recommended by STEP Canadaand is a welcome amendment, it isarguable that such an amendmentshould also be extended to inter vivostrusts in similar circumstances (to pro-mote tax neutrality in similar circum-stances).

The 2014 proposed amendments(composed of the 2013 proposedamendments as amended by the 2014federal budget) will generally apply tothe 2016 and subsequent taxationyears of trusts and estates. Existingtestamentary trusts that do notalready have a calendar year-end fortax purposes will have a deemed year-end on December 31, 2015, and exist-ing estates will have a deemedyear-end on the later of the end oftheir 36-month administration periodand December 31, 2015.

Sections 14 to 27 of the notice ofways and means motion that wasincluded with the 2014 federal budgetset out a first draft of some of themeasures that will be required toimplement the 2014 proposed amend-ments. More detailed provisions willno doubt follow in the coming monthsin a budget implementation act.Assuming that each of the provincesdecides to follow the lead of the fed-eral government, as in most cases


The key change that the minster did make inresponse to the submissions of STEP Canada and

others was continuing to apply graduated ratesto testamentary trusts whose beneficiaries are

eligible for the federal disability tax credit.


they are mandated to do pursuant tofederal-provincial agreements on taxadministration (Quebec excluded), theprovinces will likely have to reviewtheir income tax legislation to deter-mine if any consequential changes arenecessary.

Following the proposed changes tothe income tax rules applicable to tes-tamentary trusts as set out in the 2014federal budget, many tax, estate, andtrust practitioners are wonderingwhether testamentary trusts willremain an effective planning tool fortheir clients. While initially it mayappear that these trusts will lose theirusefulness, ultimately this is unlikelyto be the case. Testamentary trustswere developed in response to manylegitimate needs that continue to exist,and that will continue to exist in thefuture. In addition, income splittingwith beneficiaries in low tax bracketsmay still provide a useful means ofdistributing trust income in appropri-ate circumstances. However, it is clearthat the minister sought to constrainthe use of testamentary trusts, partic-ularly those established for purely tax-motivated purposes, and the 2014proposed amendments will likely beeffective in that respect.

Now that the minister has indicatedthat the government is moving for-ward with the 2014 proposed amend-ments, practitioners should considervarious matters on behalf of clientswho have testamentary trusts, estates,or grandfathered inter vivos trusts:1) whether existing testamentary

trusts, estates, or grandfatheredinter vivos trusts (or those thatwill be created before 2016)should be varied to permitincreased distributions to benefi-ciaries or perhaps earlytermination when the level oftaxation is punitive (thisconsideration may beparticularly important forspousal testamentary trusts);

2) whether any such variation is

permitted or practical under theapplicable trust or estatedocumentation, or whether acourt application is required,available, or warranted inrelation to its cost;

3) whether clients who have thecapacity to amend their willsshould do so;

4) whether anything can be done toamend the will of an individualwho may not have the mentalcapacity to take intoconsideration the implications ofthe 2014 proposedamendments, or whether anapplication to vary the will orestate (or any testamentarytrusts created thereunder)should be made as soon aspossible after the death of the

individual, and what steps, ifany, should be taken to preparefor the variation application;

5) whether clients should considerusing alter ego, joint partner, orother inter vivos trusts,particularly given the benefit ofavoiding probate, which reducesprovincial probate taxes and feesand provides privacy;

6) whether clients should considerestablishing or moving the taxresidence of a trust to a lower-tax jurisdiction, such as Alberta,particularly considering theincreased level of taxation forany income required to beaccumulated in a trust (querywhether a trustee who fails toconsider alternatives to reducingthe level of income tax borne bya trust or estate is negligent andthus accountable to thebeneficiaries).

Practitioners should generally alsoreview their wills, estates, and trustprecedents and practice to determineif any changes are required as the gov-ernment implements the 2014 pro-posed amendments.

In conclusion, the 2014 proposedamendments will constrain the use oftestamentary trusts, particularly thoseestablished for purely tax-motivatedpurposes. However, the many non-taxbenefits of these trusts ensure thatthey are likely to continue to be usedfor many generations to come. Giventhe non-tax benefits of all types oftrusts, we can hope that the minis-ter will one day undertake a more thor-ough review of their taxation andmove toward proper tax integrationof trust income, as called for by theCarter commission and by STEPCanada in its December 2, 2013 sub-mission. n

While initially it mayappear that these

trusts will lose theirusefulness, ultimately

this is unlikely to bethe case. Testamentarytrusts were developed

in response to manylegitimate needs that

continue to exist, andthat will continue to

exist in the future. Inaddition, income

splitting withbeneficiaries in low tax

brackets may stillprovide a useful means

of distributing trustincome in appropriate

circumstances.

FIRST HOLOGRAPHDOCUMENT ADMITTED TO PROBATE IN NOVASCOTIA

TANYA L. BUTLER, TEPAssociate, Stewart McKelveyMember, STEP Atlantic

Casavechia Estate (Re), 2014 NSSC 73,is Nova Scotia’s first reported decisionadmitting a holograph codicil to pro-bate. In 2008, amendments to theNova Scotia Wills Act allowed holo-graph wills, or wills that are whollywritten in the testator’s own handwrit-ing and signed by the testator. InCasavechia, the testator made aformal will in 1996, leaving his spousean interest in real property and makingspecific gifts of money to his childrenfrom a previous marriage. For years,he discussed subdividing and sellingthe property, reserving a lakefront lotfor himself. In 2010, having still notsubdivided or sold the land, he wrotea letter to his biological daughter, with-out his wife’s knowledge. He deliveredthe letter, which was entirely hand-written, in a sealed envelope while hiswife was out, and he told his daugh-ter to “wait to open it for the timebeing." The letter read as follows:

[To] my one and only Daughterat this time, this note is toconfirm a promise that I will giveher lake front Building lot on myproperty in Cole Harbour,Dartmouth the lot, the southernEnd borders amorans land with abig oak tree on it, it’s to be freeof all expenses taxes etc. the lotwill be taken out when my lakefront property is sold, and willbe in accordance with other lakefront lots. I hope this will beagreed with all concerned.

My reason for doing this isbecause I owe her a weddingHoneymoon gift and I feel guiltybecause of it.

With love her father,Bill Casavechia

After the testator’s sudden death in2012, the letter was opened. All par-ties agreed that it was in the testator’shandwriting, but the spouse contestedits admission to probate, arguing thatit did not demonstrate the requisite tes-tamentary intention or animus testandi.

The court followed the test in Ben-nett et al. v. Gray/Bennett et al. v.Toronto General Trusts Corporation,[1958] SCR 392, which states thatalthough a document wholly written

and signed by a deceased may con-stitute a valid holograph will, it is nota holograph will unless it demon-strates a deliberate or fixed and finalintention to dispose of the writer’sproperty on death.

In this case, although the letter didnot use the word “will” and made noexplicit reference to death, the courtfound a testamentary disposition wasimplicit. The writer’s style was formal,and he addressed and signed the letterusing full names. He used the word “gift”and described the lot in question indetail. Rather than stating that the giftwas to take effect when the writer soldthe property, the document stated thatthe gift was to take effect when the prop-erty was sold (that is, by the writer’sexecutor). Finally, the writer expressedthe wish that all would be in agreementand gave a reason for the gift, as thoughhe would not be present to explain it.Evidence at the hearing revealed thatthe testator had often expressed frus-tration at not being able to revise hiswill until the land was sold. It was stillon the market until just before his death,and he had never revisited his lawyer todiscuss a new will.

Although legislation permittingholograph wills can soften the harsh-ness of the formalities of execution in


I N T H E H E A D L I N E S

some circumstances, this case high-lights the importance of encouragingclients not to delay in revising a formalwill and not to rely on homemadeplanning documents to effect theirwishes. The cost of good planningfrom the outset is far less than thecost of litigation after death, whendocuments have to be proved in court.

RECTIFICATION AND ADECEASED PERSON’SRIGHT TO PRIVACY

JENNIFER LEACHAssociate, Sweibel Novek LLP

In November, the Supreme Court ofCanada issued its long-awaited deci-sion on rectification in Quebec (Agencedu Revenu) v. Services Environnemen-taux AES inc., 2013 SCC 65. In thisdecision, the court confirmed that theconcept of rectification is applicablein Quebec. In so doing, it ensured thatparties to a contract in any Canadianprovince may seek to correct errorsretroactively when the contract doc-uments clearly do not reflect the par-ties’ specific mutual intentions.

The Supreme Court of Canadawarned that rectification may not beused simply to avoid unforeseen taxconsequences. Such was the case inDésourdy et Fiducie Gérald Désourdy,2014 QCCS 147 (CanLii), in which amotion was brought to modify theterms of a trust retroactively to thedate of its creation. The applicantsmaintained that, as drafted, the trustwould not allow the transfer of prop-erty to the beneficiaries on a rolloverbasis. They sought a rectification order,positing that such a tax result wentagainst the settlor’s original intentionto transfer wealth with the least fiscalimpact. The clerk of the Quebec Supe-rior Court quashed the motion. Whileall the relevant parties shared a desireto reduce the fiscal burden associatedwith the trust, to allow a trust docu-ment to be changed retroactively toreflect a new interpretation of the taxlaws would be to create an “inconceiv-able, aberrant and surreal” result. Whilea retroactive change to the trust doc-ument was not allowed, the partieswere invited to seek to change thetrust on a prospective basis.

Pagé v. Henley (Estate of), 2014QCCS 772 (CanLii), reviews the provi-sions that protect a deceased person’sright to privacy. The case involved adaughter’s attempt to nullify hermother’s last will, which excluded twoof the testator’s three surviving chil-dren, on the basis that her mother wasincapable of consent at the time ofsigning. To prove her mother’s inca-pacity, the plaintiff requested andobtained her mother’s medical recordsfrom the hospital and long-term carefacility where she lived immediatelyfollowing the signing of her will.

The Civil Code of Quebec protectsevery person’s right to reputation andprivacy; no one may invade a person’sprivacy without the person’s consent,unless authorized by law (article 35).Article 9 of the Quebec Charter ofHuman Rights and Freedoms protectsevery person’s right not to disclose

confidential information and prohibitsany person bound by law to profes-sional secrecy from disclosing confi-dential information, even in judicialproceedings, unless authorized to doso by the person or by an express pro-vision of law. The tribunal must, exofficio, ensure that professionalsecrecy is respected.

The Quebec Act Respecting HealthServices and Social Services providesthat a patient’s record is confidentialand may not be accessed without thepatient’s consent or the consent of aperson qualified to give consent on thepatient’s behalf (article 19). If the patientis deceased, the Act Respecting HealthServices and Social Services providesthat only the deceased patient’s heirs,legatees by particular title, and legalrepresentatives may access thedeceased’s medical record and only tothe extent necessary for the exercise oftheir rights in such a capacity (article23, al.1). The deceased patient’s spouse,ascendants, or direct descendants mayaccess information in the deceased’smedical record only if it relates to thecause of death and only if the deceasedhas not previously refused to releasethis information (article 23, al. 2).

Because the plaintiff was not an heir,legatee, or legal representative of thedeceased, she could not access hermother’s medical records, except toknow the cause of her death, whichwas not at issue. While the plaintiff hadimproperly obtained a copy of hermother’s medical records, she was notauthorized under Quebec law torenounce her mother’s right to privacy;she therefore could not present theserecords as evidence in the case. Thecourt expressed the view that while theprivacy protections afforded to personsin Quebec may occasionally obscurethe truth, they are a fundamental socialvalue and must be upheld. Given theconstraints against disclosing confi-dential information, the plaintiff wasunable to prove that her mother lackedthe capacity to consent to her last will.


Although legislationpermitting holograph

wills can soften theharshness of the

formalities of executionin some circumstances,this case highlights the

importance ofencouraging clients not

to delay in revising aformal will and not to

rely on homemadeplanning documents to

effect their wishes.

VARIATION OF TRUST TOADDRESS DEEMEDDISPOSITION

JOAN E. JUNGPartner, Minden Gross LLP; Member,STEP Toronto

Pursuant to the Income Tax Act, aninter vivos trust is deemed to disposeof its capital property at fair marketvalue on the 21st anniversary of itsdate of settlement and each 21stanniversary thereafter. To avoid thedeemed disposition, a common plan-ning step is to have the trust distrib-ute and transfer appreciated capitalproperty to the capital beneficiariesbefore the 21st anniversary. What hap-pens, however, if the trust providesno authority or discretion to encroachon capital and distribute at this time?

This was the situation that pre-sented itself in Eaton v. Eaton-Kent,2013 ONSC 7985; the trusteesaddressed the issue by applying to thecourt to amend the trust under theVariation of Trusts Act. By court order,the trust was varied to add adminis-trative and discretionary powers sothat a reorganization could be imple-

mented, leaving all beneficiaries eco-nomically whole and accelerating thedistribution of capital. In addition, thetrustees were empowered to requirethat a shareholders’ agreement,

acceptable to them, be entered intobefore any shares were distributed.(Although the trust deed contained anamendment clause, the trustees chosenot to rely on it.)

In 1992, Harold Fishleigh settled atrust for the benefit of his issue. Theterms of the trust provided thatHarold’s two children (Wayne and

Diana) were entitled to the income forlife in equal shares. On the death ofthe first to die of Wayne and Diana,50 percent of the net income was tobe paid to the issue of the deceased


The valuation of so-called thin voting shares has been the subject of commentary in recent

years, and the CRA’s response has not beenentirely satisfactory…

beneficiary in equal shares per stirpes;on the death of the last to die of Wayneand Diana, the capital of the trust wasto be distributed to the grandchildrenon a per stirpes basis. In 2013, Wayneand Diana were still alive, and the 21stanniversary was imminent. There wasno provision for encroachment on cap-ital during their lifetimes. The trust’smain asset was 57 percent of thecommon shares of a private real estatecorporation, and these shares had asignificant inherent gain. The remain-ing common shares of the corporationwere held by Wayne, Diana, and theirrespective children.

The evidence indicated that the cor-poration declared dividends annuallyon its common shares. Wayne, Diana,and their respective children receiveddividends by virtue of their direct own-ership of shares. Wayne and Diana alsoreceived dividends as income benefi-ciaries of the trust.

The reorganization approved by thecourt involved the creation of twoclasses of preferred shares (class A pre-ferred and class B preferred) and fourequivalent classes of common shares(effectively one class for each of Diana,Wayne, Diana’s children, and Wayne’schildren). Diana, Wayne, Diana’s chil-dren, and Wayne’s children exchangedtheir respective common shares for aseparate class of common shares. Thetrust exchanged its existing commonshares for two separate classes ofcommon shares and the two classes ofpreferred shares. The proposal was thatthe trust would distribute one class ofcommon shares to Diana’s children andthe other class of common shares toWayne’s children. Therefore, on its 21stanniversary, the trust would hold onlythe two classes of preferred shares.

The class A preferred shares heldby the trust were non-voting, non-par-ticipating, and provided for an annualaggregate six-figure dividend. Itappears that this amount wasintended to equal the annual incomedistribution that Wayne and Diana

received as income beneficiariesbefore the reorganization by virtue ofthe trust’s ownership of commonshares. The proposed shareholders’agreement included a covenant todeclare this dividend. There was alsoa covenant to declare a dividend ina specified amount on each of the fourclasses of common shares, whichappeared to be based on the dividendamount received by the particularperson in the year preceding the reor-ganization. These dividend covenantswere to continue until the deaths ofboth Wayne and Diana. In this manner,it appears that all beneficiaries wouldbe kept economically whole becausethey would receive the same dividendsthat they received in the year preced-ing the reorganization.

The class B preferred shares heldby the trust allowed the trust to con-tinue to control the corporation.

The trustees applied for an advanceincome tax ruling and asked for con-firmation that the variation to accel-erate the distribution of capital wouldnot result in a resettlement of thetrust, a deemed disposition of prop-erty held by the trust, or a dispositionof an income or capital interest of anybeneficiary of the trust. The CanadaRevenue Agency (CRA) ruledfavourably in this respect.

On the 21st anniversary, the trustwould have been subject to a deemeddisposition at fair market value of theclass A preferred shares and the classB preferred shares. It appears to havebeen recognized that there was aninherent gain in respect of the class Apreferred shares based on the fixed $1per share redemption value. The classB preferred shares were non-partici-pating voting shares with no dividendrights and a nominal redemption value,but they represented voting control ofthe corporation. A ruling wasrequested that the deemed dispositionof these shares would not result in taxliability, but the CRA declined to rulebecause the matter was one of valu-

ation. The valuation of so-called thinvoting shares has been the subject ofcommentary in recent years, and theCRA’s response has not been entirelysatisfactory, as is the case here, whenit declined to rule.

TRUSTS AS MATRIMONIALPROPERTY

NANCY L. GOLDING, TEPPartner, Borden Ladner Gervais LLPMember, STEP Calgary

The issue of trust assets as matrimo-nial property is a topic of great inter-est in Alberta and across the country.For some time, matrimonial lawyershave been asking the courts to valueinterests in trusts and to distributetrust funds as matrimonial propertyin divorce actions; the resulting judi-cial decisions have often perplexedpractitioners.

In January 2014, the Alberta Courtof Queen’s Bench considered thisissue once again in Shopik v. Shopik,2014 ABQB 41. In Shopik, the courtwas asked to determine the divisionof the parties’ numerous assets,including their interests in a familytrust. The parties were married in1972 and had two children, who were21 and 17 at the time of the decision.The accountant husband created afamily trust in 2002. The settlor wasthe husband’s father. The trust hadentered into a real estate transactionin which its property had been sold,leaving only the invested sale pro-ceeds in the trust.

The husband was the sole trustee.The beneficiaries were the husband,the husband’s children, and the hus-band’s spouse from time to time.“Spouse” was defined in the trust deedto exclude a person who is “living sep-arate and apart by reason of a break-down of their marriage.” Therefore,although the wife was initiallyincluded as a trust beneficiary, she


was excluded following the marriagebreakdown. The trust deed gave thetrustee unfettered discretion in themanagement and administration ofthe trust.

The husband advised that the trustwas set up as an estate-planning/taxdeferral mechanism and existed forthe benefit of the children of the mar-riage. No trust money was ever paidto the husband or wife, but moneyhad been paid to the children.

The husband acknowledged thathe did most of the financial planningthroughout the marriage, and the wifeconceded that she knew very littleabout the family’s financial affairs,although she did understand thatthere was a trust and knew about thereal estate transaction.

The court reviewed Kachur v.Kachur, 2000 ABQB 709, and Grossev. Grosse, 2012 SKQB 464. In Kachur,the court considered whether the chil-dren of a marriage had an interest ina trust that could be carved out or thatrendered the trust exempt from dis-tribution pursuant to a matrimonialclaim. In Grosse, the wife was claim-ing a matrimonial interest in a familytrust. The similarities between the

trusts in Grosse, Kachur, and Shopikare as follows:1) A nominal settlor created the

trust.2) The sole trustee was the

husband.3) The beneficiaries were the

husband, the children, and thegrandchildren.

4) The trustee had unfettereddiscretiona) to manage the trust;b) to distribute income or capital

to any beneficiary to theexclusion of the others; and

c) to amend the terms of thetrust, including removing thebeneficiaries.

5) The husband never took moneyfrom the trust.

In addition, in Grosse and Shopik, thehusband had sufficient control to beconsidered to have contingent or ben-eficial interests in the trusts.

There were differences among thecases as well. In Kachur and Grosse, thetrusts were initially set up as part of anestate freeze, and the wife was never abeneficiary. In Kachur, there was noexpectation that the husband wouldever receive anything pursuant to thetrust, and the husband had renouncedhis entitlement as a beneficiary beforegoing to court. In Shopik, the trust deedallowed the husband to receive funds,and the husband had not renounced hisinterest in the trust funds; the husbandcould therefore legitimately receivemoney from the trust.

The wife in Grosse had significantknowledge about the trust and wasable to obtain independent legal andaccounting advice. The court in Shopikfound that the wife did not have thesame level of knowledge, whereas thehusband was the professional adviser.In Kachur and Grosse, the court foundthat, because the trust property wasgrowth shares, any unwinding of thetrust could have dire or untended taxconsequences. This was not the case

in Shopik, where the trust was hold-ing money.

In Grosse, the court found that“[t]he trust was created during themarriage, well before [the wife] left.During a marriage a couple is free todo what it wishes with its assets,jointly or singly, subject only to con-siderations such as dissipation.”

In Shopik, the court indicated thatit did not want to leave control of thetrust in the husband’s hands and sug-gested two alternatives: (1) the wifeand husband could be co-trustees,which might result in a stalemate; or(2) the trust could be split into twoseparate and equal trust funds, withthe wife controlling one and the hus-band controlling the other as soletrustee of their respective funds. Eachof these trusts would have the sameterms as the original trust, and, ifeither party encroached on the trustfunds within his or her control for per-sonal gain, one-half of the amountwould be payable to the other partyas matrimonial property.

Although the court suggested thesealternatives, it did not come to a deci-sion about what should be done withthe trust. Clearly, though, it was pre-pared to allow a matrimonial claim tobe made against the trust assets in theamount of one-half for each spouse.

VARIATION OF TRUST TOADDRESS DEEMEDDISPOSITION

ANDREA FRISBYLegacy Tax + Trust LawyersStudent Member, STEP Vancouver

KATE MARPLES, TEPLegacy Tax + Trust LawyersMember, STEP Vancouver

The long-awaited Wills, Estates andSuccession Act (WESA) and new courtrules dealing with probate and estateadministration came into effect on


The issue of trustassets as matrimonialproperty is a topic of

great interest in Albertaand across the country.

For some time,matrimonial lawyers

have been asking thecourts to value

interests in trusts andto distribute trust

funds as matrimonialproperty in divorce

actions…


March 31, 2014. WESA replaces andharmonizes the Estate Administra-tion Act, the Probate Recognition Act,the Wills Act, and the Wills VariationAct. The new court rules update therules for grant applications and pro-vide modified new court forms whichshould, in due course, streamline theapplication process. This articleshowcases several of the significantnew features.

The new probate rules are foundin part 25 of the BC Supreme CourtCivil Rules, which repeals rules 21-4and 21-5. Rule 25 and the new forms,set out in appendix A.1 to rule 25,give grant applications a new look.The forms are designed to make theapplication process more straightfor-ward by providing questions withcheckbox answers to highlight theinformation that an applicant for agrant of probate or administrationmust bring to the court’s attention.An applicant can use a short-form orlong-form application, depending onthe complexity of the estate in ques-tion. Rule 25-3(2) provides a compre-hensive list of the new forms anddocuments required for a successfulapplication.

Another significant change, whichwas felt immediately by estate admin-istration practitioners during the tran-sition period that began on March 31,2014, is the new 21-day noticerequirement prescribed by rule 25-2.Pursuant to this rule, an applicantmust deliver notice to parties inter-ested in an estate, as defined in rule25-2(2), 21 days before submittingthe application for the grant of pro-bate or administration. Applicantscan rely on rule 25-2(5), which pro-vides that notice of an intention toapply for a grant is deemed to bedelivered on the day that it is mailed,or they can use the new electronicdelivery provisions, which permitdelivery by email and other methods.When notice is delivered electroni-cally, the recipients must acknowl-

edge receipt of the electronic notice.The procedure for giving notice whena minor is involved has also beenmodified: the public guardian andtrustee need not receive notice forminors who have interests in prop-erly constituted testamentary trusts,unless a minor is the spouse or thechild of a deceased. The 21-daynotice requirement came into effectfor all applications commencingMarch 31, 2014, regardless of thedeceased’s date of death, creating atemporary hiatus in applicationsduring the first few weeks of April2014.

Another noteworthy amendmentis provided by rule 25-8, which per-

mits a court to make an order requir-ing a third party to provide anapplicant with the deceased’s finan-cial information so that the applica-tion for the grant can be completed.This mechanism is designed toaddress the difficulty that arises forapplicants in administrations in whicha third party, often a financial insti-tution, will not provide the deceased'sfinancial information because theapplicant has not yet been appointedas the deceased’s personal represen-tative. Under the new scheme, theapplicant can submit his or her appli-cation, completed but for the missinginformation in the affidavit of assetsand liabilities, and seek an authoriza-tion from the court requiring the thirdparty to deliver the information to theauthorized applicant within 30 days.If the information is not forthcoming,the court can make additional ordersagainst the third party, including anorder for the costs of seeking any sub-sequent order or orders.

Finally, rule 25-13 promises tomodernize the process for dealingwith the accounts and remunerationof personal representatives. Pursuantto rule 25-13(3), the court may “hearand decide any matter relating to theaccounts.” The personal represen-tative or “a person interested in anestate” may initiate a passing ofaccounts under rule 25-13(6)(b). Ifthere is no existing court proceed-ing, this process can be initiated byrequisition rather than by petition(which was formerly required). Also,rule 25-13(2)(a)(iii) provides that anapplication for passing of accountsand fixing of remuneration may pro-ceed by way of a consent order if all

interested persons have consentedto the accounts. An application forremuneration of a personal represen-tative may now be heard separatelyfrom an application for the passingof the personal representative’saccounts. The effect of these newprovisions is to provide the court withconsiderable scope and flexibility indesigning a process that fits the cir-cumstances of a case.

In summary, there may be minordiscord as the public, practitioners,and the courts learn to navigateBritish Columbia’s new legislation,rules, and forms. However, it is antic-ipated that practice will quickly per-fect the new process, and, in the nearfuture, probate and administrationapplications will proceed harmo-niously and efficiently under the newsystem, leaving no one singin' theblues for the repealed regime. n

An application for remuneration of a personalrepresentative may now be heard separately

from an application for the passing of thepersonal representative’s accounts.

IAN WORLANDChair, STEP Canada

It’s my pleasure to open thismessage with a warm wel-come to the newly launched

Okanagan chapter, assuredlylead by Chair Geoffrey White,Deputy Chair Alison Oxtoby,and their executive team. Thechapter launch took place on

March 31 and was attended by over 60 practitioners. The chap-ter will provide high-level technical education and network-ing opportunities for over 250 Okanagan area members andnon-members whose practices include trust and estate work.

Our eight regional branches and the two new chaptershave been working diligently to examine and, in many cases,improve the products and vehicles that they are offering theirmembers. I look forward to attending a number of branchevents in 2014, including those held in Vancouver, Ottawa,Winnipeg, and Calgary, and eagerly anticipate visiting theremaining branches and chapters as our schedules allow.

2014 is an exciting year for STEP because the Vancouver,Calgary, Winnipeg, Ottawa, and Montreal branches all cele-brate their 15th or crystal anniversaries.

I am pleased to direct your attention to the first few pagesof this issue, where the most recent graduates of the STEPCanada diploma program are featured, along with the top-ranking students and the recipient of the Gerald E. OwenPrize for the highest overall marks. Also featured are thequalified practitioner graduates, along with the top-scor-ing student in this category; all of these students have suc-cessfully completed the essay route to the TEP designation.Congratulations to our graduates!

The Education Committee is overseeing two exciting newprojects, the first of which is the creation of the STEP Canadacertificate in estate and trust administration. Enrolment forthis online course will begin November 2014 for individualswho are contemplating a career in trust and estate adminis-tration or who have already secured employment in the fieldand want to deepen or refresh their knowledge and expert-ise. Details can be found in the STEP Canada education fea-ture that is included in this issue. In response to members’requests, we have launched our second new project: start-ing in May 2015, the STEP Canada diploma program will switchfrom the traditional paper binder approach to online programdelivery. My thanks go to the devoted members of the Educa-tion Committee for their hard work on these new initiatives.

As you are all aware, the 2014 national conference willtake place June 16 and 17 in Toronto. The Program Commit-tee, lead by co-chairs Rachel Blumenfeld and Nadja Ibrahim,released the very impressive final program on March 26th,and we have seen registration numbers soar since that time.My thanks go to the committee for putting together such atimely and encompassing program for attendees. For the

first time, the conference materials will be provided throughan app, supported on multiple platforms with wireless Inter-net throughout the conference area. I am advised that theapp has been tested and looks great. See you at the con-ference – I hope to connect with many of you there.

The Tax Technical Committee, chaired by Pamela Cross,worked very hard on several submissions in 2013 and hasplans to reinvigorate itself with more members to addressthe volume of new measures that are being introduced. Mem-bers wishing to become involved or looking for more infor-mation are encouraged to contact Michael Dodick at the STEPCanada office.

The Trust and Estate Technical Committee, chaired by Kath-leen Cunningham, continues to encourage provincial branchesto review the Uniform Law Conference of Canada’s UniformTrustee Act and consider how it might be promoted in theirjurisdictions. A survey concerning issues that practitionersencounter when dealing with financial institutions about estatedocumentation, power of attorney documentation, and accept-ance of attorney instructions is being finalized for circulationto members before the summer. The committee continues tomonitor challenges facing our members and to look for oppor-tunities to comment on law reform initiatives in the provinces.

On the governance front, STEP Canada is well positionedto bring itself into compliance with the Canada Not-for-ProfitCorporations Act by October 2014. The Governance Com-mittee, chaired by Secretary Pamela Cross, is working withcounsel to amend our constating documents within the req-uisite time period. We will need to approve these new doc-uments at our annual general meeting on Sunday, June 15.

Recently, the Member Services Committee, currentlychaired by Nancy Golding, revamped the application processfor experienced practitioners to ensure greater transparencyand to streamline the procedure in all regions of Canada. Iam pleased to report that the committee has surpassed itsgoal of acquiring 2,040 members by March 31, 2014; ourmembership count now stands at 2,059. The 2014-15 mem-bership renewal campaign is in full swing, and I thank allof you for renewing your memberships in STEP.

I encourage senior members to search their organizationsand communities for potential new STEP members and toencourage fellow practitioners to examine the many poten-tial routes to membership. By simply mentioning STEP andyour own trust and estate practitioner (TEP) designation tocolleagues, you are furthering recognition within the indus-try of this significant qualification. The TEP designation isbecoming the gold standard for industry referrals and a qual-ification that potential clients look for when addressing theircurrent and future planning needs.

My continued thanks go to the Executive Committee,made up of Deputy Chair Tim Grieve, Deputy Chair RuthMarch, Treasurer Chris Ireland, and Secretary Pamela Cross,in addition to board members, past chairs, my colleaguesat STEP Worldwide, and the dedicated staff at the STEPCanada national office for their support and assistance. n