Inheritance – Doug Carroll

Estate and capacity planning for vacation properties across borders

When I was a boy, we had a modest cottage a couple of hours out of the city. Just getting there was an adventure, as my parents piled six kids and a dog into a Datsun 510 — with no air conditioning.

These days, it is not uncommon to have a vacation property in another province or outside the country altogether. Whether that’s a family getaway, a snowbird retreat, or a new Canadian continuing to hold property ‘back home’, our society lives across borders like never before.

With this modern mode of living comes complexity, particularly when it comes to estate and capacity planning.

Wills and estate transfers

Generally a Canadian Will is effective to deal with a person’s real property (real estate) in the home province, and personal property wherever it may be. In order to deal with real estate elsewhere, the Will would have be proven to the satisfaction of the courts/law in that other jurisdiction. While this is not an impossible task, it presents some additional cost, time and potential uncertainty.

With that in mind, it may be desirable to plan ahead by executing a second Will in that other jurisdiction. In so doing, it is crucial that the second Will doesn’t inadvertently revoke the person’s main Will, or otherwise alter distribution. Accordingly, there must be an open dialogue between the lawyers in the two jurisdictions.

Discussions with the foreign lawyer should include gaining an understanding of tax obligations (currently and for the estate), and legal responsibilities of the executor. This may necessitate adjustments in the home Will, or at least some informal guidance. Alternatively, it could lead to naming a distinct second executor, with appropriate allocation of powers and constraints between the two. This knowledge may even affect the owner’s longer term intentions for the property.

Incapacity while owning or being abroad

Arguably, the estate transfer is the easy situation as compared to having to respond to a crisis while an owner is living. While an estate transfer is a property matter, there are both property and personal issues that can come up while a person is living, with attendant greater urgency.

Powers of attorney (POAs) and powers of attorney for personal care (PAPCs) have been a recommended part of the estate planning process for decades now. And while it is usually intended that the power may be exercised wherever the grantor or property may be, challenges can crop up when foreign jurisdictions are involved.

Some jurisdictions require these documents to be executed in a prescribed form, include specific language or otherwise be constrained in some manner that may be at odds with the home jurisdiction’s rules. Even if there are no such formal impediments, there can be delays (and associated costs) as individuals, health care workers and businesses assure themselves of their obligations — perhaps even requiring them to seek their own legal advice before being able to take instructions.

As with Wills, it may be desirable to have parallel documents drawn up in the foreign jurisdiction in order to expedite action at critical times. In addition to the provisos about guarding against revocation and having open communications, some further questions should be canvassed:

Can the same person be named in both jurisdictions? Are there practical/logistical/linguistic concerns that may lean toward naming a different person in the foreign jurisdiction?
What events may cause an appointment to be revoked (eg., marriage, separation, bankruptcy)? If such rules differ between the jurisdictions, how will that be reconciled?
What is the scope of the attorney’s activity for each of the jurisdictions? Where there is a gap, how will this be handled?
If it is intended that the home jurisdiction attorney have ‘final say’, is this possible under the foreign jurisdiction’s rules? How can an attorney be removed?
Is compensation allowed/required/prohibited, and do the planning documents together guard against double compensation?
What checks are there to assure appropriate accounting and accountability for each attorney’s actions?

Cross-border developments

These concerns have been attracting greater interest in recent years, with two major developments worth noting.

In the summer of 2015, the Uniform Law Conference of Canada tentatively approved a uniform law on cross-border recognition of powers of attorney for both property and health care, health care instructions and similar documents. The Uniform Law Commission in the United States approved its draft in 2014. Provinces and states that incorporate the recommendations into their domestic law will enable their residents’ documents to be effective in all reciprocating jurisdictions.

In the area of estates, as of August 17, 2015, a new cross-border succession regulation is in force in the European Union (except Denmark, the U.K. and Ireland). It affects European citizens and residents, and European property held by non-residents. Canadians should consult with their lawyer whether any action is required on their part.

Whether a gift to an executor is taxable compensation

At issue

Compensation received by an executor is income from an office, and thereby taxable.

Where an individual is both named as executor and provided a legacy or bequest in the Will, there is a presumption that that gift is in lieu of compensation. For distinction, a legacy is a dollar amount, whereas a bequest is an item of property. Either way, the amount of compensation would be the fair market value of the gift. Ironically in the case of a large single property bequest, an executor who lacks cash liquidity may have to dispose of the item in order to pay the corresponding tax bill.

The executor may rebut the presumption that a gift is compensation by offering evidence of the testator’s contrary intention, either through the Will or by surrounding circumstances.

Boisvert v. The Queen, 2011 TCC 290

Guy Boisvert and a notary were named as liquidators (the proper term for executor in Quebec) of the estate of Marcel Sauvé. The Will provided that as a “token of gratitude” for the services as liquidator, Mr. Boisvert would be bequeathed the deceased’s residence and contents. In time, Mr. Boisvert was assessed for income from an office in the amount of $68,080, as quoted in the estate’s declaration of transmission.

On appeal, Mr.Boisvert testified that, despite the words in the Will, he had a very small role in the estate administration, deferring much to the notary. In turn, the value of the property should be seen as disproportionately large to be characterized as remuneration.

The court held that even if he played a small role, he “had accepted the office and the responsibilities that came with it” and therefore the presumption of compensation was not rebutted, and the tax assessment was upheld.

Re Hayes (Estate of), 2006 ABQB 427

This matter came before the court as a contested passing of accounts, opposed in part by the Public Trustee on behalf of minor beneficiaries who were grandchildren of the deceased. Among the arguments offered, it was asserted that the gift of a residence to one of the executors constituted compensation, and therefore there should be no further claim for personal expenses of the executors.

After summarizing the arguments, the judge simply stated the view that “the gift to Delwin Hayes as Bert’s son was personal and therefore the presumption has been rebutted.” Though this was not a tax case, the opposite finding would certainly not have been helpful to Mr. Hayes in dealing with his subsequent tax return.

Capital Trust Corpn. Ltd. v. The Minister of National Revenue, [1937] S.C.R. 192

Joseph Mackenzie was one of a number of executors of the estate of his father, who died in 1923. A Codicil to the Will provided that Mr. Mackenzie should be paid $500 monthly, which was to be in addition to any entitlement that “courts or other authorities may allow him in common with the other executors.”

For reasons unexplained, the monthly amount was not paid until a catch-up payment of $19,500 was made in 1927.

Mr. Mackenzie’s argument that this constituted a gift was not successful as he would not have been entitled to it had he not accepted the appointment. Furthermore, he was taxed on the full amount as received in 1927, and specifically was not allowed to allocate the amounts proportionately across the intervening years.

Practice points

A testator should understand that where a gift is closely tied to an absence of compensation, it is likely that the executor will be taxed on that amount. Bear in mind as well that it is often the case, especially with small and quickly administered estates, that there is little or no corresponding tax deduction to the estate, effectively resulting in a gratuitous windfall to the government.
An executor who is a beneficiary of a bequest or legacy may wish to review the Will before accepting the appointment. Depending on phrasing, this could bring a gift under tax scrutiny that might not have occurred had the individual been strictly a beneficiary. On the other hand, if there is a direct connection between accepting executorship and the gift, a taxable gift is likely better than nothing at all.

For some inheritances, timing really is everything

The adage timing is everything is a convenient phrase that is often used for emphasis in situations where it is not entirely true. In the case of determining entitlement to an inheritance though, it could very well be right on the money.

Back in 1991, Nora Mulligan provided in her Will both for her three (adult) children of her first marriage, and for her second husband Arthur. The children were bequeathed such “money” that she may own at her death, and her husband was to continue as surviving joint owner of the house and beneficiary of the residual estate assets.

In May 2005, Nora’s sister died without having made a Will. According to the rules of intestacy of the province where the sister resided, Nora and her one other sibling were the statutory beneficiaries under the intestacy. The Public Guardian’s office in that other province initiated proceedings to administer the estate, which consisted of “money” type assets, out of which Nora was to receive about $75,000.

In November 2005, the Public Guardian’s application was granted, and the sister’s estate was ready to be administered. Unfortunately, Nora had died some weeks earlier in October 2005 so she would not be able to enjoy that inheritance personally.

As the sole named executor under Nora’s Will, Arthur distributed all of her $115,000 “money” to her children; the $60,000 house passed to him by right of survivorship. Perhaps not surprisingly though, a dispute arose as to whether the $75,000 forthcoming from the sister’s estate was in turn to be characterized as “money” when received in Nora’s estate.

The matter progressed to court, and after a review of relevant case authorities the judge held that Nora had “no interest in the specific assets in her sister’s estate… [and] …those assets, accordingly, cannot be the subject of a specific bequest.”

For Nora’s children to have succeeded, Nora would have had to survive not only up to the grant of administration to the Public Guardian, but further to the point where her estate entitlement was properly distributed to her while living. Things may have been different if Nora’s sister had executed a Will that might have allowed for a quicker administration, or if Nora’s own Will had been drafted to cover such contingencies.

As it turned out for Arthur, timing really was everything, and he took that right to the bank.

CASE REFERENCE
Mulligan v Hughes 2007 SKQB 123 (CanLII)