Miller Thomson on Estate Planning

Miller Thomson is pleased to announce the release of Miller Thomson on Estate Planning, written by 30 of our lawyers from 9 of our offices across the country. The two-volume review published by Carswell offers precise, practical, up-to-date information on tax and legal issues ranging from will and trust drafting, estate administration, family law, corporate law and creditor proofing to the management of both large and small businesses.

To order a copy: http://www.carswell.com/product-detail/miller-thomson-on-estate-planning/

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Environmental Liabilities: Executors and Attorneys Beware!

Gail P. Black, Calgary
Teresa L. Meadows, Edmonton

By now, most people assume that environmental legislation is based solely on the theory that the “polluter pays”, but few people think about what happens when an executor, attorney or trustee steps into the shoes of a former “polluter”.  How does the law treat such personal representatives and could they face liability even if they did not cause or contribute to the mess?

Of course the short answer is, “it depends”, but the fact that they could face this type of liability at all just might be a shock to most personal representatives.  Under some provincial and federal environmental regimes, the tough “polluter pays” legislation also extends the liability net to include: “persons responsible” who can include a successor, assignee, executor, administrator, receiver, receiver manager or trustee of the owner of a contaminant or contaminated property, regardless of whether the person responsible caused or contributed to the contamination themselves. 

The obligations that come with being designated as a person responsible under environmental laws can include being subject to orders to identify, monitor and assess the contamination onsite and develop and implement a plan to clean up the contamination; all of which can be costly endeavours.  Worse yet, failing to meet the obligations as a person responsible can lead to fines, and in some jurisdictions, even jail time for a breach of environmental laws.

However, although the liability net is broad at the outset and does extend beyond polluters, most jurisdictions have recognized some limited protection for administrators, attorneys, trustees and other personal representatives, provided that these parties do not:

• exercise care, management or control over the site, activities resulting in the contamination, or the contamination itself;
• act in a reckless or grossly negligent manner in dealing with the contamination or the contaminated property; or
• cause or further contribute to the contamination themselves. 

The wording of the protection from liability varies from jurisdiction to jurisdiction, so it is important to understand what activities of a personal representative are, and more importantly, are not protected.  It is also important to remember that the protections from liability in some jurisdictions simply put an upper limit in place on the value of the liability to no more than the costs of the assets administered by the personal representative.  Some jurisdictions allow the personal representative to except their reasonable administration fees from these limits, while others do not.  In addition, it should be noted that regulatory limitations may not protect against civil liability to third parties (such as adjacent landowners) affected by the contamination or regulatory responsibility for contamination that has migrated off-site.  It should also be noted that the practice of personal representatives obtaining court orders that further limit their liability (beyond statutory limits) have recently been called into question unless the relevant environmental regulator has been given notice of the limitation and has agreed to its terms.

Clearly, environmental liability can be a potential nightmare for personal representatives, attorneys and other fiduciaries.  An executor or administrator might be aware of the potential risks when agreeing to take on the estate of a deceased who owned or operated a dry-cleaning or gas station business but may not be as aware of these issues in other situations.  Environmental risks on farm properties, for example, can include:

• improper storage and disposal of some very toxic (even banned) pesticides and herbicides such as DDT; rat poison; and arsenic;
• underground and above ground fuel storage without containment;
• leaking/unlined manure lagoons;
• contamination and/or special waste disposal costs associated with “bone yards” of old farm implements/equipment;
• the presence of unidentified hazardous wastes (e.g. stockpiling PCB containing electrical transformers, asbestos containing materials, and others); and
• contamination associated with “vermin” (such as hanta virus from deer mouse droppings) and mould which require remediation before sale.

So what should a prudent individual or corporate trustee contemplating acting as a personal representative or other fiduciary do?  Truly the only way to assess the environmental risks on any given property is to know as much as possible about the history of the property and about the activities of the deceased or incapable person with respect to their use of the property before accepting the position.  In addition, not “intermeddling” (i.e. taking steps that could be characterized as exercising “care, management or control” over the property or otherwise holding oneself out as the representative) before deciding whether or not to renounce the appointment can be critical.  Knowing how the environmental laws in your jurisdiction treat personal representatives is also essential to assessing the risk of environmental liability in any given situation.

If a decision is taken to act as personal representative or other fiduciary, a myriad of other challenges can arise with respect to the estate administration.  A sampling of these challenges includes:

• Whether or not to continue an existing business as a question of risk management;
• Obtaining insurance coverage for contaminated lands (although more insurance products have become available in recent years, this type of insurance may be quite costly);
• Challenges in selling contaminated land which can include, in addition to obvious concerns, the ability of prospective purchasers to obtain financing;
• Sale documentation may need to be varied to provide additional protection for the vendor personal representative;
• Beneficiaries may choose to decline the gift; and
• Careful record-keeping to demonstrate that the personal representative took reasonable steps to respond to the situation can be extremely valuable protection later on. 

For the individual planning his or her estate, consideration of any potential environmental issues can be very helpful, including inserting appropriate clauses in the Will (or other relevant document) which can be of assistance to the personal representative if any environmental issues should arise.  Such a clause might allow the personal representative to expend as much of the estate as required for investigation and remediation.  The individual might decide to obtain additional life insurance to address any such concerns.  As well, the individual can accumulate historical information and documentation which may be of assistance in the future.

Although potential environmental liability may not be a concern for most estates, where it does arise it can pose an unexpected challenge and considerable costs for the unwary. As noted above, knowing the property and the laws in your jurisdiction are essential, but these laws are complex and vary from jurisdiction to jurisdiction.  To address your particular situation, please contact one of our private client services or environmental lawyers.

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The Trustee Act and Asset Protection/Creditor-Proofing Opportunities for Owners of Private Corporations

Martin J. Rochwerg, Toronto
Rahul Sharma, Toronto

Introduction

The unexpected death of a business owner could mean that his or her estate trustees will come to hold legal title to all, if not a controlling portion of, the issued and outstanding shares in the capital of an operating company.  On the other hand, a business owner’s estate plan may have specifically contemplated his or her shares in an operating company being held by his or her estate trustees, including for creditor-proofing purposes, and to take advantage of the two-year limitation period under the Trustee Act (Ontario).  This may be particularly relevant to the owners of businesses in certain industries, which place them at a higher risk of being the subject of actions in tort commenced by third parties.

This paper will discuss the Trustee Act’s two-year limitation period, and its judicial interpretation.  In light of the two-year limitation period, this paper will also consider why business owners, as well as other high net worth individuals who want to creditor-proof their estates to the greatest extent possible, may consider having estate assets, including shares in an operating company, held by their estate trustees after their death. 

Subsection 38(3) of the Trustee Act

Estates in Ontario benefit from the protections afforded by subsection 38(3) of the Trustees Act, which provides that no action may be brought against the estate of a deceased person more than two years after the date of the deceased’s death.  Unlike the Ontario Limitations Act, the two-year limitation period in subsection 38(3) of the Trustees Act imposes a strict bar to actions against an estate, and is not dependant on when an action or cause of action was discovered by a particular plaintiff or creditor.  This is clear from the language of the subsection, which provides that: “an action under this section shall not be brought after the expiration of two years from the death of the deceased.”  This is also in contrast to the Limitations Act, which provides that claims shall not be brought before the earlier of two years after the date that they were discovered, or fifteen years following the incident that gave rise to the claim.

Section 38 of the Trustee Act permits estate trustees to maintain claims or actions in tort brought by the deceased during his or her lifetime against third parties, with the exception of claims in libel or slander.  Subsection 38(2) also permits such third parties to bring actions against a deceased’s estate for any wrongs committed by him or her during his or her lifetime against their property, with the exception, once again, of claims in libel or slander.  The subsection 38(3) limitation period may therefore be particularly advantages to the owners of businesses in certain industries or sectors, which may cause them to be at a higher risk of being the subject of third party tort claims.  Such businesses may be in the transportation or energy sectors, or may otherwise be directly involved in activities that place them at risk for damaging the environment or private property owned by third parties. 

More particularly in this regard, paragraph 19(1)(a) of the Limitations Act provides that the limitation periods contained in the Limitations Act (including no limitation for environmental claims) trump all other limitation periods contained in all other Ontario statutes, with the exception of those provisions listed in Schedule A to the Limitations Act. Note, however, that there may be an argument that, in providing no limitation period for environmental claims, the Limitations Act does not actually impose any limitation period at all that could be caught by paragraph 19(1)(a). Subsection 38(3) of the Trustee Act is listed in Schedule A to the Limitations Act and is therefore exempt from the application of that statute.  As such, by operation of paragraph 19(1)(a) of the Limitations Act, the ultimate two-year limitation period from the date of an individual’s death governs a plaintiff’s ability to bring an action against in tort against his or her estate.  As discussed, the doctrine of discoverability, which is a component of the section 4 limitation period in the Limitations Act, is therefore irrelevant with respect to the time limit for bringing actions against estates. 

Planning Opportunities

The Court of Appeal for Ontario confirmed this view in Washkowski v. Hopkinson Estate.  The Court of Appeal held that, due to the clear language of subsection 38(3) of the Trustee Act, the discoverability principle does not apply to actions against estates, which are governed by a strict two-year time limit. The case dealt with the liability of an estate with respect to negligence on the part of the deceased that led to a motor vehicle accident.  The facts in Waskkowski are therefore not on par with a business owner’s circumstances, but the principle is nonetheless relevant and applicable in estate planning.

To the extent that dividends are regularly paid to the estate from an active business, the resulting income may be protected from liability.  If the creditors of an active business pursue their claims against the business, although the corporation’s assets may be at risk, the estate itself, and the estate trustees, in their personal capacities, are protected from liability.  Evaluating the risk and possibility of future claims and actions, and the benefits of creditor protection, may also be relevant considerations when building an estate plan and determining whether to include a spousal trust.  If such a plan is implemented, as long as sufficient powers and discretion are provided to the estate trustees to lend funds to third parties, including individuals and corporations, the trustees may loan funds paid to the estate by way of dividend from an active business corporation back to the corporation and secure such loan with a general security agreement (“GSA”).  The GSA may, in turn, be registered at the personal property registry, providing enhanced creditor protection to the business and to the estate.

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Tax Tips for Recreational Property Owners

Yens Pedersen, Regina

One of the most common and biggest tax savings measures available to Canadians is the principal residence exemption from capital gains tax.  Ordinarily, if you sell a property for more than you paid to buy it, you have a capital gain and you are required to pay tax on that capital gain. However, if the property is your primary residence, you can claim the principal residence exemption and avoid paying that tax. If you have a recreational property (such as a cottage, cabin, or condo) where you live part of the year, you can claim the principal residence exemption on that property. You may even be able to claim the principal residence exemption on a property outside of Canada. However, there’s a catch -- you can only claim the exemption on one residence at a time. For example, let’s say you bought your house and also inherited a cottage in 1999.  In 2011 you decide to move houses, but you plan to keep the cottage.  Let’s say the house appreciated in value by $50,000 in that time and the cottage has appreciated in value by $225,000.  For the years 1999 to 2011, you can claim the principal residence exemption on only one of the properties.  Although you do not plan to sell the cottage anytime soon, it may be wiser to pay the small amount of tax on the capital gain on your house (you will have to pay tax on an extra $25,000 of income) and preserve the ability to claim the much larger exemption for those years on the cottage at a later time when you decide to sell.  You should seek specific advice at the time to determine which is the better option.

If you do not want to claim the exemption on your house when you sell it because you want to save it for later, you need to file Form T2091-(IND), “Designation of a Property as a Principal Residence by an Individual.” If you fail to file this form, the CRA will assume that you are using your exemption to eliminate the gain, and, therefore, you will not be able to use it for another property for those years. 

You can also minimize the amount of tax you pay by keeping good records of the capital costs that you put into both properties. Any capital expenditures that you make will reduce the amount of any future capital gain. A capital gain is commonly explained as the difference between the sale price you receive and the amount you paid to buy the property.  But technically the gain is the difference between your “proceeds of disposition” (usually your sale proceeds) and your “adjusted cost base” (your purchase cost plus capital costs).  In order for a cost to be a capital cost, it has to be for a lasting improvement to the property. If the expense represents something that is used up in the year or is replacing something that was used up, it will not qualify as a capital cost.  For example, gas and power are used up; therefore, utility bills are not considered to be capital costs.  Similarly, renovations to replace worn items (such as wall to wall carpet) are not capital expenses.  However, a lasting improvement over and above the property’s original condition is a capital expense.  Using the previous example, adding a new carpet to a floor that had never had carpet would be a capital cost.  The property’s original condition is its condition when you purchased the property.  In other words, if the roof was in terrible shape when you bought the property, the cost of a new roof would be capital, while replacing the roof 15 years after you bought the property with similar roofing material would not be capital. 

Keeping track of capital expenses can make a big difference when it comes to determining whether you should claim the exemption on your house or your second property.  These receipts must be kept for at least three years after you have sold the property.

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Digital Asset Estate Planning

Marissa Berry, Calgary

Due to the development of technology, there has been tremendous growth in personal ownership of digital assets.  As part of the estate planning process, it is important to consider how digital assets are disposed of, both at death and upon incapacity.  There are numerous types of online digital assets, including: blogs, photo-sharing accounts and domain names.  There are also digital assets in the form of devices such as computers or smartphones which can store any number of types of files and content.

An individual can appoint an attorney to manage his or her assets during incapacity through a power of attorney and an executor to administer his or her estate on death through a Will.  Such legal representatives should be informed of what digital assets an individual owns and also the individual’s intentions with respect to how these assets are to be dealt with on incapacity or death.  To enable efficient administration, legal representatives should be granted appropriate powers specific to digital assets in estate planning documents.

Several areas of law must be considered when a legal representative intends to access and dispose of digital assets.  If a device is not owned by an individual then ownership rights of the digital asset must be reviewed.  Terms of use for online service providers also need to be analyzed.  Corporate policies, privacy legislation and jurisdictional issues should also be assessed. 

Legal representatives should understand an individual’s wishes regarding disposition of digital assets.  For example, an individual may wish that certain digital information be deleted on his or her death.  Upon beginning to act, a legal representative should consider changing passwords in a timely manner and perhaps closing accounts.  Thought must be given to whether a testator intends content stored on a device to be bequeathed to one beneficiary but intends the physical device to be bequeathed to another beneficiary. 

A legal representative must have the tools necessary to carry out the deceased/incapable person’s intentions.  Estate planning documents should contain language granting an individual’s legal representative the power to access, control, delete and transfer digital assets.  To assist a legal representative in dealing with digital assets, it may be helpful to prepare an inventory of digital assets including usernames and passwords.  For safekeeping the inventory could be stored in a safety deposit box.  Alternatively, two lists could be created which are kept in different locations, one list containing usernames to online accounts and the other list containing passwords with the legal representative having access to both locations.  There are also online options available for storing this information requiring only one username and password to access all of an individual’s usernames and passwords.

If the disposition of digital assets is not properly planned for, there may be unintended negative consequences.  Digital information not properly protected may reveal secrets that could damage an individual’s reputation or cause strife amongst family and friends.  Also, if a legal representative is not able to quickly access and take control of digital assets, fraud or identity theft could result.  Planning for the disposition of digital assets is recommended to minimize the risk to incapable persons, legal representatives, and beneficiaries.

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US Estate Tax on Vacation Homes

Stephen Rukavina, Vancouver

In recent years, the high Canadian dollar and the fall in United States housing prices has encouraged Canadians to buy US vacation properties.  However, Canadians should be aware of the tax consequences of owning a US vacation home before making a purchase.  One of the most important considerations is potential exposure to US estate tax.

US Estate Tax

US estate tax is a tax on the estate of a deceased individual.  It is commonly and pejoratively known as the “death tax”.  The US estate tax can apply to Canadians who hold certain US assets, for example, real property located in the US.  A Canadian who buys a US vacation home is, therefore, potentially exposing his or her estate to taxation in the US. 

US estate tax can be a significant sum of money because it is imposed on the value of assets rather than any gain that has accrued on the assets over the course of the deceased’s ownership of the property.  A US vacation home with a value in the millions can attract several hundred thousand dollars in tax under the current US estate tax regime.

The exact amount of US estate tax payable in future years is unpredictable because of the vagaries of the US political system.  US politicians have been constantly tinkering with the tax in recent years.  In 2009, the maximum US estate tax rate was 45%.  The tax was temporarily repealed in 2010 before being re-enacted in December of that year.  Currently, the maximum US estate tax rate is 35%.  The maximum US estate tax rate is set to jump to 55% in 2013, unless new legislation is passed.

Various deductions and tax credits can be claimed in order to reduce the amount of US estate tax payable.  Canadians can take advantage of some of these deductions and credits.  However, the value of the most important credit has been subject to constant change in recent years, making it difficult to predict the value of the credits an estate will have to off-set the tax.

How Can Canadians Avoid US Estate Tax?

In the past, Canadians used a “single-purpose corporation” to hold a US vacation property.  It was generally accepted that Canadians could avoid US estate tax with this structure.  The Canada Revenue Agency (“CRA”) allowed for this practice by not applying the shareholder benefit rules in such circumstances.  However, the CRA reversed its administrative position for post-2004 acquisitions of US real property. 

Today, a Canadian who uses a corporation to hold a US vacation home may have a shareholder benefit included in his or her income and subject to Canadian income tax.  The amount of the shareholder benefit is the value of the benefit the corporation is providing to the shareholder by allowing the shareholder to use the US vacation home.  One way the CRA determines this amount is by using the fair market rental value of the vacation home.  Another method is income being imputed based on the return on investment that the corporation would otherwise get from the use of its money.  Either method can result in a large, unexpected Canadian income tax bill.

Now that single-purpose corporations are no longer an attractive planning tool, one of the most popular ways to hold US vacation property in a manner that avoids US estate tax is through a trust.  However, there are several drawbacks with using a trust.  The most notable drawback being that the settlor (i.e. the person who provides funds to set up the trust) may be required to relinquish any possible control over or interest in the trust and the vacation home. 

There is also a possibility that US estate tax can be avoided by using a partnership to hold the US vacation home.  However, this strategy is complex and highly uncertain, and generally requires there to be a profit motive.  Another option is to hold the US vacation home personally and leave it to a surviving spouse.  If done properly, this can at least delay the payment of the US estate tax.  However, this cannot be done by simply making a bequest of the US vacation home to a spouse; several Canadian and US legal requirements must first be satisfied.

Given the complexities involved, Canadians thinking of buying a US vacation home should put serious thought into how to structure the transaction.  It is recommended that Canadians consult with both Canadian and US tax experts.  It is especially important to consult a US tax expert to confirm the applicable US estate tax rates, deductions, and credits that may apply in an individual’s particular circumstances.

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What's Happening at Miller Thomson

Dragana Sanchez Glowicki will be the chair for the Wills and Estates Panel at the Alberta Law Conference on February 2, 2012.

Dragana Sanchez Glowicki will speak at the PLAN Edmonton October Workshop on October 27, 2012.

Wendi Crowe will speak at a seminar providing an overview and key changes on the new Alberta Wills & Succession Act at an upcoming breakfast presentation to the Mayfield Networking Group on October 17, 2012.

Dragana Sanchez Glowicki will speak at the Edmonton Community Foundation Wills Week on Dependent Adult Issues, Wills and Estates Planning, Trusts and Related Matters on October 1, 2012.

Wendi Crowe and Joseph Yurkovich wrote on "Have a U.S. property? The tax man cometh” for the Edmonton Journal publication on September 29, 2012.

Wendi Crowe spoke on a seminar providing an overview and key changes on the new Alberta Wills & Succession Act at the Engineering Lunch and Learn on September 27, 2012.

Susan Manwaring presented with Brad Offman on "Understanding Endowments - Everything You Need to Know! - From Policy to Practice" at the CAGP GTA September Education Session on September 20, 2012.

Wendi Crowe spoke on "Transferring Your Legacy" at the Canaccord Wills Workshop on September 15, 2012.

Martin Rochewerg spoke on “Tax Planning” at the Law Society of Upper Canada – Practice Germs:  The Administration of Estates, 2012.

Rachel Blumenfeld was the workshop leader for the Osgoode Professional Development Seminar on Estate Planning and Estate Administration on September 2012.

Rachel Blumenfeld spoke at the Canadian Association of Gift Planners’ Leave A Legacy Program on August 13, 2012.

Rachel Blumenfeld co-chaired the STEP Conference on June 11 and June 12, 2012.

Martin Rochewerg was appointed as a member of the Executive Council of the International Academy of Estate and Trust Law.

Rachel Blumenfeld was recently appointed to the Toronto Estate Planning Council Executive.

Rachel Blumenfeld was recently appointed as the co-chair of the 2013 National Conference.

Rachel Blumenfeld was the recipient of the 2012 Hoffstein Book Prize award from the Ontario Bar Association for demonstrating leadership in the trusts and estates bar.

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