Foreword...iii What s New...xvii

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1 TABLE OF CONTENTS Foreword...iii What s New...xvii Chapter 1: Introductory Concepts 1.1 Introduction Tax Systems Around the World Income to Date of Death Deemed Realization of Income Deemed Disposition of Assets The Will Tax Significance Intestacy Tax Significance Spousal Claims Tax Significance Jointly-Held Property Special Assets Charitable Donations Special Rules & Elections Insurance Valuation Issues Tax Filings, Payments & Assessments Non-Residents Foreign Assets Post-Mortem Planning Tax Issues of Estates Estate Planning Recommendations for Amendment Arm s Length & Related Is the Deceased Related to the Estate? Acquisition of Control of a Corporation Meaning of Spouse and Common-Law Partner Missing Persons Residence Income Attribution Rules About the CRA Income Splitting...24 Chapter 2: Income in Year of Death 2.1 Introduction Computation of Income...27 v

2 2.3 Periodic Income Rights or Things Employment Income General Rules Taxable Benefits CRA Views Interest Income Dividends Rental Income Royalty Income Business Income Professional Income Farming Income Fishing Income Pension Income General Rules CRA Views Death Benefit General Rules CRA Views Retirement Compensation Arrangement ( RCA ) Canada Pension Plan Payments, Old Age Security Payments General Rules CRA Views Income from RRSPs/RRIFs, etc Alimony Income of a Partnership Basic Rules Cessation of Partnership Ceasing to be a Partner on Death Residual Interest in Partnership Summary Special Rule Income of Two Periods Other Partnership Issues Employee Stock Options General Rule Per Cent Deduction Rules for Canadian-Controlled Private Corporation Deferral for Public Company Shares Summary of Rules Taxation on Death Income from a Trust Income Averaging Annuity Contract Taxable Capital Gains/Allowable Capital Losses Retiring Allowance Flow-Through Shares Shareholder Loan...69 vi

3 2.28 Exempt Income Foreign Income Exempt by Treaty Disability and Other Exempt Payments First Nations Persons Social Assistance Investment Tax Credit Splitting of Pension Income RRSP Deduction in Year of Death Topics Discussed Elsewhere Claiming of Reserves RRSP, RRIF, RDSP, TFSA, RESP, and other Similar Plans Capital Gains on Deemed Disposition Foreign Income ( FAPI ) Insurance Capital Dividend Eligible and Ineligible Dividends Capital Gains Exemption Allowable Business Investment Loss Debt Forgiveness Other Matters Summary Tables...75 Chapter 3: Income Deemed to Arise 3.1 Introduction RRSP General Rule Refund of Premiums Decrease in Value Matured RRSP Registered Retirement Income Fund ( RRIF ) Introduction Rules Applicable at Death Home Buyer s Plan Life Long Learning Plan Registered Education Savings Plan ( RESP ) Tax-Free Savings Account ( TFSA ) Registered Disability Savings Plan ( RDSP ) Deferred Profit-Sharing Plan ( DPSP ) Registered Pension Plan ( RPP ) Employees Profit Sharing Plan ( EPSP ) Registered Supplementary Unemployment Benefit Plan ( RSUBP ) Reserves in the Year of Death General Rules Capital Gains Reserve Land Inventory Reserve Other Reserves vii

4 3.14 Stock Options Unregistered Pension Plan Individual Retirement Account ( IRA ) Other U.S. Deferred Compensation Plans Chapter 4: Deemed Disposition of Assets 4.1 Introduction Deemed Sale of Property Deemed Disposition of Capital Property Capital Property other than Depreciable Property Life Estates Proceeds of Disposition Cost of Property Outlays and Expenses Depreciable Property Partnership Interest Trust Interest Eligible Capital Property of Deceased Resource Properties and Land Inventories of a Deceased Taxpayer Resource Properties Land Inventories NISA at Death Spousal Rollover Conditions for Spousal Rollover Transfer or Distribution as a Consequence of Death Additional Conditions for Spousal or Common-Law Partner Trust Untainting a Tainted Spousal or Common-Law Partner Trust Automatic Spousal Rollover When Conditions Met Election for Spousal Rollover Not to Apply Attribution Death of Spouse or Common-Law Partner Inter Vivos Spousal or Common-Law Partner Trust Alter-Ego and Joint Partner Trust Vested Indefeasibly Principal Residence Small Business Corporation Shares Farming and Fishing Properties Special Rollover at Death Conditions for the Transferee Properties Eligible for the Rollover Farming and Fishing Properties Held Directly by the Deceased or Left to a Spousal or Common-Law Partner Trust Shares of the Capital Stock of a Family Farm or Fishing Corporation Interest in a Family Farm or Fishing Partnership Direct Transfer at Death Transfer from a Spousal or Common-Law Partner Trust viii

5 Election for Rollover not to Apply Lifetime Capital Gains Exemption Personal Use Property V-Day Value Capital Property other than Depreciable Property Depreciable Properties Summary Table Chapter 5: Wills 5.1 Introduction Validity Typical Layout and Example General Comments Graduated Rate Estate Testamentary Expenses Medical Expenses Donations Allocation of Assets Spousal Rollover Joint Tenancy versus Tenants-in-Common Personal Effects Terms of Trusts Residue of the Estate Death of a Beneficiary Buy-Sell Arrangements Will Variations Insurance Conflicts of Law Spousal Claims Alter Ego and Joint Partner Trusts Insurance Funded Trust Chapter 6: Intestacy 6.1 Introduction What is Intestacy? Common Reasons for Intestacy Administration of Intestate Estate Income Tax Implications Chapter 7: Spousal Claims 7.1 Introduction Basis of Spousal Claim Conflicts of Laws Income Tax Implications ix

6 Chapter 8: Special Assets 8.1 Introduction Principal Residence General Rule One Property Multiple Properties Disposition to Spouse or Common-Law Partner Multiple Properties Disposition to Trust for Spouse or Common-Law Partner Multiple Properties Disposition to Next Generation Small Business Corporation Shares General Rule Ownership Test Conditions of Corporation at Death Conditions of the Corporation During the Holding Period Conditions for the Individual Alternative Minimum Tax Planning with Capital Gains Exemption Farming and Fishing Properties Lifetime Capital Gains Exemption Qualified Farm or Fishing Property Rollover Provisions for Farming or Fishing Land Inventory Partnership Interest Trust Interest Worthless Assets Personal-Use Property Resource Property Loans Receivable Chapter 9: Charitable Donations 9.1 Introduction General Principles Tax Credits for Individuals Total Gifts The Eligible Amount of the Gift Proof of Gift Donation in Kind Special Relief for Capital Gains Tax Special Tax Relief at Death No 75 Per Cent Income Limitation Carryback to Immediately Preceding Year Gift by Will Intent to Gift Stipulated Amount of Donation No Encroachment of Capital by the Trustee x

7 9.4.4 Gift at Law Proof of Gift by Will Gifts of Capital Property Gifts of Art Direct Designation Insurance Proceeds Direct Designation RRSPs, RRIFs, and TFSAs Donation of Non-Qualifying Securities Donation of Crown Gifts, Cultural, and Ecological Property Chapter 10: Special Rules and Elections 10.1 Introduction Medical Expenses Spousal Rollover Election for Spousal Rollover not to Apply Capital Losses Superficial Loss Rules not Applicable Application of Capital Losses Reduction for Capital Gains Exemption Alternative Minimum Tax Debt Forgiveness Rules Deceased as a Creditor Deceased as a Debtor Special Elective Tax Returns Rights or Things Return Partnership Income Testamentary Trust Income Acquisition of Control Exception to Acquisition of Control Transfer to an Estate Exception to Acquisition of Control Transfer to Beneficiary Chapter 11: Insurance 11.1 Introduction Types of Insurance Policies Valuation of Corporate-Owned Life Insurance Policy Definitions Insurance Proceeds on Death Common Insurance Structures Corporate-Owned Criss-Cross Arrangement Capital Dividend Account Components of Capital Dividend Account Capital Gains Inclusion Rate Sample Calculation Excess Capital Dividend Filing of Capital Dividend Election xi

8 Chapter 12: Valuation Issues 12.1 Introduction Valuation of Personal Effects Valuing Art, Antiques, Collectibles Valuing Private Corporations Valuing Real Estate Other Valuation Issues Trust Interest and Life Interest Costs of Disposal Voting Control Premiums Personal Goodwill Shareholder Loans CRA Views Chapter 13: Tax Filings, Payments, Assessments 13.1 Introduction Types of Returns Rights or Things Stub Period Income Testamentary Trust Income Filing Due Date Individual Returns for the Deceased, and the Spouse or Common-Law Partner Trust Returns for the Estate or a Testamentary Trust Created under a Will Special Tax Filing Issues Taxation Year Proration of Income Calculation of Capital Gains or Losses Use of Tax Credits Amendment to Prior Year Return Capital Losses to the Estate Payment of Tax Options Assessment Audit Appeals Common Problems Voluntary Disclosures Liability of Legal Representatives Insolvent Estate Chapter 14: Non-Residents 14.1 Introduction Income to Date of Death Deemed Disposition at Death Taxable Canadian Property Treaty Exemptions xii

9 14.4 Special Rules for Non-Residents No Spousal Rollover No Lifetime Capital Gains Exemption CCPC Status Capital Loss Land Inventory and Resource Property Business Assets Certificate of Compliance Special Provisions Under the Canada-U.S. Tax Convention Rental Real Estate Former Canadian Resident Stock Options Registered Plans Chapter 15: Foreign Assets 15.1 Introduction Foreign Tax Issues Canadian Income Tax Implications U.S. Estate Tax Introduction U.S. Estate Tax Non-Resident Alien Canada-U.S. Treaty Single Purpose Corporation Foreign Domicile Foreign Corporations Introduction Foreign Affiliate Controlled Foreign Affiliate Implications at Death Dividend Distributions U.S. LLC Non-Resident Trust Chapter 16: Post-Mortem Tax Planning 16.1 Introduction Overview of Planning Objectives Allocation of Assets Capital Losses of the Estate Capital Property Time of Disposition by Estate Canadian Private Corporation Special Rules Depreciable Property Stock Options Other Properties Partnership xiii

10 Foreign Corporation Further Examples Part Ownership Step-Up Strategy General Rule Step-Up Examples Pipeline Strategy Description and Example Pipeline Strategy and Capital Gains Exemption Combining the Strategies Utilization of Capital Loss by Beneficiary, Estate or Spousal or Common-Law Partner Trust Stop-Loss Rules and Share Redemption on Death Summary Buy-Sell Agreements Distributions to Beneficiaries Testamentary Trusts Post-Mortem Estate Freeze Registered Plans Chapter 17: Taxation of Estates 17.1 Introduction Creation of Testamentary Trust Qualification as Testamentary Trust Taxation of Testamentary Trusts Cost of Assets Acquired by Testamentary Trusts Trust Income and Distributions Testamentary Spousal or Common-Law Partner Trusts Distribution of Assets Year Rule U.S. Beneficiaries Distributions to Non-Residents A Distributions in General Withholding Tax Other Matters Alternative Minimum Tax Tax Clearance Chapter 18: Estate Planning Pre-Death 18.1 Introduction Estate Planning Objectives Estate Freeze Donation Strategy Spousal Rollover Qualified Small Business Corporation Insurance Strategies RRSP/RRIF xiv

11 18.9 Family Cottage Family Debts Chapter 19: Recommendations for Amendments 19.1 Introduction Rights and Things Partnership Taxation Election for Deemed Disposition at Fair Market Value Partnership Estate Freeze Tax Filings Estate Tax Filing Deceased Taxpayer Change of Control Rules Capital Loss Carryback Step-Up Transactions Payment of Tax Unused Donations Life Interests Pipeline Method and Deemed Dividend Executor Fees Non-Taxable Components of Income Graduated Rate Estate ( GRE ) Appendix List of Resources Glossary of Terms Index xv