When to revise your Will

Do new rules for trust taxation warrant a review?

For some people, even the thought of creating a Will casts a pall over their mood. Yes, a Will deals with a person’s death, but the broader process of estate planning is about caring for the most important people in your life, and having an up-to-date Will is central in that process.

But how do you know if you are really “up to date”?

While there’s no black-and-white answer to that question, there are principles that can be used as a guide. And within that inquiry, recent changes to the taxation of trusts may be sufficient to prompt a review and potentially a revision.

When to have a Will

Estate planning is about taking care of yourself now and in the future, and taking care of the people around you – now, in the future and when you are no longer there.

Sometimes the need for a Will is obvious: There is a significant other or a child, or a house or business with employees. Consider though a parent forced to deal with the intestacy of a twenty-something child, or an unanticipated large insurance payout or court award from an accidental death. 

In my opinion, everyone who is legally capable of executing a Will should do so.

Having a Will provides certainty, not just about who will receive what, but also because it allows for tailored planning of when an inheritance will be distributed, and how the process will be managed. In this last respect, there is little ability to manage tax concerns without having worked through the issues ahead of time and having executed a Will designed to manage remaining contingencies.

When to review your Will

What then may prompt the review of a Will? (And when I say “prompt,” I am suggesting that a call to your lawyer may be in order to ask whether there is a need to discuss implications.) I would put it into the following three categories, in order of priority:

Changes to the people

  • This includes you, a dependent, a Will beneficiary, an immediate family member (whether or not a beneficiary), an executor, or a trustee or guardian
  • Beginning or end of a close personal relationship, whether or not legally married
  • A birth, adoption, death, mental capacity concern or significant health event
  • Immigration, emigration or change in citizenship
  • A change in liability exposure, such as a bankruptcy, being joined in a lawsuit, signing a guarantee or starting a business

Changes to the property

  • Sale of a large asset, especially if it is the subject of a specific Will bequest
  • A windfall, such as an inheritance, court award or lottery prize
  • A theft, loss or consumption, including a marked decline in or withdrawal from an investment account, especially for an RRSP/RRIF plan where a beneficiary designation factored into inclusion or exclusion of beneficiaries in a Will
  • Ownership change or transfer, including loans or gifts to Will beneficiaries, a change to bank signing authority, or addition of a joint owner on investments or real estate
  • Cancellation or loss of life insurance (for example, on retirement from employment) where the plan proceeds or a beneficiary designation factored into Will planning

Passage of time

Even if you and the property have remained effectively the same, the legal landscape may have shifted beneath you. It is difficult to say exactly how much time would be appropriate, but I would suggest no more than five years. The principal sources of law are as follows:

  • Case law – Judicial decisions where the strategies, circumstances and facts may have relevance to your situation and planning decisions
  • Provincial law – Changing legal entitlements and administrative processes, for example, Ontario creating a more stringent estate-administration tax-reporting regime and Alberta now treating a marriage as not revoking a pre-existing Will
  • Federal law – Mainly changes to tax legislation that could have an impact on drafting Wills and on the administration of estates and trusts

Trust tax changes

First proposed in the 2013 Federal Budget and passed into law in 2014, as of the beginning of 2016, testamentary trusts have lost most of their previous tax preferences.

A testamentary trust is created under a person’s Will. Up to the end of 2015, such a trust was entitled to graduated-tax-bracket treatment, similar to an individual’s personal tax treatment. Though taxable from its first dollar of income, the trust would initially be subject to the lowest combined federal-provincial rate then work its way up through the tax brackets. As of 2016, the top federal-provincial rate – near or exceeding 50% in most provinces – applies throughout.

There are two key exceptions to the new rules, bringing two new acronyms into the lexicon:

  • Graduated rate estate (GRE) – For the first 36 months of a deceased’s estate, graduated tax brackets will remain available. However, the rules are complex, and if not carefully navigated, the preferential treatment may be lost
  • Qualified disability trust (QDT) – Ongoing graduated-tax-bracket treatment may be available to a testamentary trust with a beneficiary who is qualified for the disability tax credit

In the past, an estate-planning lawyer may have recommended the creation of one or more testamentary trusts and drafted the Will accordingly. Today, those trusts may have little or no benefit and may turn out to be an impediment to efficient estate administration. For those who have benefited from what was good planning in the past, it may be time to call the lawyer and discuss appropriate planning in this new environment. 

The new Canada Child Benefit

Family support payments overhauled

Being a parent is the quintessential labour of love, though every parent knows that raising a child is costly.  

And every government knows it too, which is why the provision of support to young families has long been a feature of public finance.  But opinions on the manner of providing that support vary from time to time, from person to person and from one political party to the next.   

This debate was front and centre in last year’s federal election campaign, so it was no surprise that the Liberals took action to change things up in their very first Budget.  The new Canada Child Benefit (CCB) makes the first of its monthly payments on July 20, 2016.

Programs being terminated

To fully appreciate the changeover, parents and their advisors need to know what’s going away as much as what’s coming.  This is not merely an exercise in purging acronyms from the lexicon; it helps in understanding who is affected, why (from the governing party’s perspective), and how much it will impact household budgets.  In this last respect, it should inform the family’s monthly budgeting and longer term financial planning, including establishing adequate education savings. 

The CCB directly replaces the following support programs that will make their final payments in June, 2016:

  • Canada child tax benefit (CCTB)
  • National child benefit supplement (NCBS)
  • Universal child care benefit (UCCB)

Introduction of the CCB will also have an impact at tax filing time: 

  • The family tax cut (the income splitting tax credit worth up to $2,000) is eliminated after 2015,
  • The education tax credit and textbook tax credit are eliminated after 2016, and 
  • The children’s fitness and arts credits are halved for 2016, and eliminated after 2016. 

Rationale for the CCB

Taken together, the CCTB, NCBS and UCCB included taxable and non-taxable amounts, some of which were income-tested and others not.  In addition to it being relevant who received the payments, this required consciousness of latent tax obligations, coordination with other benefits and catering to particular family circumstances.  For example, at tax filing time a single parent would have to decide whether to report UCCB income personally, as income of the child for whom the UCCB was received, or as income of any eligible dependant. 

Vis-à-vis the programs it replaces, the CCB is positioned as being simpler, better-targeted to those in need, and more generous to those most in need.

All CCB payments are tax-free, neutralizing income reporting complications.  With income and expenses denominated in the same way – i.e., both after-tax – there is no mystery whether or how much tax will be due the next April, and no need to keep a reserve for the purpose.  Accordingly, assembling a household budget becomes a more manageable exercise, and again the family’s financial advisor can play an important role in pulling that together.  

Income-testing applies to all potential CCB recipients.  According to the government’s calculations, families with income under $150,000 will receive more through the CCB as compared to the current system, on average receiving $2,300 more.

Table – Canada child benefit phase-out and adjusted family net income thresholds

What families can expect

Of course no family is average, whether talking CCB or otherwise.  What is relevant for an actual family is the number of children, their ages, and the total household income – or technically “adjusted family net income” (AFNI).  

The full entitlement is $6,400 per child under the age of 6 and $5,400 per child for those aged 6 through 17.  These amounts are reduced by the percentages shown in the table, as AFNI crosses the $30,000 and $65,000 income thresholds.  To recognize the additional costs of caring for a child with a severe disability, there is an additional amount of up to $2,730 per child eligible for the disability tax credit. The phase-out of this additional amount begins at the $65,000 income level.

To illustrate how this operates, assume that a family has two children ages 4 and 7, and AFNI of $90,000.  Their base entitlement is $6,400 + $5,400 = $11,800.  The 13.5% clawback applies to the income from $30,000-$65,000 and 5.7% to the excess $25,000.  That’s a total reduction of ($4,725 + $1,425) = $6,150, leaving them with $5,650.

Fortunately, the family does not have to do the calculation themselves.  The entitlement is calculated by the government based on the information in parents’ tax returns filed each April. Allowing for tabulation time, the program cycle runs from the following July to June of the next year.  In the meanwhile, parents can get a rough idea by using the CCB Calculator http://www.budget.gc.ca/2016/tool-outil/ccb-ace-en.html that was launched when the Budget was tabled in March.

Claiming medical expense tax credit on hot tubs, pools and warm weather

At issue

The medical expense tax credit (METC) may be a bit of a mystery for the average taxpayer.  Likely this is because it is intended to capture large outlays (individually or in aggregate), leaving smaller amounts in each taxpayer’s hands.  To the point, the credit is only available on expenses in a year that exceed the lesser of $2,000 and 3% of net income.

But for those with a standing medical condition, the METC addresses a fundamental financial need.  It is also a substantial government spend — and unfortunately is open to abuse, particularly where an element of leisure attaches to large ticket items.  On closer examination though, what is a luxury to some may be a necessity to others, irrespective of tax considerations. 

Hot tubs and hardwood

In the early 2000’s there were a number of court cases and Canada Revenue Agency (CRA) letters dealing with hot tubs and hardwood floors.  Generally a medical practitioner had recommended the former for alleviating mobility problems, and the latter for asthma sufferers.

CRA letters usually opined in the case of hot tubs that at best the installation costs may be allowed.  The court dispositions were not always consistent.  Here’s a selection:

  • Gibson v. Canada, [2000] T.C.J. No. 753 – Costs of renovation for installing hot tub could be claimed, but not hot tub itself. (Fybromyalgia with severe neck pain)
  • Donahue v. The Queen, 2003 TCC 888 – Cost of hot tub is an allowed medical expense. (Severe chronic back pain)
  • Canada v. Klywak, 2005 FCA 354 – Cost of hot tub allowed as a device that is designed to assist an individual in walking. (Fybromyalgia impairing walking and other mobility)

These and other cases conducted under the informal procedure relax the rules of evidence and are not binding on other courts.  Adding to uncertainty, more than one judge had allowed the hot tub cost in one case while denying in another.  Outcomes were fact-dependent.

2005 Federal Budget and after

The 2005 Budget amended the criteria for claiming medical expenses.  The supporting notes to the Budget explicitly referred to Department of Finance concerns with hot tubs and hardwood floors.  

Income Tax Regulation 5700(i) was amended to limit mobility claims to devices “exclusively” designed to assist “walking”, effectively over-ruling future claims akin to Klywak.  And an over-riding test was added at Income Tax Act s.118.2(2)( l.2), requiring that any alterations or additions:

  1. could not increase the value of a dwelling, and 
  2. could not be a cost that someone without mobility challenges would typically spend.

Pools and warm weather

The new provisions shifted judicial analysis toward these legal tests, leaving less latitude for discretionary fact-driven outcomes.   

  • Barnes v The Queen 2009 TCC 429 – A regular swimming pool used for rehabilitative physiotherapy does not meet the second part of the new test as it is something that a person with normal mobility might install. (Cerebral palsy and Special Olympics training)
  • Johnston v The Queen 2012 TCC 177 – Hot tub solely used for subject person shown to assist wheelchair mobility throughout home, but still fails the second part of the new test. (Cerebral palsy, related quadriplegia, and contractures of limbs)
  • Sotski v The Queen 2013 TCC 286 – Replacing relatively new carpet with inexpensive laminate flooring satisfies all requirements.  (Parkinson’s condition with serious trip/fall concern)
  • Tallon v. The Queen, 2015 FCA 156 – And as to that warm weather?  A taxpayer initially succeeded on claiming costs of being in a warm southern climate to alleviate chronic joint pain experienced during the cold Canadian winter, but was later reversed on appeal.

Practice points

  1. The selection of cases here is not comprehensive, but rather shows the range of outcomes, and that each situation is unique.
  2. Even so, the rules are much tighter since 2005.  As more than one judge has stated: “The bar has been clearly set high by Parliament.” 
  3. As Sotski shows, it may still be possible to succeed on a claim under the new rules, less likely though that may be for hot tubs and pools.