CANADA Law and Practice Contributed by: Ian M Hull, Suzana Popovic-Montag and Nick Esterbauer, Hull & Hull LLP
must generally be in writing, signed by the parties, and witnessed. Canadian courts also retain discre- tion to set aside agreements that are unconscionable, entered without independent legal advice, or affected by material non-disclosure. Where an agreement is negotiated with full and honest disclosure, and without exploitative conduct, however, it will likely withstand judicial scrutiny. An agreement will not necessarily be set aside for lack of legal advice if the surviving spouse knowingly chose not to obtain it, particularly where they had sufficient familiarity with family law matters to appreciate the option: see Steernberg v Steernberg Estate , 2006 BCSC 1672. The governing framework varies by province, with each jurisdiction prescribing legislation governing domestic contracts and their interaction with succes- sion law. Where a dependant support claim is brought against the estate of the deceased spouse, the agree- ment may be considered by the court in assessing the testator’s moral obligations at the time of death, but it will not oust the court’s jurisdiction. 5. Tax Treatment of Lifetime Transfers and Testamentary Dispositions 5.1 Lifetime Transfers In Canada, an outright transfer of property during the donor’s lifetime is generally treated as a disposi- tion that triggers the realisation of any accrued gain, meaning that income tax is payable the year of the transfer unless the gain is offset by a loss or the trans- fer qualifies for rollover treatment. The tax treatment may depend on the recipient of the property. Transfers between spouses may qualify for tax-deferred rollovers, allowing assets to pass between spouses – or former spouses as part of a matrimonial property settlement – without immediate tax consequences. Certain transfers to children may also qualify for rollo- ver treatment. This relief applies where the transferred property consists of real property or depreciable property of a prescribed class, the child was resident in Canada immediately before the transfer, and the
property was used principally in a farming or fishing business. Property transferred to a trust may qualify for an exemption under Section 107.4 of the Income Tax Act if specified conditions are met, including that the disposition does not change the beneficial ownership of the property, the proceeds are not otherwise deter- mined under another provision of the Act, and the trust is resident in Canada at the time of the transfer. Where real property is transferred, provincial land transfer tax will also generally be payable. The rate and structure of this tax varies provincially. 5.2 Testamentary Dispositions Canada does not impose any estate or inheritance taxes. However, on death, a taxpayer is deemed to have disposed of all of their capital property – both depreciable and non-depreciable – at its fair market value for the purpose of calculating capital gains tax. This deemed disposition occurs immediately before death and may give rise to either a capital gain or loss equal to the difference between the property’s fair market value and its adjusted cost base (for non- depreciable properties). Fifty percent of any gain is included in deceased’s taxable income as a taxable capital gain, while capital losses may be applied against gains in the year of death. Where property passes to beneficiaries, it is generally rebased at fair market value at the time of death. Any gains or losses accruing between death and distribu- tion of the property are taxable to the estate, which is treated as a separate tax payer. For up to 36 months after death, qualifying estates may benefit from gradu- ated tax rates, if they meet the definition of a gradu- ated rate estate under the Income Tax Act. Where the property passes to the deceased’s spouse or common-law partner, or to a qualifying spousal trust, capital gains tax may be deferred through roll- over provisions. In such cases, the deferred capital gains are instead realised on the death of the surviving spouse or partner. The principal residence exemption also either elimi- nates or reduces the capital gain on the deceased’s
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