There are many reasons that a beneficiary, co-executor or other interested party might want to remove an executor, including hostile relations, failure to act or possible misconduct. However, courts have generally been reluctant to do so, preferring not to interfere with the deceased’s choice of who should administer the estate.

“The threshold for evidence to be submitted in these kinds of cases is very high,” said Shruthi Raman, an estate and trust lawyer with Synergys Law LLP in Toronto. “The conduct has to be so egregious and so harmful to the administration of the estate or to the interests of the beneficiaries that the court must seriously consider removal.”

The court will prioritize the welfare of the beneficiaries, said Matthew Urback, partner with Shibley Righton LLP in Toronto: “If there’s any risk to [estate] funds — risk of loss, risk to the trust, a risk that there could be further impropriety — that’s when this turns into something a little bit more contentious, and an executor may be removed.”

An individual named as an executor in a will does not have to accept the role. However, once they begin administering an estate, they must continue to do so unless they are removed by the court, either after  applying to step down or after someone else has applied to remove them.

Anyone with an interest in an estate can apply to court to have an executor removed if they think the executor is not fulfilling their fiduciary duties to the beneficiaries or not acting in the best interests of the estate.

The most common reason is breach of fiduciary duty, Raman said: “They could have come across information or [identified] assets that they have failed to disclose to the beneficiaries, or they are refusing or failing to provide an accounting for work to date, or they just simply failed to keep a balanced and even hand between the beneficiaries.”  

Urback said misconduct, acting in bad faith, personally benefiting from the estate, acting to the detriment of the beneficiaries, and an inability or an unwillingness to do their job are all relevant considerations for the court.

Where multiple executors are administering an estate, friction between executors can jeopardize the timely administration of an estate and lead to executors asking the court to remove another executor, Raman said.

Someone might also look to remove an executor who has become incapable due to illness, has declared personal bankruptcy, or is facing a criminal conviction, Raman said: “Anything that would affect the trustworthiness, or the creditworthiness, of the executor could create grounds for proceeding with an application to have them removed.”

Courts will look for evidence that the executor’s continued administration presents a risk, Urback said.  “If, say, there was a single incident that the beneficiary may not have agreed with, that may not necessarily establish that there is an ongoing risk to the administration of the estate.”

Where interested parties are seeking to remove a sole executor, the court will look to see whether another person is willing to step in as a replacement with the beneficiaries’ support.

“When a beneficiary tries to remove an executor, or even an executor wants [to step down], they are best served by proposing a replacement who has already agreed to take on the role,” Urback said.

Where an estate is being administered by more than one executor, the court generally doesn’t need to name a replacement when ordering an executor’s removal.

An executor who has been removed by court order may seek and be entitled to partial compensation in certain circumstances: “It would be highly dependent on the reason for their removal and the work done to that point,” Urback said.

With small estates, beneficiaries and other interested parties may decide the cost of litigation isn’t worth the trouble of trying to remove an executor they don’t like, he said.

Both Urback and Raman said that an executor’s best strategy to prevent a contentious administration, or the most effective defense against attempts to remove them, is to keep good records and to regularly communicate with beneficiaries.

“If they have gotten advice from a professional — say, an accountant, or another lawyer — [it is] important to keep documentation about that. It’s important to set out who they’ve been relying on in some of their decision making, and why,” Urback said.

Executors should set out what they’ve done, as well as the reasons, so they have a paper record if their actions are challenged, he added.

Said Raman: “I always advise [executor] clients: keep your lines of communication open. That is the keystone of any relationship that hinges on trust — transparency and clarity.”

Rudy Mezzetta

Rudy is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on tax, estate planning, industry news and more since 2005. Reach him at rudy@newcom.ca.

Clients commonly name their loved ones, such as spouses or children, as estate executors, given that family members tend to be most trusted to carry out last wishes and administer the estate accordingly. However, family members who are named as executors should be cautioned about paying for expenses on the estate’s behalf, as this could taint the estate’s graduated rate estate (GRE) status.

GREs have become an important estate planning tool for many Canadians, and they provide many post-mortem tax benefits. The primary benefit is that the estate is subject to graduated tax rates, whereas most other trusts are taxed at the highest marginal tax rate for every dollar earned. Additional benefits include flexibility in claiming donation tax credits, the ability to choose a non-calendar year-end, and flexibility for post-mortem tax planning for private corporations.

To access these benefits, the estate must meet several conditions, one of them being that the estate must be a testamentary trust as defined under subsection 108(1) of the Income Tax Act (ITA). Per paragraph (b) of the definition of a testamentary trust, an estate will lose its testamentary trust status if property is contributed to the trust “otherwise than by an individual on or after the individual’s death and as a consequence thereof.” Paragraph (d) of the definition prohibits the estate from incurring a debt or any other obligation owed to, or guaranteed by, a beneficiary or any other person or partnership with whom the beneficiary of the trust does not deal at arm’s length (“specified party”), with a few exceptions.

These two limitations can result in estates losing their testamentary trust status, and, consequently, their GRE status. So, what are some common ways this can happen?

Most executors who are also beneficiaries of the estate (e.g., surviving spouse, children or grandchildren) may find it easier and simpler to pay for estate expenses, such as funeral expenses, maintenance costs for the deceased’s home, accounting fees and so on, out of their own pockets. They may be indifferent to how the expenses are paid, as either they bear the costs personally and immediately or the estate bears the cost, reducing their inheritance.

In other cases, estates may have illiquid assets, such as a family cottage, that the deceased would like to pass on to the children. However, because there are no other liquid assets in the estate, the beneficiaries may have to pay the taxes resulting on death to keep the property within the family.

As noted in the limitations, contributions to the estate can be made only by an individual on or after their death and as a consequence thereof. “Contribution” is not a defined term in the ITA, and as such we rely on the precedent set by Greenberg Estate vs. R, which refers to “contribution” as meaning a voluntary payment made to the estate for no consideration, and that increases the estate’s capital. When executors who are also beneficiaries believe that expenses paid by them personally would be no different than the estate bearing the cost and subsequently reducing their inheritance, that belief could ultimately result in the testamentary trust being tainted.^* A contribution can be made even if no direct payment is made to the estate. Payment of expenses on the estate’s behalf are considered gifts to the estate, as they relieve the estate of a liability, thereby increasing the estate’s capital. 

What happens if an individual decides to pay for an expense on behalf of the estate and treats the payment as a loan? As noted above, loans to the estate by a specified party can also taint testamentary trust status. However, the ITA provides exceptions when the loan was made within the first 12 months of the individual’s death and was repaid by the estate within 12 months after the payment was made.

Often, when a specified party loans money to the estate, the individuals do not seek repayment from the estate until the estate is ready to make distributions. However, given the time frame provided in the legislation, specified parties should be mindful of the timing of estate expenses, and reimbursement from the estate should be sought no later than 12 months after the loan is made.

Also, if any payment made on behalf of the estate is considered a loan, it is important that the loan be documented. In Greenberg Estate vs. R, the appellant attempted to argue that the payment was a loan; however, absent an agreement with specific terms of repayment, the court denied this argument.

Many estate expenses may be due or paid for well in advance of the completion of the estate settlement. Caution should be taken for any payments on behalf of the estate, as they could taint the estate’s GRE status prior to accessing tax planning opportunities. If any expenses are paid on behalf of the estate within the first 12 months of the deceased’s death, care should be taken to document the payment as a loan, and repayment should be sought immediately. While the ITA permits repayment no later than 12 months after the payment is made, immediate repayment will ensure the “deadline” is not missed.  

It’s important for financial, accounting and legal advisors to stay in touch with estate clients to keep careful watch of when and how expenses are paid to ensure that GRE status is preserved.

* CRA document 9613135

Catherine Hung

Tax & Estate

Catherine Hung is vice-president, Tax, Retirement and Estate Planning with CI Global Asset Management.

Employers will be extra busy this tax-filing season providing eligible employees with completed tax forms they’ll need to deduct home office expenses on their 2023 returns.  

The temporary “flat rate” method, which allowed Canadians working from home due to Covid to claim up to $400 in employment expenses in 2020 and up to $500 in 2021 and 2022, is not available for 2023. That method did not require the employee to get a form from their employer. 

Employees who worked from home in 2023 and who are eligible to claim home office expenses will have only one option — the “detailed” method, which will require a completed Form T2200: Declaration of Conditions of Employment from their employer. 

More employees are going to need T2200s this year, said Edward Rajaratnam, a tax partner at EY Canada in Toronto, during a Jan. 10 webinar presented by the firm on the topic of home office expenses. 

On its website, the Canada Revenue Agency (CRA) says it’s updating the T2200 for 2023 to make it easier to complete in cases where an employee is only claiming a deduction for home office expenses (as opposed to other employment expenses such as vehicle expenses). The CRA will release the updated T2200 and updated guidance in late January, the agency says. 

A shorter, simpler version of the T2200 — the T2200S: Declaration of Conditions of Employment for Working at Home Due to COVID-19 — that the CRA made available for 2020, 2021 and 2022 isn’t available for 2023. 

“There’s going to be a lot more burden administratively [for employers] to complete a form that is not as efficient or not as simple as the short form of the T2200,” Rajaratnam said.  

Before 2020, generally two types of employees required their employer to provide a T2200: those in a commissioned sales role and those who had a permanent arrangement with their employer to work from a home office. Far fewer employees needed completed T2200s prior to the pandemic, Rajaratnam said. 

In 2020, when many employees began working from home because of Covid, the CRA allowed employees to choose between the temporary flat-rate method and the detailed method depending on how big a deduction for expenses they expected to receive. Both methods were available in 2021 and 2022 as well. 

Under the detailed method, the only one available for 2023, an employee who works from a home office more than half the time for a period of at least four consecutive weeks in a year can claim eligible expenses. Employees can’t claim expenses for which the employer has already paid. Employees claiming home office expenses do not need to file the T2200 with their return but must have one if the CRA asks. 

In 2023, with pandemic-era measures largely over, many Canadians continued to work from home either exclusively or through a hybrid work arrangement with their employer, raising a key question: If an employee is working from home voluntarily, are they eligible to claim home office expenses and do they require a T2200? 

At the webinar, Lawrence Levin, a tax partner at EY Canada in Toronto, said the CRA has yet to provide definitive guidance for 2023.

However, recent CRA technical interpretations and Guide T4044: Employment Expenses for 2023, published in December, suggest the CRA may take the approach that an employee who has either a written or oral arrangement to work from home is, in effect, required to work from home as part of their contract of employment and would be responsible for paying expenses associated with working from home, Levin said. 

The CRA said Friday that it could not immediately provide more information on eligibility requirements for claiming employment expenses.

Levin said employers should keep in mind that providing a T2200 to an employee who works from a home office and an employee’s eligibility to claim home office expenses are separate matters. 

“The employer’s responsibility is limited to [providing] the form T2200,” Levin said. “Whether the employee claims a deduction and how much they claim, that’s on the employee.” 

A bit of good news for employers is that for 2023, employers will no longer be required to provide a handwritten signature for the T2200. The CRA will accept an electronic one. 

While there is no statutory deadline for employers to provide T2200s, employees will be expecting to receive the forms in a timely fashion so they can claim their expenses and complete their tax returns, Rajaratnam said.

Employers should begin putting procedures and policies in place now, and communicating with employees about when they might receive T2200s in order to manage expectations should there be delays.

“It’ll stop the questions coming back from employees,” Rajaratnam said. 

Rudy Mezzetta

Rudy is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on tax, estate planning, industry news and more since 2005. Reach him at rudy@newcom.ca.

Industry organizations and tax professionals are calling on Ottawa to extend its proposed underused housing tax (UHT) filing exemption relief back to 2022.

First proposed in the 2021 federal budget, the UHT is an annual 1% tax on the ownership of vacant or underused housing in Canada, effective for 2022 and subsequent years. That tax generally applies to foreign owners of Canadian residential property but can apply to Canadians who own residential property through a trust, corporation or partnership.

In the 2023 fall economic statement, the government proposed exempting a person who owns residential property in Canada through a trust, corporation or partnership from filing a UHT return from 2023 onward if the entity is substantially or entirely Canadian — and therefore already eligible for an exemption from the tax itself.

However, a person who owned a home through such an exempt Canadian entity would still have a filing requirement for 2022.

The consultation period for the proposed legislation ended Jan. 3.

The Conference for Advanced Life Underwriting’s (CALU) submission to the Department of Finance said it was “inappropriate” for the government to require reporting for exempt Canadian entities for 2022, while also proposing to lift the requirement for subsequent years.

“The government has recognized by proposing this amendment that such obligation imposes an unnecessary burden on exempt Canadian entities,” CALU said.

The Joint Committee on Taxation of the Canadian Bar Association and CPA Canada also recommended the proposed change be retroactive to 2022.

Doing so would avoid creating a “one-time filing event” for exempt Canadian entities, said John Oakey, vice-president of taxation with CPA Canada in Dartmouth, N.S., in an email.

In a Dec. 29 post on LinkedIn, Hugh Neilson, a tax consultant in private practice in Edmonton, said that he also recommended to Finance that they extend the filing waiver to 2022. Neilson suggested that requiring non-compliant filers to file wouldn’t represent a benefit to those who already had filed.

The deadline to file a UHT return for 2022 remains April 30, 2023, but the Canada Revenue Agency (CRA) has twice extended the effective deadline to file a return without incurring penalties or interest. The effective deadline for filing 2022 returns is now April 30, 2024, which is also the deadline for filing 2023 UHT returns.

The CRA provided the deadline extensions to give affected owners more time to comply with their obligations, the agency indicated.

Last month, the CRA told Advisor.ca that it had finalized or was in the process of finalizing 426,200 UHT returns for 2022, as of Dec. 14.

In reply to questions from Advisor.ca, a Department of Finance official wrote in a Jan. 4 email that the government would “now carefully consider and review the submissions received [during the UHT consultation], in order to introduce the legislative amendments in Parliament in due course.”

The official did not respond to questions as to whether legislative amendments would be introduced in the 2024 federal budget, or before the April 30, 2024 deadline for 2022 and 2023 UHT returns.

Rudy Mezzetta

Rudy is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on tax, estate planning, industry news and more since 2005. Reach him at rudy@newcom.ca.

The end of 2023 was busy on many fronts, but what was actually achieved?

It’s a good question to ask the federal government, which released draft legislation and tabled a bill to implement several tax proposals during Parliament’s fall sitting. None of those proposals, however, passed into law.

Further, Prime Minister Justin Trudeau has not issued new mandate letters since 2021 for most of his cabinet ministers despite a shuffle in July. (Updated letters were issued to two ministers with non-financial portfolios in November.)

With the House of Commons not sitting until Jan. 29, we review the state of the government’s major tax and estate-planning promises since our last update.

Proposals in Bill C-59

In November, the federal government tabled Bill C-59 to implement measures from the 2023 federal budget and fall economic statement, but MPs left Ottawa in December with the bill at second reading.

The bill contains legislation to implement the following key proposals:

• Changes to intergenerational wealth transfers that occur on or after Jan. 1, 2024. Two updates were made to the August draft legislation:
  • Parents looking to sell their business to their children no longer need to control the company immediately before the sale.
  • Business owners who sold all or part of their business to their child under the current rules, enacted under Bill C-208 in 2021, won’t be prevented from using the new framework to sell the rest of their business, or another business, to their child.
• Changes to the general anti-avoidance rule (GAAR), which were largely unchanged from August. However, the penalty will now be calculated as 25% of the additional tax owing by a taxpayer as a result of the GAAR’s application. This is slightly harsher than the August calculation since it includes the value of refundable tax credits lost when GAAR was applied.
• The 2% share buyback tax that will apply as of Jan. 1, 2024, to the annual net value of equity repurchases by public corporations and certain public trusts and partnerships.
• Making planning that results in non-CCPC status a reportable transaction so the Canada Revenue Agency (CRA) can assess whether or not the corporation is a “substantive CCPC.”
• Permitting a qualifying family member to be a successor-holder of an RDSP following the death of that plan’s last remaining holder who was also a qualifying family member.
• Changes to the tax treatment of dividends on Canadian shares for financial institutions, a move that could increase fees for investment products.
• Employee ownership trusts, with an improved tax incentive.
• Tax changes to retirement compensation arrangements.

Notable proposals not in C-59

• The new alternative minimum tax was not included in Bill C-59, but is meant to be effective as of Jan. 1, 2024.
• Changes to the underused housing tax outlined in the fall economic statement were out for consultation until Jan. 3. 

Proposals passed into law

As mentioned, no major income tax proposals passed into law during the fall session of Parliament. However, Bill C-56, which received royal assent in December, included a GST rebate on construction of rental housing.

Proposals with no major updates since our last check-in

• The Liberals promised in their 2019 election platform to raise the CPP and QPP survivor’s benefit by 25%, and the matter is being studied as part of the 2022-2024 Triennial Review of the CPP.
• The Aging at Home Benefit was first proposed in the Liberals’ 2021 election platform. The National Seniors Council launched a consultation regarding how to support aging at home, and presented its report to the Minister of Labour and Seniors and the Minister of Health on Sept. 29, 2023, the council told Investment Executive. The report is currently being reviewed.
• As stated in the 2023 federal budget, the CRA will pilot a new automatic filing service intended to help vulnerable Canadians receive benefits beginning in 2024. A spokesperson for the CRA confirmed in December that it intends to move forward, but did not indicate whether the pilot project would be ready in time for the 2023 tax filing season.
• These promises from the 2019 election platform were mentioned in Finance Minister Chrystia Freeland’s 2021 mandate letter, but no progress has been announced since:
  • make the Canada Caregiver Credit refundable
  • implement a Career Extension Tax Credit for working seniors
• Increasing the guaranteed income supplement by $500 for single seniors and by $750 for couples, beginning at age 65, was included in the mandate letter for Seniors Minister Kamal Khera, but no progress has been announced since.
• Nothing has been announced with regards to these 2019 election promises:
  • increasing the Canada Child Benefit by 15% for kids younger than one year old;
  • making EI maternity and parental benefits tax-exempt
  • doubling the child disability benefit

Melissa Shin

Melissa is the editorial director of Advisor.ca and leads Newcom Media Inc.’s group of financial publications. She has been with the team since 2011 and been recognized by PMAC and CFA Society Toronto for her reporting. Reach her at mshin@newcom.ca. You may also call or text 416-847-8038 to provide a confidential tip.

The ringing in of a new year also signals the effective date for new or significantly revised tax legislation.

Here’s the major tax legislation that took effect Jan. 1, 2024: 

Employee ownership trusts

The 2023 federal budget introduced tax rules to facilitate the creation of employee ownership trusts (EOTs), which allow groups of employees to purchase a business over time. While the enabling legislation to implement EOTs included in Bill C-59 has yet to pass into legislation, the effective date for the rules governing EOTs is Jan. 1.  

Family business transfer rules

Ottawa’s new framework for the “genuine” intergenerational transfers of family businesses came into effect for transfers undertaken on Jan. 1, 2024 or later. Enabling legislation was included in Bill C-59. 

Share buyback tax

In its 2023 budget, the federal government proposed a tax of 2% on the net value of equity repurchases by certain Canadian corporations, trusts and partnerships whose equity is listed on a designated stock exchange. Enabling legislation was included in Bill C-59. 

Revised alternative minimum tax

In its 2023 budget, the federal government proposed increasing the alternative minimum tax (AMT) to 20.5% from 15% while also increasing the AMT exemption to $173,205 for 2024, up from $40,000. Enabling legislation for the revised AMT was not included in Bill C-59. Nevertheless, the effective date under draft legislation released Aug. 4, 2023 is Jan. 1, 2024. 

General anti-avoidance rule

Amendments to the general anti-avoidance rule included in Bill C-59 will generally apply to transactions that occur Jan. 1 and after. However, a preamble to the GAAR, which is intended to assist in interpretation, will apply only when Bill C-59 receives royal assent. Further, a new GAAR penalty provision will apply only to transactions that occur on or after the date that Bill C-59 receives royal assent. 

Dividend received deductions

The “dividend received deduction” allows corporations to claim a deduction on dividends received from shares of Canadian corporations, effectively excluding the dividends from income. Beginning Jan. 1, the government is denying the dividend received deduction for dividends received by financial institutions on shares that are mark-to-market property. Enabling legislation is in Bill C-59.

TFSA contribution room of $7,000

In 2024, Canadians receive $7,000 in new TFSA contribution room, up from $6,500 in 2023. For someone who has been eligible for the TFSA since its launch in 2009, but who has never contributed, the total TFSA contribution room for 2024 is $95,000.  

New second earnings ceiling for CPP contributions

Starting in 2024, a second Canada Pension Plan (CPP) earnings ceiling of $73,200 will be used to determine additional CPP contributions, known officially as the year’s additional maximum pensionable earnings. As a result, earnings between $68,500 and $73,200 will subject to a second tranche of CPP contributions as part of the plan’s expansion that began in 2019. 

CRA charging 10% interest on overdue tax

Through the first quarter of the year, the Canada Revenue Agency (CRA) will charge 10% interest on overdue tax balances. The interest rate the CRA charges on current or previous overdue balances is tied to the consumer price index and may adjust each quarter.

Mandatory electronic filing threshold lowered

Beginning Jan. 1, businesses filing six or more information returns must file them electronically to the CRA. Previously, a business that filed 50 or fewer returns could file them on paper.  

Rudy Mezzetta

Rudy is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on tax, estate planning, industry news and more since 2005. Reach him at rudy@newcom.ca.

The Canada Revenue Agency has assessed $30.3 million of underused housing tax (UHT) so far, a figure well below the federal government’s revenue estimates for the new program.

In an email, CRA spokesperson Nina Ioussoupova told Advisor.ca the agency had assessed $30,315,000 of UHT as of Dec. 14, 2023 for the 2022 tax year. That figure represented the amount of tax the CRA had assessed on the UHT returns it had finalized, not the total number of UHT returns it had received, she said.

The amount assessed is likely to rise as the CRA will continue receiving UHT returns for 2022.

The deadline to file a UHT return for 2022 remains April 30, 2023, but the CRA has twice extended the deadline to file a UHT return for 2022 without incurring penalties or interest. The effective deadline for filing 2022 returns is now April 30, 2024.

Ioussoupova also said that, as of Dec. 14, the CRA had finalized or was in the process of finalizing 426,200 UHT returns. Of the finalized returns, 1.69% had an amount of UHT owing.

The government’s revenue estimates for the UHT have fluctuated over the years.

The 2021 federal budget estimated the tax would generate $700 million over four years, beginning in 2022–23. The revenue would be used to help “support the government’s investment to make housing more affordable for Canadians,” the government said.

In the 2022 budget, the government projected it would generate $200 million in UHT in 2022–23.

And on testimony to the Standing Committee on International Trade in June 2023, Robert Ives, expert advisor in the sales tax division of the Department of Finance’s tax policy branch, said department estimates were that the UHT program would generate $875 million in UHT between 2022–23 to 2027–28, and $140 million annually thereafter.

First proposed in Budget 2021, the UHT is an annual 1% tax on the ownership of vacant or underused housing in Canada, effective in 2022 and subsequent years. That tax generally applies to foreign owners of Canadian residential property but can apply to Canadians in certain circumstances.

The amount of UHT the CRA has assessed has risen since last summer, after the agency provided its first extension — to Oct. 31, 2023 — for filing the UHT return for 2022 without interest or penalties, but before it provided its second extension.

In testimony to the Standing Committee on International Trade in June, Adnan Khan, director general of the business returns directorate of the assessment, benefit and service branch of the CRA, reported that as of June 15, 135,000 UHT returns had been filed and $7.5 million UHT had been assessed. Of the UHT returns filed to that date, less than 5% involved a UHT amount owing, Khan said. 

While the UHT mostly affects foreign owners of Canadian residential property, a Canadian who owns a property through a trust, private corporation or partnership has an obligation to file a UHT return. If the trust, corporation or partnership is substantially or entirely Canadian they may qualify for an exemption from the UHT as a “specified” Canadian corporation, Canadian partnership or Canadian trust.

In the fall economic statement, released in November, the government proposed to expand the definition of “excluded owner” — a taxpayer who doesn’t have an obligation to file a UHT return — to include these specified Canadian corporations, partnerships or trusts.

The proposed change would be effective for 2023 and subsequent years, but would not be retroactive to 2022.

The federal government also proposed reducing penalties associated with the failure to file a UHT return to $1,000 for individuals from $5,000 currently, and to $2,000 for a corporation from $10,000.

That proposed change would be effective for 2022 and subsequent years.

The government released draft legislation containing those proposals for consultation ending Jan. 3, 2024.

The changes are being proposed “in response to suggestions from Canadians about the implementation of the UHT,” the government said, and would help “facilitate compliance, while ensuring the tax continues to apply as intended.”

The government estimated that the proposed changes would have no effect on the total UHT it assessed.

The UHT return and payment deadline for the 2023 tax year is April 30, 2024, the same date as the effective deadline date for the 2022 UHT returns and payments.

Rudy Mezzetta

Rudy is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on tax, estate planning, industry news and more since 2005. Reach him at rudy@newcom.ca.

The IRS said Tuesday it is going to waive penalty fees for people who failed to pay back taxes that total less than $100,000 per year for tax years 2020 and 2021.

Nearly 5 million people, businesses and tax-exempt organizations — most making under $400,000 per year — will be eligible for the relief starting this week, which totals about $1 billion, the agency said.

The IRS temporarily suspended mailing automated reminders to pay overdue tax bills during the pandemic, beginning in February 2022, and agency leadership says the pause in automated reminders is a reason behind the decision to forgive the failure-to-pay penalties.

“Due to the unprecedented effects of the Covid-19 pandemic, these reminders would have normally been issued as a follow up after the initial notice,” the IRS said in a statement.

“Although these reminder notices were suspended, the failure-to-pay penalty continues to accrue for taxpayers who did not fully pay their bills in response to the initial balance due notice.”

While the IRS plans to resume sending out normal collection notices, the Tuesday announcement is meant as one-time relief based on the unprecedented interruption caused by the pandemic, IRS officials said.

“It was an extraordinary time and the IRS had to take extraordinary steps,” IRS Commissioner Daniel Werfel told reporters. He said the change will be automatic for many taxpayers and will not require additional action.

Taxpayers are eligible for automatic relief if they filed a Form 1040, 1041, 1120 series or Form 990-T tax return for years 2020 or 2021, owe less than $100,000 per year in back taxes, and received an initial balance-due notice between Feb. 5, 2022 and Dec. 7, 2023.

If people paid the failure-to-pay penalty, they will get a refund, Werfel said on a call with reporters. “People need to know the IRS is on their side,” he said.

There are an estimated 1 million Americans living in Canada, and an estimated 800,000 Canadians living in the U.S. The Canada/U.S. tax treaty helps reduce the incidence of Canadians and Americans having to pay taxes to both governments on the same income, but U.S. persons in Canada may still have U.S. tax obligations.

Fatima Hussein, The Associated Press

Fatima Hussein is a reporter with The Associated Press,  an American not-for-profit news agency headquartered in New York City and founded in 1846.

Staff

The staff of Advisor.ca have been covering news for financial advisors since 1998.

If your clients have set up an in-trust-for (ITF) account for their minor child or they own certain assets jointly, they could be subject to new trust reporting rules that apply for taxation years ending after Dec. 30. These new rules could require your clients to file a T3 Trust Income Tax and Information Return within 90 days of the year-end, even if there is no income or activity to report.

The new reporting requirements were initially applicable only to express trusts, which are trusts created using the settlor’s clear written or verbal intent (as opposed to arising by operation of law). However, these rules were later expanded to include bare trusts, which are defined under the legislation to include “an arrangement where a trust can reasonably be considered to act as agent for its beneficiaries with respect to all dealings in all of the trust’s property.”

Based on this expanded definition, if your clients have arrangements where beneficial ownership is separated from legal ownership of an account or asset, they could be subject to these reporting requirements.

As an example, if your clients added their child(ren) to title of their house to simplify estate administration and minimize probate fees, without transferring any beneficial interest, these clients would be subject to the new trust reporting rules. Similarly, if your clients were added to title of their children’s house (without any beneficial interest) to help them qualify for a mortgage, they would now have to report this arrangement on a T3 return.

Another common arrangement that can be considered a bare trust and subject to these rules is when your clients have an ITF account set up for their child or grandchild.

A new beneficial ownership schedule (T3 Schedule 15 Beneficial Ownership Information of a Trust) has been added to the T3 return that will require your clients to provide certain information for all trustees, beneficiaries (including contingent beneficiaries) and settlors of the trust.

In addition, information regarding any person who can exert influence over the trustee decisions regarding allocation of income or capital would be reportable. The information to be reported would include the name, address, date of birth (for individuals), jurisdiction of residence, and taxpayer identification number (such as social insurance number for individuals and business number for corporations).

Given that trusts typically have a calendar year-end, the first tax return for 2023 would be due by April 2, 2024 (as March 30 falls on a Saturday, and April 1 is Easter Monday).

If the T3 return is not filed on time, your client can be subject to penalties. For the 2023 tax year, bare trusts have been granted temporary relief and won’t be subject to late-filing penalties. Going forward, the penalty is $25 for each day the return is late, with a minimum penalty of $100 and maximum penalty of $2,500.

An additional penalty can apply for gross negligence (if the return is not filed knowingly or false/incomplete information is provided) equal to the greater of $2,500 or 5% of the highest value of the trust property in the year.

Exceptions to the reporting requirements

Certain trusts are excluded from these new reporting requirements:

• trusts that have been in existence for less than three months at year-end
• trusts that hold only certain assets (such as cash or securities listed on a designated stock exchange) and have total fair market value of $50,000 or less throughout the year
• registered plans such as the RRSP, RRIF, registered pension plan, registered disability savings plan, RESP, TFSA and first home savings account
• graduated rate estates and qualified disability trusts
• mutual fund trusts and registered charities (including express internal trusts held by registered charities)

As the reporting requirements can be onerous, it is important for your clients to work with their tax and legal advisors in advance of the deadline to gather all the information required for these new rules. In addition, they may consider evaluating whether any dormant trusts should be dissolved to minimize compliance obligations in the future.

Vivek Bansal

Tax Strategies

Vivek Bansal, CPA, CA, is director of tax and estate planning with Mackenzie Investments. He can be reached at vibansal@mackenzieinvestments.com.

The federal government’s latest refinement of its general anti-avoidance rule (GAAR) revamp failed to provide any penalty relief — and actually made the penalty slightly worse.

The final GAAR proposals in Bill C-59, the budget implementation bill that passed first reading in the House of Commons on Nov. 30, contained minor modifications compared with the draft legislation released in August.

“Frankly, I think these changes are a big nothing burger,” said Steve Suarez, a partner with Borden Ladner Gervais LLP in Toronto. He’s more troubled by the Department of Finance’s insistence on proceeding with a new automatic penalty.

Under C-59, the penalty would be calculated as 25% of the additional tax owing by a taxpayer as a result of the GAAR’s application. This is slightly harsher than the calculation in the August proposal since it includes the value of refundable tax credits lost when GAAR was applied. The total amount is then reduced by the value of any “gross negligence” penalty already imposed, to avoid the risk of duplication.

But it’s the lack of discretion regarding the imposition of the penalty that bothers Suarez, since tax officials have no room to distinguish between cases driven by aggressive tax planning and those involving legitimate interpretational uncertainty.

“You could win at the Tax Court and the Federal Court of Appeal, then lose 5-4 at the Supreme Court of Canada and the penalty still applies to you,” Suarez said. “It’s something that fundamentally fails the basic test of fairness.”

The final version of the GAAR legislation also left intact an exception preventing the penalty’s imposition in cases involving transactions that are “identical or almost identical” to those that were the subject of government guidance or court decisions indicating the GAAR would not apply.

In addition, taxpayers will be able to avoid penalties and reassessments related to transactions that are disclosed — whether voluntarily or as required legislatively — under the Canada Revenue Agency’s new mandatory disclosure regime, which took effect in June.

According to Toronto tax lawyer Pooja Mihailovich, a partner with Osler Hoskin & Harcourt LLP, other key consistencies between C-59 and the August draft GAAR proposals include a three-year extension to the statutory limitation period for assessment or reassessment when the rule applies, and the lowering of the threshold for an avoidance transaction from one whose primary purpose is obtaining a tax benefit to a transaction where a tax benefit is “one of the main purposes.”

However, the C-59 version of the rule, which is scheduled to come into force in 2024 once the bill has received royal assent, abandons the draft legislation’s proposal to create a rebuttable presumption of abuse or misuse for transactions that are “significantly lacking in economic substance.”

Instead, the new test says the lack of economic substance will be an “important consideration” that “tends to indicate” that the transaction results in misuse or abuse.

“There are still concerns with how the test will apply in practice,” Mihailovich said, noting that explanatory notes issued alongside C-59 suggest that misuse and abuse will still be considered the “starting point” for analyzing transactions lacking in economic substance.

“It remains to be seen how the proposed economic substance test will interact with the existing misuse and abuse analysis, which is rooted in examining the policy of the relevant provisions as opposed to starting the analysis with a finding that there has been a misuse and abuse,” she added.

Suarez said the courts were already accounting for the economic substance of transactions in GAAR cases: “The changes that are proposed on economic substance don’t seem to really move the needle in terms of what the existing jurisprudence does.”

If C-59 passes as written, Mihailovich said taxpayers and their advisors will need to take a more proactive approach when executing transactions to avoid triggering the economic substance test.

“Diligence undertaken at the planning stage will be of assistance not only in defending against a GAAR assessment but also against any penalty that may be concurrently imposed,” she said.

Michael McKiernan

Michael is a freelance legal affairs reporter who has been covering law and business since 2010.