Deemed Disposition at Death

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.  

Due Diligence Defence: Objective Standard

The following article was published in the December 2011 edition of the Canadian Tax Highlights. It is republished here with permission.  I thought of this article after conversing with a director who is facing a director liability assessment from Canada Revenue Agency.  This director has forgone a salary  for years all in the hopes of keeping the corporation functional but as can be seen from what I wrote in December 2011 the courts take a harsh view on the director who uses the Crown monies to keep a corporation afloat in the hopes that matters can be rectified subsequently.

Due Diligence Defence: Objective Standard

The federal and provincial tax and other statutes administered by the CRA and its provincial counterparts contain provisions that impose personal liability on a director of a corporation that fails to remit source deductions or GST, HST, or PST held in trust. Those statutes also allow the director to escape personal liability if she can show that she carried out her duties with due diligence to ensure that remittances would be made to the tax authorities. For years, uncertainty surrounded the nature of the standard of care: is the director's personal knowledge and background relevant (a subjective test)? Or is she held to the same standard as every other director (an objective test)?


In 1997, the jurisprudence on the issue was inconsistent. In Soper (97 DTC 5407), a decision since considered 186 times, the FCA attempted to establish a standard for the determination of whether a director had acted with due diligence to ensure that source deductions withheld under subsection 153(1) would be remitted. The taxpayer accepted a directorship of a company that he knew was experiencing financial difficulty, but failed to inquire about whether the tax remittances were being made. Because the taxpayer was an experienced businessman, he was found not to have carried out his duty with due diligence.


The FCA said that the standard of care was "objective subjective," and looked to section 122(1)(b) of the Canada Business Corporations Act (CBCA), whose language was adopted in ITA subsection 227.1(3).

Rather than treating directors as a homogeneous group of professionals whose conduct is governed by a single, unchanging standard, that provision embraces a subjective element which takes into account the personal knowledge and background of the director, as well as his or her corporate circumstances in the form of, inter alia, the company's organization, resources, customs and conduct. Thus, for example, more is expected of individuals with superior qualifications (e.g. experienced business-persons).

The standard of care set out in subsection 227.1(3) . . . is, therefore, not purely objective. Nor is it purely subjective. It is not enough for a director to say he or she did his or her best, for that is an invocation of the purely subjective standard. Equally clear is that honesty is not enough. However, the standard is not a professional one. Nor is it the negligence law standard that governs these cases. Rather, the Act contains both objective elements--embodied in the reasonable person language--and subjective elements--inherent in individual considerations like "skill" and the idea of "comparable circumstances." Accordingly, the standard can be properly described as "objective subjective."

In Peoples Department Stores Inc. (2004 SCC 68), the SCC considered the CBCA section 122(1)(b) standard of care for a director and said that the Soper characterization of the standard as "objective subjective" could lead to confusion. "We prefer to describe it as an objective standard. To say that the standard is objective makes it clear that the factual aspects of the circumstances surrounding the actions of the director or officer are important in the case of the s. 122(1)(b) duty of care, as opposed to the subjective motivation of the director or officer, which is the central focus of the statutory fiduciary duty of s. 122(1)(a) of the CBCA." Subsequent TCC decisions were divided between adherence to the different standards of care described by the FCA in Soper and by the SCC in Peoples (the latter decision did not deal directly with tax legislation).


Most recently in 2011, the FCA dealt with the issue again in Buckingham (2011 FCA 142). The TCC (2010 TCC 247) had concluded that up to February 2003 the director took reasonable business measures to address the corporation's financial difficulties and to avoid failures to remit taxes, including work on a proposed equity issue, attempts to secure a line of credit, reductions in expenditures, and an attempt to merge with another company. Thereafter, however, the director focused on curing defaults in remittances rather than undertaking efforts to avoid further failures to remit. The FCA cited Worrell ([2001] 1 CTC 79 (FCA)), which said that the due diligence defence is not available if the director's efforts are aimed at remedying defaults after they have occurred: a director's duty is to prevent the failure to remit, not to condone it in the hope that matters can be rectified subsequently. The FCA further emphasized that the interpretation of ITA and ETA defences should not encourage remittance failures by allowing a due diligence defence to a director who finances corporate activities with Crown monies in the expectation that the failures can eventually be cured.


The FCA agreed "with the trial judge that the 'objective subjective' standard set out in Soper has been replaced by the objective standard laid down by the [SCC] in Peoples Department Stores" because of the reference to a "reasonably prudent person." The similarity of language in the CBCA, the ITA, and the ETA "is not a mere coincidence, but rather a further indication that the standard of care, diligence and skill required by all these provisions is similar. Similar legislative language dealing with similar matters should be given a similar interpretation unless the legislative context indicates otherwise." Thus, the common-law principle that a director's management is to be judged according to her personal skills, knowledge, abilities, and capacities is set aside: the factual aspects of the circumstances surrounding the director's actions are stressed, not her subjective motivations.


The TCC has since followed the FCA's Buckingham decision in Boles (2011 TCC 288) and Heaney (2011 TCC 429). In Boles, a de jure director did not realize that his verbal resignation as a director was insufficient. He had not been active in the company for more than two years when he received an assessment under the ETA's directors' liability provision. The taxpayer unsuccessfully raised the due diligence defence. The TCC cited the FCA in Buckingham and said that a director must exercise reasonable care, diligence, and skill and take appropriate steps "to prevent the failure" to remit and not to cure it thereafter. The court further said (quoting Buckingham) that the defence was not available to "inactive directors chosen for show or who fail to discharge their duties . . . by leaving decisions to the active directors. [Thus] a director must carry out the duties of that function on an active basis and [cannot rely] on his or her own inaction."


In Heaney, the appellants were directors of a corporation, DSL, which ran into financial difficulty due to the economic times and unforeseeable technical problems stemming from a contract with Bell. The facts were similar to those in Buckingham. At a certain point, DSL elected to delay making its remittances to the CRA; the directors saw this as a temporary measure because they fully expected to find new financing that would allow DSL to meet its obligations to the CRA. But throughout 2001 the directors were unsuccessful in their search for new partnerships, investors, and other ways to recapitalize the company. Before that time, they took positive actions to cover remittances--ceasing to advertise, changing product offerings, reducing customer hours, and focusing on receivables. The directors were not allowed the due diligence defence in the later period when their focus was on finding financing to remedy DSL's remittance failures. The TCC emphasized that the use of an objective standard did not imply that the director's particular circumstances were to be ignored; quoting Buckingham, the court said that "[t]hese circumstances must be taken into account, but must be considered against an objective 'reasonably prudent person' standard."


The three 2011 decisions indicate that a director who focuses on remedying past-due remittances rather than on preventing failures to remit cannot rely on the due diligence defence. Moreover, the FCA has recognized that stricter standards now apply to directors and that, as the SCC stressed in Peoples, "the emergence of stricter standards puts pressure on corporations to improve the quality of board decisions."

Sunita Doobay
TaxChambers, Toronto

Canadian Tax Highlights

Volume 19, Number 12, December 2011

©2011, Canadian Tax Foundation

Family Trust

There is a lot of discussion now in the media about the proposed tax hike put forward by the Provincial Government of Ontario.  Premier Dalton McGuinty has proposed and dear reader do "note proposed" - it was not mentioned in the budget nor have I seen any proposed legislation - that a new tax bracket will be introduced whereby a two percent tax rate will be applied to annual income of $500,000 or more per year.  Per the Ottawa Citizen this would mean the total tax hike would be 3.12 per cent on income above that level.  This is to start July 1, 2012.

The discussions I have witnessed appear to presume that this will be additional incentive for high net worth individuals to cease residency and to move to a lower cost jurisdiction.  From experience however I will note that moving offshore is often not as easy as it sounds as one must sever ties with Canada and ensure that visitation days in Canada do not amount to 183 days or more within the taxation year as that will re-establish Canadian residency status.  Others have mentioned the setting up of a family trust in Alberta.  Well if this is done then do note that my comments on in the mind and management post  are very much relevant.  If an Alberta trust is created care has to be taken the trust is managed and controlled in Alberta to ensure that the trust remains an Alberta trust and does not become an Ontario Trust.

Ode to Canada

The other day I happened to notice an immigration consultant’s advertisement encouraging immigration to Canada.  One of the encouragements was that Canada does not have an estate tax.  Yikes I thought.  We may not have an estate tax but we sure do tax on death.  Under the Canadian Income Tax Act, an individual is deemed to have disposed of his or her capital assets at fair market value immediately before death.  This allows the heir to the assets to receive it at fair market value at time of death.  The estate pays the capital taxes due if any.  For the reader who is curious, a capital asset is a long-term asset that is not purchased or sold in the normal course of business such as furniture, land, buildings.  Do note that upon death, one can defer the deemed disposition through a spousal trust. 

I have noticed a fair amount of my readers are from outside of Canada and wanted to clarify that although we  tax capital assets at death here in Canada this does not make Canada less attractive.  I have been fortunate to have worked in Vancouver, Montreal and currently carry out my law practice here in Toronto and can attest to the beauty of this vast country.  The natural beauty of Vancouver where my twins were born will always stay with me – especially at this time of the year when the city’s cherry blossom trees are all abloom.  I adore Montreal – the food, the ambiance, Old Montreal.  Toronto – what I love about this city – is that it truly is a reflection of the United Nations.  Our dentists hail from the Philippines and Cuba.  Our dental hygienist is from Serbia.  Our close friends are Russians, Croatians, many generations ago Canadians and I can continue on. Of course we are all Canadians but it is nice when I can go for Congee in Richmond Hill and feel as if I am in Hong Kong and can carry on a conversation in Dutch.  The twins experienced the celebration of Holi and got covered in colored powder a month ago in Toronto. 

But what I love best about Toronto is the honesty and kindness of its inhabitants. I can attest to that – one of the twins lost her cell phone on the board walk last summer – a flip blackberry – someone found it and called my number which was on the display of the phone.  I managed to lose my Prada wallet with credit cards, all identification and cash – was returned by the Toronto Police – delivered to my door.  I left my gold bracelets in a change room in a shop – returned after I realized I had left it behind four hours later with the sales person telling me “people leave their jewelry behind all the time”.  My daughter left her Marc Jacobs bag behind in a shoe store in the Eaton Centre containing her wallet and yes the same phone which was left behind on the boardwalk – of course we got it back.

Trust or Estate?

The following article was published in the April 2012 edition of Canadian TaxHighlights, a Canadian Tax Foundation publication.  With permission from the Foundation it is reproduced here.  I hope you enjoy reading it as much as I enjoyed writing it.  Voilà:

Tax practitioners treat estates as trusts, but trusts are seldom classified as estates. A Canadian trust beneficiary is obliged under subsection 233.6(1) to file form T1142, "Information Return in Respect of Distributions from and Indebtedness to a Non-resident Trust." Form T1142 is due when the Canadian beneficiary's income tax return is due; failure to timely file results in a late-filing penalty of $25 a day, up to a maximum of 100 days (subsection 162(7)). However, "an estate that arose on and as a consequence of the death of an individual" is specifically exempt from the filing obligation, making the distinction between an estate and a trust critical. The recent TCC decision in Hess (2011 TCC 360) dealt with whether a specific trust was an estate and thus exempt from filing.


The CRA historically has interpreted the form T1142 filing exemption as applying only to distributions from estates that were not yet fully administered; it has rejected the view that a US testamentary trust was an estate (CRA document nos. 2007-0233741C6, June 8, 2007, and 2009-033252117, March 23, 2010). Hess is the first judicial consideration of whether the filing exemption applies to a testamentary trust.


In Hess, a testamentary trust was created on the death of the taxpayer's great-uncle. Its beneficiaries were the taxpayer's father and, after his death, the taxpayer. The taxpayer failed to file T1142 forms disclosing distributions received from the trust, and the CRA levied late-filing penalties on the taxpayer for the 2002 to 2006 taxation years for failure to file those forms.


The TCC's analysis turned to the minister's pleadings, which did not challenge the taxpayer's classification of the US trust as a testamentary trust. A testamentary trust is defined in subsection 108(1) as a trust or estate that arose on and as a consequence of an individual's death. Thus, the TCC concluded that the parties' agreement that the trust was a testamentary trust did not preclude it from being part of the great-uncle's estate. The court further said that the minister had failed to address whether the great-uncle's estate had been wound up so that the testamentary trust was a distinct trust administered separate and apart from the estate by, for example, being administered by trustees who were not executors. Because the minister had not addressed the issue of whether the estate had been wound up, he could not argue that the testamentary trust was not an estate. The TCC thus allowed the taxpayer to rely on the form T1142 filing exemption afforded to an estate.


CRA document no. 2011-0407681E5 (November 2, 2011), issued after Hess, appears to concur with the TCC's decision. In response to the question "[w]hether a dual resident of Canada and xxxxx must fill out a T1142 if she is a beneficiary of a foreign trust and received a distribution in the year," the CRA says,

[W]e note that beneficiaries are exempt from filing form T1142 in respect of "an estate that arose on death" when such distributions have arisen before the estate is fully administered (which is normally the year following the death of the individual). However, once the estate has been administered, a Canadian beneficiary of any ongoing non-resident testamentary trust must file form T1142 in any year where a distribution is received from the trust or where the Canadian beneficiary becomes indebted to the trust.

Sunita Doobay
TaxChambers, Toronto

Canadian Tax HighlightsVolume 20, Number 4, April 2012
©2012, Canadian Tax Foundation

Update - April 9, 2017
This article was written in 2012 and since then there has been legislation passed in Canada wherein a Canadian estate is deemed to be a trust. I have not updated the article and hope to so within the next few months.

Please don't allow your investment advisor to forge your signature

Two investment advisors, namely, Mark Steven Rotstein and Jessica Elizabeth Zackheim, were reprimanded yesterday by the Investment Industry Regulatory  Organization of Canada ("IIROC") for forging their client signatures for more than a decade.  In October of 2011, IIROC filed allegations that the pair had forged client signatures for over a decade on documents including trading authorizations, private placement subscription forms, U.S tax certifications, fee schedules and risk disclosure, contrary to IDA ("Investment Dealers Association")  By-law 29.1 and IIROC Dealer Member Rule 29.1.  


According to the Financial Post  the pair, who managed more than 2,000 client accounts at RBC Dominion Securities with assets valued at about $500-million, were terminated for cause by RBC in April of last year (2011), according to a regulatory filing in connection with the case.  They began working at Scotia Capital Inc. the following month, albeit with “terms and conditions” imposed on their regulatory registration, including strict supervision and controls on client signatures. They are still there, a spokesperson for Scotia Capital, the broker-dealer arm of Bank of Nova Scotia, confirmed Tuesday.


Well, I am a loss for words.  After all in this day and age of post Madoff - allowing anyone to forge your signature is just plain foolish.  No financial harm came to the clients of these investment advisors as the signatures were forged not for personal gain or for fraudulent purposes but merely to avoid the clients from the hassle of having to come to the offices of the investment advisors to sign.  But we must remember allowing an investment advisor to forge your signature is not the same as a kid forging their parent's signature on a poor grade assignment.  It is much more serious.  It is human nature to trust easily.  And one only needs to read Vanity Fair's article on Madoff to see how easily one can be duped.


The advisors will be able to serve their one year suspension in two six months stint as long at it completed by October 15, 2014 thereby allowing them to return to work.  Mr. Rotstein will  pay a $250,000 fine to the IIIROC. Ms. Zackheim will pay a fine of $50,000, and the pair will also pay $10,000 in costs.

Granny Trusts

The world seems to be shrinking.  When I am now in the Eaton Centre – I find myself trying to guess whether the shopper next to me is from Sao Paulo or from Rio de Janeiro by their accent or from some other part of Brazil. Fourteen years ago hearing Brazilians in the food court would have been a novelty to such an extent that they likely would have been invited home for dinner.  Now I just smile and walk by guessing the origin of the accents.  I of course never stop listening for a Dutch accent from South America.  This quest to speak Dutch however is not so strong anymore with the advance of Skype and believe it or not finding my elementary class mate from de Juliana School.  I found Jozef only a year ago although both Jozef and I have been living in Canada since the early 1980s.  I had heard he had immigrated to Canada but had never been able to find him.  Thanks to Facebook I was able to find Stuart from the home country and through him Jozef. 

I am not rambling dear reader – the whole point I am trying to make is that with so many of us here in Canada with origins elsewhere and with relatives remaining outside of Canada – we should not lose sight of tax planning opportunities.  I already mentioned the immigration trust vehicle which however does not make sense for those of us longer than 5 years in Canada.  

What makes sense and should be considered is the Granny Trust for those of us with relatives back home and where such relatives wish to contribute to the welfare of those in Canada.  Of course an outright gift could be made to the Canadian beneficiaries but as an advisor I caution against direct gifting of large sums.  Direct gifting subjects the funds to claims from creditors, from ex-spouses and can be depleted quickly with poor spending habits of the beneficiaries. 

The Granny trust is named as such because it was set up by one grandparents for the benefit of the grandchildren in Canada.  However it is not restricted to intergenerational gifting.  The name Granny is a misnomer.  It is a foreign trust set up for Canadian beneficiaries by a non-resident settlor and is not limited to grandparents setting up a trust for their grandchildren.  As the trust is known as a Granny Trust, I will continue to refer to it as that.   A Granny trust set up correctly allows the Canadian beneficiary to receive capital from the trust free of Canadian income tax. 

To ensure the Granny trust is not deemed a Canadian trust, the trust has to be managed and controlled outside of Canada.  There can be no Canadian contributors to the trust at any time.  Only a non-resident can contribute to the trust.  The trust can be a testamentary trust which means it is created upon death through the will of the settlor.  The trust can also be set up during the life of the settlor.  A trust set up during the testator’s life time is referred to as an inter-vivos trust.  

The trust must be settled by a non-resident of Canada and must be managed and controlled outside of Canada.  At no time can there be a Canadian contributor.  At all times, the trust contributions must be made by a non-resident of Canada.  Income and gain accumulated in the trust can be added to the capital of the trust which can then paid out free of Canadian income tax to the beneficiary situated in Canada.