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.

More than half the stocks in the S&P/TSX Composite index have negative price returns this year, according to analysis from National Bank of Canada Financial Markets, with 62 of those names falling by more than 10% as of Nov. 17.

This dismal performance creates a ripe opportunity for tax-loss harvesting, wrote Daniel Straus, Tiffany Zhang and Linda Ma of NBCFM in an ETF strategy note released this week.

As of Nov. 17, four of the 10 sectors within the S&P/TSX Composite — materials, communications services, utilities and real estate — have posted negative returns for the year to date.

On the fixed-income side, long bonds have also declined significantly.

Tax-loss harvesting involves selling a security with a capital loss in order to offset realized capital gains, which reduces a client’s tax liability. The strategy has no effect in tax-sheltered accounts such as RRSPs and TFSAs, but can work in non-registered accounts. Capital losses can be applied in the current year, carried back three years or carried forward indefinitely.

The strategy is common, but there are several caveats.

Clients who tax-loss sell may be tempted to repurchase the same securities at a later date. To avoid running afoul of the superficial loss rules in the Income Tax Act, clients must wait at least 30 days after the sale to repurchase the security. The same goes for anyone considered an “affiliated person” to the client, such as a spouse or common-law partner.

Clients would also violate the superficial loss rules if they bought the same securities during the period beginning 30 calendar days before the sale.

The definition of the “same securities” — known officially as “identical property” — is broader than one might expect. The Canada Revenue Agency considers different series of the same mutual fund to be identical property. ETFs that track the same index (e.g., the S&P/TSX Composite), even if they are manufactured by different financial institutions, are also considered identical property.

To help investors avoid running afoul of the identical property rule, Straus, Zhang and Ma developed a list of 62 ETFs that clients can buy to maintain approximate exposure to the 62 stocks that have fallen by more than 10% for the year to Nov. 17.

These pairs include:

• TELUS International CDA Inc. (-64% as of Nov. 17) and the Fidelity Canadian Value Index ETF
• NorthWest Healthcare Properties (-54%) and the BMO Equal Weight REITs Index ETF
• Aritzia Inc. (-49%) and the NBI Canadian Family Business ETF
• First Quantum Minerals Ltd. (-46%) and the Horizons Copper Producers Index ETF
• Innergex Renewable Energy Inc. (-40%) and the Dynamic Active Energy Evolution ETF
• Northland Power Inc. (-39%) and the iShares Global Clean Energy Index ETF

The last day to tax-loss sell Canadian-listed stocks is Wednesday, Dec. 27. Trades executed on Dec. 28 and 29 will settle on Jan. 2 and 3, 2024, respectively — making them ineligible for tax-loss harvesting in 2023.

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.

Nearly eight in 10 (79%) Canadian family business leaders are speeding up their succession plans due to growing pressures, according to a KPMG Canada survey.

The survey findings reflect responses from 285 family business leaders who were included in KPMG’s larger business survey of 700 small and medium-sized Canadian companies, conducted from Aug. 30 to Sept. 25.

These leaders cited several pressures that were accelerating their succession plans, including the uncertain economic landscape, disruptive technologies, and climate and tax changes. More than seven in 10 (73%) respondents expected to transition their businesses within the next three to five years.

Families making the transition decision need to examine “what should happen to the business, next generation readiness, and how best to preserve family wealth and legacy,” said Yannick Archambault, partner and national leader with KPMG Family Office, in a release.

Regarding tax changes, KPMG alluded to legislative amendments aimed at addressing surplus stripping — the conversion of dividends to capital gains, without a genuine business transfer between family members. The measures, scheduled to apply to transfers on or after Jan. 1, 2024, introduce new requirements for intergenerational business transfers.

To avoid these changes, 70% of survey respondents said they were accelerating their succession plans or putting them into effect before Jan. 1.

“Depending on a number of factors, family business owners who are contemplating passing on the business to their adult children or grandchildren may opt to do so before new tax rules take effect, but that window is closing very quickly,” said Chris Gandhu, partner with KPMG Family Office Leader for Calgary, in the release.

“Decisions of this magnitude are about more than tax relief strategies, but advisors should be having discussions with their clients now to inform them about their options. Whether these family business leaders choose to sell to a third party or pass the torch to the next generation, there are significant business and tax implications to consider at this time.”

The KPMG release also noted that 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.

In the fall economic statement on Tuesday, the government proposed exempting from taxation the first $10 million in capital gains realized on the sale of a business to an EOT. The incentive would be in effect for the 2024, 2025 and 2026 tax years.

The temporary measure “should be welcome news,” the KPMG release said, given that in the survey 72% of respondents said EOTs with a capital-gains exemption for owners could have a positive impact on the Canadian economy, fuelling innovation and growth.

Inadequate succession and transition strategies are the single biggest factors, along with financial factors, in the failure of family businesses, Archambault said in the release. “Getting it right is critical,” he said.

In the survey, 71% of respondents had a detailed succession process or plan; 19% had a plan but it wasn’t detailed; and 6% didn’t have a plan at all, saying it was understood who in the family would take over the business.

Michelle Schriver

News

Michelle is Advisor.ca’s continuing education editor. She has worked with the team since 2015 and been recognized by the National Magazine Awards and SABEW for her reporting. Email her at michelle@newcom.ca.

As 2023 comes to a close, it’s time for clients to consider year-end tax moves, including some new developments.

Listen to the full podcast on Advisor To Go, powered by CIBC.

“There are a few things that we’re going to focus on in 2023 that may be a little bit different than in prior years,” said Jamie Golombek, managing director of tax and estate planning with CIBC Private Wealth, in a recent interview. 

One of the primary strategies Golombek emphasizes is tax-loss selling: selling securities or funds and realizing a loss to recoup tax paid on capital gains in the past or eliminate tax on future capital gains. Because Dec. 30 and Dec. 31 fall on a weekend in 2023, Golombek said clients have to settle trades no later than Dec. 27 to be able to use their loss for this year.

Clients with investments in foreign currency should also consider potential gains due to currency fluctuations. “What might look like a loss could actually be a gain,” he said.

However, investors need to be mindful of the superficial loss rule, which prohibits the repurchase of an identical security within 30 days of the tax-loss sale.

For those looking to claim deductions on investment expenses, Golombek recommends paying interest expenses and investment counselling fees by the end of the year to ensure deductions can be claimed in 2023. 

He also reminds clients turning 71 that they must convert their RRSP to a RRIF by the end of the year.

Looking forward to 2024, Golombek cautions investors about the new alternative minimum tax (AMT) rules scheduled to take effect on Jan. 1, 2024.

The new rules impose a minimum level of tax on taxpayers who claim various deductions and credits to reduce their tax liability significantly. The changes include raising the AMT rate, broadening the base by limiting exemptions, deductions, and credits, and altering how capital gains and employee stock options are taxed for AMT purposes. 

“Any losses that are carried forward from prior years are only 50% allowable, while the gains are 100% taxable for the purposes of AMT,” Golombek said. 

To avoid potential AMT scenarios in 2024, Golombek said investors should consider realizing gains in 2023, as well as exercising employee stock options before year-end.

Additionally, as the exemption for high-income earners is set at $173,000, Golombek said those who donate large amounts to charity, especially in the form of appreciated securities, may face challenges in 2024. Starting next year, only 50% of the donation credit will be allowable, and a 30% inclusion rate will apply to donated appreciated securities for AMT purposes. 

To avoid these implications, Golombek recommends making donations before the end of 2023 or considering donor-advised funds as a tax-efficient charitable giving option.

Lastly, Golombek reminds advisors that the first home savings account (FHSA) — which allows first-time homebuyers in Canada to save tax-free for their first home — was introduced in 2023. 

The FHSA room accumulates at $8,000 per year, beginning when the account is opened, so Golombek advises eligible individuals to open an FHSA in 2023, even if they cannot make the full contribution, as the unused room can be carried forward. 

Unlike with RRSPs, contributions to FHSAs made within the first 60 days of 2024 can’t be deducted in 2023, Golombek said, emphasizing the significance of contributing before year-end.

This article is part of the AdvisorToGo program, powered by CIBC. It was written without input from the sponsor.

Maddie Johnson

Maddie is a freelance writer and editor who has been reporting for Advisor.ca since 2019.

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Rates on guaranteed income products have risen to levels not seen in years. How should the current investing environment affect how retirees decumulate their nest egg, particularly as they begin drawing down their RRIFs? How can they do this tax efficiently, especially when considering government benefits? For business owners, how can pre-retirement withdrawals from a corporation improve retirement income? This webinar will address current opportunities for retirees amid today’s higher interest rates, as well as the perennial question of when and how to draw that income. 

This virtual roundtable, which aired live on Tuesday, November 28, 2023, at 1 pm ET and hosted by Advisor.ca and Investment Executive, will address current opportunities for retirees amid today’s higher interest rates, as well as the perennial question of when and how to draw that income.

Moderated by: 
Melissa Shin, Editorial Director, Advisor.ca & Investment Executive

Presented by:
Mustafa Bukhari, National Team Lead, Skyline Wealth Management Inc. 
Lori Clements, Director, Tax & Estate Planning, Sun Life Global Investments 
Bryan Lee, Vice President & Director, Retail Client Portfolio Management Team, TD Asset Management Inc.
John Natale, Head of Tax, Retirement & Estate Planning Services, Manulife Investment Management  

About the moderator

Melissa Shin

Editorial Director, Advisor.ca & Investment Executive

Open section

Melissa Shin is the Editorial Director of Advisor.ca and Investment Executive. As an award-winning journalist, Melissa turns technical subject matter into accessible content for sophisticated audiences. Her reporting has been cited in university syllabi, in textbooks and to national regulators. Melissa has been with Advisor.ca since 2011. Prior to that, she was managing editor of Corporate Knights, a North American magazine focused on clean capitalism. Melissa is the vice-chair of the board for Fashion Takes Action, a non-profit focused on advancing sustainability in the fashion industry. She is a graduate of the Schulich School of Business at York University.

About the presenters

Mustafa Bukhari

National Team Lead, Skyline Wealth Management Inc.

Open section

Mustafa is responsible for managing Skyline Wealth’s Advisor team and sourcing new business opportunities to further expand Skyline Wealth’s investor base across Canada. He aholds a Chartered Investment Manager designation with more than 12 years of experience in the financial services industry. Mustafa has worked in Canadian banks, online brokerages, and wealth management firms, and is skilled in investment advisory services.

Lori Clements

Director, Tax & Estate Planning, Sun Life Global Investments

Open section

Lori Clements is a CPA, CA, MTax, CFP with 20 years of experience working with high net worth clients in the fields of tax and wealth management.  She enjoys sharing her knowledge and supporting others in growing their understanding of tax and estate planning.

Bryan Lee

Vice President & Director, Retail Client Portfolio Management Team, TD Asset Management Inc.

Open section

Bryan leads a team of Retail Client Portfolio Managers who are responsible for representing the firm’s guiding principles, investment philosophy, performance/attribution, macroeconomic outlook and portfolio positioning to internal and external clients.  Additionally, he serves as the Private Investment Counsel Portfolio Strategist where he is responsible for providing market views and opinions, and articulating the impact on client portfolios of investment design and decisions made by the Asset Allocation Team.  His previous roles in the asset management industry include investment manager research, risk oversight, and portfolio strategy involving the development and ongoing support of multi-manager asset allocation solutions. He also has extensive experience in mid-market lending with TD Commercial Banking. Bryan holds a B.A. from Western University and is a member of the TD Wealth Asset Allocation Committee.

John Natale

Head of Tax, Retirement & Estate Planning Services, Manulife Investment Management

Open section

John joined Manulife in 2001, having previously worked as a tax lawyer with a national accounting firm and a private law firm. He has experience with estate and retirement planning strategies and a wide variety of general tax matters, including personal and corporate taxation, trusts, and investment-related topics generally.

He’s a frequent speaker at industry conferences and seminars, and has appeared as a guest expert on industry podcasts and BNN Bloomberg TV. John has published numerous articles on tax and estate planning, and is co-editor of Canadian Taxation of Life Insurance.

He has a Bachelor of Commerce degree from the University of Toronto and a Bachelor of Law degree from the University of British Columbia. John was called to the Ontario Bar in 1998. He has obtained his Canadian Securities Course certificate and completed the Canadian Institute of Chartered Accountants In-Depth Tax Course. John has Elder Planning Counselor and Certified Financial Planner designations, and is a member of the Ontario Bar Association and the Canadian Tax Foundation.

The baby-boomer generation is reaching retirement age, with the oldest in the cohort turning 77 this year and the youngest turning 59. Many boomers may be thinking about how to transfer their wealth and businesses to their children and family, including whether to transfer the assets during their lifetime.

One challenge in transitioning wealth to the next generation during a person’s lifetime is that the next generation may not have sufficient funds to buy the asset. In addition, boomers must be prepared to pay the large tax bill due to the capital gain from the sale or gift of the asset. Parents may consider providing a discount to their children or other loved ones to help with the transition. But they should think twice before doing so, as receiving an amount other than fair market value (FMV) could result in double taxation.

The Income Tax Act (ITA) governs transactions between non-arm’s-length individuals, and subsection 69(1) aims to deter taxpayers from manipulating tax results by entering into transactions, with non-arm’s-length individuals, that may stray from FMV.

Consider the following hypothetical scenario:

Robyn created and incorporated her business, a flower shop, more than 25 years ago. Her son, Jackson, has been actively engaged in the business and has expressed interest in one day taking over the shop. As Robyn approaches retirement, she begins to think about selling the business to Jackson.

Robyn received a formal valuation that the business has a FMV of $2 million; however, Jackson has only $1 million saved. Robyn is eager to retire, and she has other personal savings that would suffice for her retirement. She also wants to help her son.

So, Robyn agrees to sell the business to Jackson for $1 million. She figures that, by providing her son a discount, she will get the added bonus of minimizing her capital gain and therefore taxes due. The adjusted cost base (ACB) of the shares of the corporation is $100.

Without subsection 69(1), Robyn would dispose of her shares with proceeds of disposition equal to $1 million, realizing a capital gain of $999,900^* and resulting in taxes payable of $267,623 (53.53% in Ontario). As a result of this transaction, Jackson would receive a business worth $2 million for half price, and Robyn’s capital gain would be reduced by half, thereby resulting in less tax.

However, since Robyn and Jackson, as mother and son, are deemed not to deal at arm’s length, subsection 69(1) prevents such favourable tax results. Under paragraph 69(1)(b), Robyn is deemed to have received proceeds of disposition equal to the FMV of the shares of $2 million and will realize a capital gain of $1,999,900. Robyn’s taxes payable on the capital gain would be $535,273 even though she received only $1 million.

Further, although Robyn’s proceeds of disposition were bumped up to the FMV, there is no similar provision that would deem Jackson to acquire the shares equal to FMV. As such, Jackson’s ACB on the shares is equal to the amount he paid of $1 million. The differential in the tax treatment between the transferor and transferee results in double taxation on the $1 million in which the proceeds strayed from the shares’ FMV. Similar punitive rules can apply under subsection 69(11) when an asset is transferred to a non-affiliated person for less than FMV (including tax-deferred rollovers).

Subsection 69(1) can also apply in circumstances where a transaction occurs at a value higher than the FMV. In this case, the rules deem the transferee to have acquired the asset with a cost equal to the FMV at the time of the sale even if they received an amount greater than the FMV. There is no similar adjustment for the transferor’s proceeds of disposition, and therefore they are still expected to report their capital gain and pay taxes in accordance with the amount paid, including the amount in excess of FMV.

These punitive rules generally do not apply on transfers made by way of a gift. If Robyn had instead gifted the shares to Jackson, Robyn would be deemed to receive proceeds of disposition equal to $2 million and pay taxes accordingly. Similarly, Jackson would be deemed to acquire the shares at FMV and, as such, his ACB for the shares would be equal to $2 million.

Whether a transaction occurs at arm’s length terms will ultimately depend on the particular facts and circumstances. To determine whether individuals are dealing at arm’s length, the courts have developed a test based on whether:

• a common mind directed the bargaining for both parties to the transaction;
• the parties to the transaction acted in concert without separate interests; and
• either party could exercise de facto control, influence or authority over the other with respect of the transaction.

As such, transactions with unrelated persons such as friends and business partners could also be caught under these rules. The CRA has also commented in Folio S1-F5-C1 that a failure to carry out a transaction at FMV may be indicative of a non-arm’s-length transaction; however, such failure is not conclusive.

Given the above punitive results, it is important to ensure that all transactions occur at FMV. In most cases where related parties are involved, it may be prudent for clients to get formal valuations of the transferred asset to demonstrate that the sale did in fact occur at FMV.

Further, individuals could contemplate the addition of a price adjustment clause in their purchase and sale agreement. Where a price adjustment clause meets the requirements provided by the CRA, the property is considered to be transferred at FMV and may prevent subsection 69(1) from applying to the vendor if the transaction strays from the FMV.

* For illustrative purposes, the intergenerational business transfer rules and lifetime capital gains exemption were ignored.

Catherine Hung

Tax & Estate

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

The benefits of the new tax-free first home savings account (FHSA) double when each member of a couple is eligible to open an account. Married or common-law partners should understand specific FHSA rules aimed at spousal relationships to ensure eligibility and maximum benefits.

Here are answers to some common questions about how spouses can use the new accounts.

How does a spousal relationship affect first-time homebuyer status?

To open an FHSA, an individual must be a first-time homebuyer, defined as someone who did not — in the current or previous four calendar years — live in a principal residence that either the individual or their spouse or common-law partner owned solely or jointly.

Consider the following example.

Carlos is a Canadian resident who is 34 years old. Carlos would like to open an FHSA in October 2023. He lives in a home owned by his common-law partner, so Carlos is not considered to be a first-time homebuyer. As a result, Carlos is not a qualifying individual and will not be permitted to open an FHSA.

It is important to note that first-time homebuyer status applies not only at the time an FHSA is opened but also when an FHSA holder attempts to make a tax-free withdrawal to purchase a first home. But the definition of a first-time homebuyer for withdrawal purposes is slightly different from the one that applies at account opening. Specifically, there is no reference to a spouse or common-law partner in the definition of first-time homebuyer for purposes of a tax-free withdrawal.

The result? Once an FHSA is opened, an FHSA holder can make a qualifying, tax-free withdrawal to purchase a first home even if they currently reside in a home that is owned by their spouse or common-law partner. Take the following example:

Joanne, a longtime renter, opened an FHSA in 2023, having met the eligibility criteria. In 2025 she moved into a home owned by her boyfriend, Jack, and began a common-law relationship. In 2030 the couple found a new home that they decided to purchase together. Joanne was able to make a tax-free, qualifying withdrawal from her FHSA to purchase the new home even though she lived in a home owned by Jack in the current and preceding four-year period.

Can one spouse contribute to the other’s FHSA and claim the related tax deduction?

Only the FHSA holder can contribute to their own account — not a spouse or common-law partner. Similarly, only the FHSA holder can claim the related tax deductions for contributions to the account.

That said, the rules do not prevent a spouse from gifting assets to a partner for the partner to contribute to their own FHSA. Where such a strategy is employed, the normal attribution rules that apply to gifts between spouses (i.e., taxation of resulting income to the gifting spouse) would not apply to FHSA income, as in the following example:

Earlier this year, Kelly contributed the maximum amount allowed to her FHSA. Her husband, Kevin, still has $6,000 of contribution room available. To take advantage of Kevin’s room, Kelly gives $6,000 to Kevin, which he promptly contributes to his FHSA. Kevin would claim the related tax deduction, and a withdrawal of FHSA income in the future would not be subject to attribution.

Can funds be transferred from a spousal RRSP to an FHSA?

FSHA rules allow for transfers from an RRSP to an FHSA provided the FHSA holder has not exceeded FHSA contribution limits. How do these rules apply to spousal RRSPs?

When the annuitant of a spousal RRSP makes a withdrawal from the spousal plan, an amount equal to contributions made by a spouse or common-law partner to any of the annuitant’s spousal RRSPs in the year of withdrawal or prior two-year period is taxed to the contributing spouse and not the annuitant. This is known as the spousal RRSP attribution period.

An annuitant of a spousal RRSP is permitted to transfer property from their spousal RRSP to an FHSA of which they are the holder, provided the annuitant’s spouse or common-law partner did not contribute to the spousal RRSP in the year of transfer or the previous two calendar years (i.e., the attribution period). If no contributions were made to the spousal RRSP in the attribution period, the normal RRSP to FHSA transfer rules apply. Take this example:

Saul contributes $5,000 to Carla’s spousal RRSP in April 2023. In June 2024, Carla decides to open an FHSA and maximize her FHSA on the same day. Carla’s FHSA contribution room for 2024 is $8,000 because this is the first year she opens an FHSA. Carla would like to contribute $3,000 and directly transfer $5,000 from her spousal RRSP to her FHSA. Carla would be able to contribute $3,000 to her FHSA, but, to avoid unintended tax consequences, she has to wait until at least Jan. 1, 2026, to make a transfer from her spousal RRSP.

What are the options for naming a spouse or common-law partner as beneficiary of an FHSA?

Per the Canada Revenue Agency, as with TFSAs, FHSA holders can name their spouse or common-law partner as “successor holder” on the FHSA contract or, in Quebec or any other jurisdiction, by way of will, in which case the FHSA would maintain its tax-exempt status.

If named successor holder, the surviving spouse would become the new holder of the FHSA upon the death of the original holder provided the surviving spouse meets the eligibility criteria to open an FHSA (i.e., is at least age 18, a Canadian resident and a first-time homebuyer). Inheriting an FHSA in this way would not impact the surviving spouse’s FHSA contribution limits.

When Tony opened his FHSA on May 1, 2023, he designated his spouse, Monica, as successor holder. Tony died on Sept. 13, 2023. Because Monica met the eligibility criteria to open an FHSA when Tony died, she was able to keep Tony’s FHSA and became the new account holder. Alternatively, Monica could have chosen to transfer the FHSA proceeds to her RRSP or RRIF, or receive the proceeds as a taxable payment.

If the surviving spouse is not eligible to open an FHSA at the time of their spouse’s death, amounts in the FHSA could instead be transferred to an RRSP, RRIF or a pre-existing FHSA^* if the surviving spouse has one, or withdrawn on a taxable basis. Direct transfers to RRSPs, RRIFs and FHSAs occur on a tax-deferred basis.

To avoid additional implications, the withdrawal or transfer should occur before the end of the year following the year of the FHSA holder’s death. Take the following example:

Brad died in August 2023. Prior to his death, Brad designated his spouse, Kyle, as the successor holder of his FHSA. Brad did not have an excess FHSA amount on the date of his death. Kyle has been a non-resident of Canada since January 2023; therefore, he is not considered to be a qualifying individual and cannot become the holder of the FHSA. Kyle must transfer or withdraw all the property of the FHSA by Dec. 31, 2024.

Alternatively, the FHSA holder can name any person (including a spouse or common-law partner) or organization (e.g., registered charity) as “beneficiary” of the FHSA on the account contract or by way of will.

If the beneficiary is the holder’s spouse or common-law partner, the beneficiary can transfer the proceeds to their own FHSA, RRSP or RRIF without tax implications before the end of the year following the year of the holder’s death. Alternatively, they can request a withdrawal, which would be taxable to them:

Fred names his spouse, Rhonda, age 35, as beneficiary of his FHSA. Fred passes away in May 2025. As no successor holder is named on the account, the proceeds could be paid (or in the case of a spouse or common-law partner, paid or transferred) to a designated beneficiary and the account closed. As beneficiary, to avoid immediate tax implications, Rhonda requests a direct transfer of Fred’s FHSA proceeds to her FHSA, which is completed before Dec. 31, 2026, on a tax-deferred basis. Rhonda does not require FHSA contribution room to complete the transfer.

If the beneficiary of the FHSA is not the deceased holder’s spouse or common-law partner, the funds would be paid to the beneficiary (or the deceased’s estate where no beneficiary is named) following the death of the FHSA holder. Amounts paid to the beneficiary (or deceased’s estate) would be included in the income of the beneficiary (or estate) for tax purposes.

Wilmot George, CFP, TEP, CLU, CHS, is vice-president, Tax, Retirement and Estate Planning with CI Global Asset Management. Wilmot can be contacted at wgeorge@ci.com.

Notes

* The ability of a surviving spouse (who was named successor holder but not eligible to open an FHSA) to transfer the deceased’s FHSA to their own FHSA is a proposal that has not yet passed, as of this article’s publication date. The ability to transfer to an RRSP or RRIF has already passed.

Wilmot George

Tax & Estate

Wilmot George, CFP, TEP, CLU, CHS, is vice-president, Tax, Retirement and Estate Planning at CI Global Asset Management. Wilmot can be contacted at wgeorge@ci.com.

RESPs are an effective tool for assisting family members with education costs. However, opening an RESP is not akin to setting up a trust that will flow at death to the named beneficiaries — as do funds from an insurance policy, RRSP or RRIF. An RESP can run into complications in an estate planning context, particularly in blended families.

An RESP is a registered contract between the subscriber establishing the plan and the financial institution or organization. RESPs generally allow access to government savings programs, including the Canada Education Savings Grant (CESG). Subscriber contributions and government grants earn income inside the plan. Often, RESPs are set up with a single subscriber, such as a parent or grandparent, who allocates after-tax funds for the benefit of the beneficiary. The plan may also be set up by spouses and partners with “joint subscriber” status.

Once a beneficiary is eligible (generally, once enrolled in post-secondary education), the promoter (generally, a financial institution) pays contributions, as well as income and grants, known as education assistance payments, to the beneficiary. However, if a beneficiary does not become eligible, or the subscriber does not make payments to any eligible beneficiaries, the non-grant portions may revert to the subscriber.

If the subscriber dies without a named successor by will or other form of declaration¹ (depending on province), the RESP contract is generally terminated, and the accounts held within it fall into the deceased’s estate. In that case, the estate and its beneficiaries become entitled to the accounts.

As a result, the CESG portion as well as other government contributions that may be applicable (such as the Canada Learning Bond and various provincial benefit programs) are generally lost. Ultimately, the executor may be obligated to collapse the RESP (especially if those funds are needed to pay debts or taxes), and, unless the beneficiaries of the RESP and will are the same or there are explicit instructions in the will, the executor may be in a conflict if they don’t collapse it to pay debts or taxes.

Often in blended families, the beneficiaries of the RESP and will are not the same, leading to potential issues.

Consider the following example:

• Bayani is a successful businessman in his late 40s married to his second wife, Reyna. He has one independent son, Hari, age 19, from his prior marriage. They all reside in Alberta.
• Reyna is pregnant with their first child together.
• Bayani disappeared while on a business trip abroad and was declared deceased.
• As a sole subscriber, Bayani had opened an RESP for Hari’s benefit, now worth approximately $150,000, including CESGs. Bayani’s will does not name a successor subscriber for the RESP.
• Reyna was named as the executor and sole residual beneficiary of Bayani’s estate, with Hari named as the sole contingent beneficiary if Reyna predeceased Bayani, as Bayani had not yet amended his estate documents to reflect his future child with Reyna.
• Bayani assumed that Hari would receive the benefit of the RESP and therefore named Reyna as primary beneficiary of the remainder of his estate.
• Reyna and Hari have a good relationship at present, but Hari is about to attend university. While Hari is fully independent from Bayani, he cannot afford his education without at least some of the RESP proceeds or by incurring significant student loan debts.
• Bayani’s estate consists of the RESP, $100,000 in investments and some rare antiques, as well as $100,000 in taxes and debts. Most of Bayani’s assets, including the family home, were jointly held with Reyna, and so passed to her.

In this scenario, both Reyna and Hari face significant (and preventable) challenges.

The RESP would likely be considered terminated and become part of the estate. As a result, Reyna technically would be the beneficiary of the RESP proceeds, not Hari.

Further, the RESP proceeds, less the forfeited CESG portions, could conceivably cover the estate’s debts and taxes, rather than using joint assets, investments or the antiques. This would leave the investments available for Reyna and the unborn child, and she could always open a new RESP for her child with some of those assets.

Hari may accuse Reyna of acting in her own best interests, as he may feel she is using his money when the RESP is technically the estate’s asset to administer and distribute. This acrimony could have lasting consequences to their relationship as well as Hari’s relationship with his future half-sibling. Reyna may feel compelled or coerced to give Hari some of her own funds, including to compensate Hari for the CESG amounts lost as a result of the RESP termination.

In any event, while Hari may feel disadvantaged, his path to a clear legal remedy may not exist as an independent adult child in Alberta. To be a “family member” entitled to maintenance and support under Alberta law, Hari would need to either be under the age of 18 or already a full-time student under age 22. However, his unborn half-sibling would likely meet the definition of “family member” (see Wills and Succession Act, SA 2010, C. W-12.2, SS. 72(b)).

Hari may be incentivized to attack the validity of the will. While his odds of successfully proving his father’s will was invalid because of coercion or undue influence appear low, he would likely become a beneficiary of 25% of the estate if Alberta’s intestate succession provisions were activated because of a successful challenge (Wills and Succession Act, SA 2010, C. W-12.2, SS. 61(1)(b)).

Ultimately, this situation could easily have been mitigated had Bayani received qualified advice from an experienced tax and estate practitioner.

When a will names the executor as successor subscriber and provides them with adequate powers and authorities, the executor generally gains the power to administer the RESP as the original subscriber would have. A well-drafted RESP clause in a will can also direct the executor to maintain the RESP for the designated beneficiaries as a specific bequest in trust to those named beneficiaries or, in this case, to continue to administer the RESP for the benefit of Hari and any subsequent children of Bayani’s, allowing Reyna to maintain the RESP separately for Hari and her unborn child once born. (A child requires a social insurance number to be an RESP beneficiary.)

While Hari’s recourse may be limited in Alberta, if this occurred in another province, such as British Columbia, Hari could be entitled to seek remedy under that province’s more liberal wills variation provisions (Wills, Estates and Succession Act, SBC 2009, C. 13, S. 60). As a result, it becomes even more important to regularly confirm alignment between intention and documentation, particularly in blended families containing nuanced plans such as RESPs.

It is also important to note that changes in estate, family and tax legislation occur frequently. As a result, estate plans and designations should be reviewed with qualified professionals on a regular basis or any time there is a significant change to one’s life circumstances.

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

1 In some instances, an RESP contract may allow for an additional subscriber to be designated by the subscriber in a form acceptable to the promoter.

Matt Trotta

Tax & Estate

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

Canadians are not taking full advantage of the savings and growth potential of TFSAs more than a decade after its inception.

The most recent TFSA statistics, which were released by the Canada Revenue Agency (CRA) in June and are from the 2020 contribution year, show that average unused contribution room among TFSA holders was $40,781.

Aaron Hector, private wealth advisor with CWB Wealth in Calgary, said many Canadians remain unaware that they can hold the same types of investments in their TFSA as their RRSPs. These include stocks, bonds, mutual funds and ETFs.

If the TFSA had “investment” instead of “savings” in its name, “it would open some people’s eyes up to possibilities of [owning] more than just a high-interest savings account or a GIC” in their TFSA, Hector said.

People who had TFSAs held an average fair market value (FMV) of $26,614 across all their accounts (if they held more than one) in 2020.

In fact, Canadians’ unused TFSA contribution room exceeded the FMV of their plans at all income levels, except the highest. TFSA holders who earned between $150,000 and $249,999 in 2020 held TFSAs with an average FMV of $44,870 while still having average unused contribution room of $32,293.

TFSA holders who earned $250,000 or more held TFSAs with an average FMV of $60,397 while still having average unused contribution room of $23,596.

The CRA’s statistics also show Canadians are not maximizing contributions to their plans. In 2020, only 8.9% of TFSA holders maximized contributions to their TFSAs, referring to an individual’s cumulative contribution room, not the annual dollar amount.

Hector said he’ll sometimes recommend clients sell company shares they receive as part of their compensation and use the proceeds to make contributions to their TFSA to take advantage of any unused room.

“[The company shares] are all non-registered [assets], and if they’re paying [out] dividends, then [the client] is paying tax on those dividends they’re receiving,” Hector said.

While the shares could be transferred to the TFSA in-kind, Hector believes many clients would be better served by selling them, contributing the cash to their TFSA and investing in something else: “I think it’s unwise to have all your eggs in one basket.”

Other key TFSA statistics

• The total FMV of all property held in TFSAs as of the 2020 contribution year was $428.3 billion.
• TFSA holders contributed $85.6 billion into their TFSA that year, while withdrawing $39.1 billion.
• There were 16.1 million TFSA holders who had 24.3 million accounts (individuals can open multiple TFSAs, but their total contribution room for the plan remains the same) in 2020.
• 3.7 million TFSAs were opened that year and 1.7 million closed.

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.

When the 2021 federal budget introduced the underused housing tax (UHT), many tax practitioners (including myself) assumed this new measure solely impacted non-residents and non-citizens who owned underused or vacant Canadian residential real estate. Canadian residents didn’t need to be concerned, we thought.

While it’s true that the tax generally applies to non-residents, the UHT rules are impacting Canadian residents and citizens. That is, while Canadian residents and citizens may not be subject to the 1% tax, they may be required to file the six-page UHT return for residential properties or face penalties for not filing.

With 2022 being the first year of UHT filings, this past tax season left many Canadians scrambling to determine whether the UHT rules apply to them.

Most individual Canadian citizens or permanent residents who own real estate properties personally don’t have anything to worry about. They aren’t subject to the filing nor the tax.

However, if your client owns residential properties in a private Canadian corporation or as a trustee in trust for someone else, they may be obligated to file.

Clients could potentially fall into one of three categories.

The first is “excluded owners.” These individuals are not subject to the tax nor required to file a UHT return. An excluded owner includes a Canadian citizen or permanent resident; trustees with title to property in a mutual fund trust, real estate investment trust or specified investment flow-through trust; publicly traded Canadian companies; and registered charities, among others.

If you are not an excluded owner, you are considered an “affected owner” — the second category of owners — and you must file a UHT return. Those who are not eligible for exemptions — the third category of owners — are required to pay the 1% tax.

Affected owners of underused residential property include:

• individuals who are not Canadian citizens or permanent residents
• individuals who are Canadian citizens or residents who own residential property as a partner in a partnership or as a trustee of a trust
• foreign corporations
• Canadian corporations not traded on a stock exchange

Exemptions from paying the UHT are available for affected owners. Some examples of exemptions based on the type of owner include specified Canadian corporations, partners of Canadian partnerships, trustees of Canadian trusts, new owners in a calendar year, and deceased owners (and their personal representatives).

There are other exemptions based on the availability of the residential property, such as a newly constructed or seasonally inaccessible property. There are also exemptions based on the location and use, as well as the property’s occupants.

It is important to note that real estate properties subject to UHT filings are not limited to investment or rental properties, but include any “residential” property. Therefore, whether the property is for personal use or an investment is not relevant. Residential property is defined as a detached house or similar building that contains three units or fewer, a semi-detached house, rowhouse unit, residential condo unit or other similar premises. Property that is mixed-use between commercial and residential will not be considered “residential” if the residential component is less than 50% of the property.

So, which clients may be obligated to file?

A family member may hold residential property in a trust for a person with a disability who may be living in the home as their personal residence. Or a senior may use an alter ego trust to hold residential real estate as an estate planning or succession strategy. In both cases, it appears the trustee must file a UHT return; however, given the exemptions available, there would not be any tax applicable.

For affected owners required to pay, the tax is based on the property value (adjusted for your client’s proportionate ownership in the property). Property value is defined as the greater of the property tax assessment value or the most recent sale price before Dec. 31 of the calendar year. Another option is to use the fair market value determined by an accredited appraiser.

It’s also worth noting that a separate UHT return must be filed for each residential property owned. For example, if an individual owns, say, three residential properties in a private corporation, they may be required to file three separate UHT returns.

Finally, the penalties for not filing the UHT return on time are hefty. The penalty is the greater of 5% of the tax payable and $5,000 for individuals ($10,000 for corporations). The deadline to file the UHT return is the same as the regular T1 personal tax filing deadline — April 30 following the tax year.

So much confusion about UHT tax compliance arose leading up to the 2022 tax filing deadline. Fortunately, on March 27 the government announced transitional relief for Canadians, waiving all penalties and interest (on late-filed UHT returns and late-paid UHT tax) provided the UHT return is filed and tax is paid by Oct. 31, 2023. This transitional relief means that, although the deadline for filing the UHT return and paying the UHT is still May 1, 2023, no penalties or interest will be applied for UHT returns and payments that the Canada Revenue Agency receives before Nov. 1.

Frank Di Pietro, CFA, CFP, is assistant vice-president of tax and estate planning at Mackenzie Investments. He can be reached at fdipietr@mackenzieinvestments.com.

Frank Di Pietro

Tax & Estate

Frank Di Pietro, CFA, CFP, is assistant vice-president of tax and estate planning at Mackenzie Investments. He can be reached at fdipietr@mackenzieinvestments.com.