While death and taxes are two certainties, the rules and regulations that govern both often change. That makes it challenging to keep up with the various shifts in estate laws across the country.
With that in mind, here is an overview of some of the recent and upcoming amendments to estate-related regulation in Canada and the top five most populous provinces, along with how they might affect clients.
Most estate legislation falls within provincial jurisdiction. But one change with national implications is the federal government’s intention to consult on possible measures to reduce or eliminate the tax advantages of testamentary trusts.
Currently, testamentary trusts are taxed at the same graduated rates as individuals (although they do not receive the same personal tax credits). This is one of the major differences between testamentary and inter vivos trusts. By assigning income-producing assets to a testamentary trust, it’s possible to save heirs tax. As a result, that strategy is a fixture of many estate plans across Canada.
In its March budget, the federal government voiced concern over the use of multiple testamentary trusts as a tax-avoidance strategy — establishing individual trusts for each of multiple children, for instance. While such a strategy would be costly to set up and administer, it would multiply the tax advantage of graduated rates.
The government will release a public consultation paper that will propose ways to address the issue of tax avoidance, presumably without sacrificing some of the other uses of trusts: to provide financial oversight for minor or disabled children; to ensure assets go to specific children in blended families or multiple marriage situations; to preserve assets from spendthrift heirs; and so on.
Should such changes be implemented, they would have a tremendous impact on estate plans across Canada. By eliminating the tax advantages of testamentary trusts, it’s possible the federal government would make them prohibitively expensive to create and administer.
While professionals are adopting a wait-and-see attitude, it might be wise for clients with complex estates to review their plans with their estate professionals now, and consider the potential impact new taxation rules would have on any testamentary trusts.
The big estate news from this province: the Wills, Estates and Succession Act (WESA), which was given royal assent back in 2009, will finally become law. The legislation is expected to come into force in March 2014.
The goal of WESA is to modernize the way estates and inheritances are handled. The legislation is an amalgamation of a number of previous laws that it repeals and replaces, along with many changes and recommendations that have been discussed among professionals at length. Among the significant changes were the following:
- A new distribution scheme for intestate estates. The spouse of the deceased will be entitled to the first $300,000 of the estate and half the remainder if the deceased and the spouse had children together, and $150,000 plus half the remainder if there are no children common to the deceased and the spouse (i.e. there are children from a different relationship).
- A surviving spouse is no longer entitled to a life estate in the spousal home, but does have an option to purchase it using their preferential share of the estate.
- Courts will have the power to correct technical or clerical errors in a will to ensure the deceased’s wishes are carried out.
- When an allegation is made that a will has been procured by undue influence, the burden of proof will shift to the beneficiary: i.e., the beneficiary must prove he or she did not exert undue influence over the testator.
- Land and personal property will now be applied equally against an estate’s debts. Prior to WESA, personal property gifts were applied first, offering more protection to those inheriting land.
- B.C. wills will no longer be revoked by marriage.
- B.C. residents as young as 16 will be able to write a valid will (rather than 19, the province’s age of majority).
In conjunction with WESA, the province is introducing new probate rules and administration forms to streamline the process, with some of the following highlights:
- The province’s probate forms have been extensively revised and simplified.
- Simple estates will be able to use a short-form probate application (more complicated estates are still required to use a long-form affidavit).
- A new “correction record” that allows for the correction of clerical errors in grants of probate.
B.C.’s new WESA will not automatically invalidate a client’s previously existing will, but it will change the way that will is administered and interpreted. Alert clients of these changes and work with estate planning professionals to ensure their intentions are still respected under the new act.
Alberta overhauled its estate legislation in February of 2012. Much like the new law in B.C., the Alberta Wills and Succession Act (WSA) replaced a number of older estate laws. The most significant changes included:
- entering into a marriage or common-law relationship no longer revokes a will (unless the testator specifies that it should);
- for the purpose of gifts and appointments, the WSA deems a former spouse or Adult Independent Partner to have predeceased the testator, unless a contrary intention is stated in the will. So a divorced spouse cannot act as executor, trustee or guardian, nor can he or she receive any gift under the will;
- the WSA adds two new classes of dependants: adult children of the deceased younger than 22 who attend school full time, and minor grandchildren or great grandchildren who depend on the deceased if that person acted as their parent;
- courts now have the power to validate or rectify wills that are unclear or do not meet formal will requirements.
After a full year under the new law, professionals in the province have said the transition has been relatively seamless. However, changes to the Matrimonial Property Act that were originally intended to be included in the new WSA have not yet been implemented. The changes would have affected blended families, and meant that a surviving spouse could have a greater claim to the deceased’s property than intended, and children from the first marriage would have less of a claim than intended.
Estate professionals voiced significant concerns with the proposed changes; as a result, implementation was postponed while the province seeks additional input.
Manitoba has no new legislation, but there is a recent amendment to the Court of Queen’s Bench Rules that deals with lawyer fees in estate matters (Rule 74.14).
In Ontario, the main change is the proposed amendment to legislation that governs “probate taxes” — now officially referred to as Estate Administration Taxes (EATs).
The Ontario government intended to submit legislation to allow for EAT audits back in its 2011 budget, but legislation has been delayed because of the provincial election and subsequent leadership change among the governing Liberals. Now that a new leader has been selected, estate professionals expect the legislation to be implemented rapidly.
The proposed law closes a legislative loophole: currently, there is no mechanism to verify that EAT has been calculated accurately and paid in full. Theoretically, an estate could write a cheque for a given amount of EAT without anyone checking to see if the amount paid was actually the amount owed.
The new legislation will require executors to carefully document estate asset valuations and secure professional appraisals at the estate’s expense. Failure to remit the proper amount of EAT can result in interest charges and financial penalties levied against the estate. It can also result in criminal charges against the estate’s executor if auditors find an intention to mislead or to file a false statement.
These changes make it even more important for clients to choose executors with care. People who are unaware of current probate procedures and EAT rules, or those who are more concerned with saving appraisal fees than staying on the right side of auditors, could be asking for trouble.
One tool that can help clients avoid potential EAT problems is keeping current on the valuations of their estate assets.
Having these appraisals handy at time of death will save executors considerable time and eliminate any EAT ambiguity.
Québec has no new estate legislation or legal changes to estate administration. However, estate professionals are keeping a close eye on Pauline Marois’s PQ government, which has increased marginal tax rates as a way of dealing with the province’s significant fiscal deficit. While such changes do not directly target estates, they can have important implications on estate planning. Review clients’ plans in light of higher tax burdens.
James Dolan is a Vancouver-based financial writer.