CANADA Law and Practice Contributed by: Ian M Hull, Suzana Popovic-Montag and Nick Esterbauer, Hull & Hull LLP
Partnerships Upon the death of a partner, the partnership interest is generally deemed to be disposed of at fair market value immediately before death. Any resulting capital gain or loss will be reported in the deceased partner’s terminal income tax return. If the partnership inter- est passes through a probated will or on intestacy, probate fees or estate administration tax will also be calculated on its gross value. Where the estate acquires a partnership interest but does not become a member of the partnership, the estate is treated as holding a right to receive partner- ship property rather than a partnership interest. The estate’s cost for this right equals the proceeds of the disposition to the deceased partner’s estate. Because the right is not itself a partnership interest, the estate must recognise a capital gain once amounts received from the partnership exceed the adjusted cost base of that right. If a partnership interest is left to a surviving spouse, common-law partner, or qualifying spousal trust, a tax-deferred rollover is available under the Income Tax Act. Corporations If corporate shares or assets are transferred through a secondary will that is not admitted to probate, pro- bate fees or estate administration tax should not be calculated on that property. Where the property is administered under a will that is probated, however, it will be necessary to pay probate fees. Regardless of whether probate applies, capital gains tax may arise from the deemed disposition of the shares or assets at death. This tax is borne by the estate, rather than from the asset itself, subject to the terms of the will. Where an estate freeze has been implemented, pro- bate fees may be reduced and no immediate income tax will arise if the freeze is properly structured using rollover provisions under the Income Tax Act. Future growth will accrue to the new shareholders, while cap- ital gains on the frozen shares will be deferred until a subsequent non-rollover disposition. Gains accrued before the freeze are not eliminated, however, and capital gains tax will generally become payable on
the frozen shares upon the death of the original share- holder, albeit based on the reduced frozen value.
9. Trusts, Foundations and Related Entities 9.1 Choice of Planning Vehicle Planning vehicles commonly used in Canada for estate and wealth planning include the following. • Inter vivos family trusts, which typically distribute income or capital to beneficiaries over time, and allow assets to pass outside of probate. • Testamentary trusts, typically established under a will, which distribute wealth over time following the settlor’s death. These trusts can also provide protection to vulnerable beneficiaries. • Alter ego trusts, a type of trust established under the Income Tax Act which allow taxpayers aged 65 or older to receive income from assets placed in the trust during their lifetime, on a tax-deferred basis. Following the settlor’s death, the remaining property is distributed to beneficiaries, outside of probate. • Joint partner trusts, which function similarly to alter ego trusts but apply to married spouses or com- mon-law partners. • Charitable trusts, which typically provide income to family beneficiaries with the remainder passing to charity. These trusts tend to be tax efficient, as charitable donations generate tax credits. • Private foundations, which may be funded by an individual, family, or corporation, and make grants to charities or operate charitable programmes. Private foundations are eligible for charitable dona- tion tax credits, and allow donors to retain control over their charitable giving. They may also serve a branding function, when a family’s name is associ- ated with the foundation. • Public foundations, which are generally funded by unrelated donors and support collaborative or community philanthropy. Donations to registered charities generate tax credits, making donating to a public foundation attractive to both residents and non-residents (with Canadian tax exposure).
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