A case that caught my interest and that ties into my post on “Ode to Canada” is the 2011 case that can be found on CanLii namely Fourniev. Cromarty et al., 2011 ONSC 6587 (hereinafter referred to as Cromarty). It triggered my interest because the drafting of wills is common to the practice of law and wills are essential to the smooth transition of assets from one generation to another.
As mentioned in my prior post, upon death in Canada there is a deemed disposition of capital assets held by the deceased immediately prior to death. The Estate of the deceased is liable for the capital gain taxes that arise. But dear reader what happens if the estate is asset rich but cash poor. In Cromarty the deceased Andrew Stewart Cromarty specified in his will that he was leaving three farms which were to be allocated one farm to his niece, one farm to his friends the Fournies and the residue of the estate containing the last farm to his nephew. Mr. Cromarty’s will stated that the capital gains tax that would arise upon the deemed disposition at death would be paid by the residue of the estate with respect to the farms left to his niece and to his nephew. The Fournies were to pay the capital gains tax on their farm themselves.
Simple enough but the residue dear reader did not contain sufficient cash to cover the capital gains tax that arose on the deemed disposition at death. However the final return of the estate provided that Mr. Cromarty during his life time had not used up his capital gains exemption attributable to farm property. This was great as the usage of this exemption which I shall refer to as a deduction allowed the capital tax payable by the Estate to be reduced considerably.
Utilizing this crutch, the niece and nephew of the deceased argued that the deduction should only apply to the farms bequeathed to them as this would have been the wish of their deceased uncle. After all, the niece and nephew argued the will specifically held that the estate was to cover the capital gains taxes arising out of deemed disposition relating to the farms bequeathed to them and clearly their uncle would have wished the deduction to be allocated to their farms only. The Fournies of course argued to the contrary – they argued that the capital gains deduction (the life time exemption) was to apply to all three farms as this is how the capital gains tax would be calculated in the deceased final return. The Court agreed with the Fournies.
The lesson that can be learned from this is that when drafting a will, one should be cognizant of the ability of their heirs/estate to pay the capital tax that arises at death.