Tag: Tax planning

In a field of their own: Targeted tax treatment for farmers and fishers

While each of us is unique in any number of ways, as taxpayers, we have much more in common than that which distinguishes us. Even so, those earning a living from the land or sea face very different challenges than do other occupations.

The distinctive nature of farming and fishing is acknowledged through a variety of targeted tax rules. These range from assisting farmers and fishers in their year-to-year operations through to facilitating continuity of their operations down generations. Here are the key measures.

How and when to report income

The fiscal period for reporting income is usually 12 months. For employees and self-employed individuals, the general tax rule is that the fiscal period is the calendar year, though a farmer or fisher may apply to have a non-calendar year-end. 

Farmers and fishers are also entitled to choose between accrual or cash accounting. Under accrual accounting (the general rule), income is reported when earned and expenses when incurred. Comparatively, cash accounting reports when amounts are respectively received or paid. Farmers and fishers may move from accrual to cash accounting simply by filing their next tax return in the new manner. However, permission to return to the accrual basis is required from the local tax-services office. 

Farming losses

If someone has a farming or fishing loss in a year, it may be carried back up to three years or carried forward up to 20 years. As such farm losses may be taken against any other income, this has been an area of much contention between so-called hobby farmers and the Canada Revenue Agency (CRA) over the years. 

Just because someone lives on a farm does not make that person a farmer. If the farm was not run as a business, the person cannot deduct any farm-related losses. Where the farm activity was run as a business but was not a main income source, part of the loss may be deductible under the “restricted farm loss” formula. The details are beyond the scope of this article, but the topic is covered in CRA Guide T4003, Farming Income.

Succession and capital gains

Farming and fishing are capital-intensive businesses, many being at the heart of communities dependent upon their continuity. Absent there being laws to recognize this condition, those operations, their expertise and the communities themselves may be at risk. Capital gains rules have been modified in a number of ways to accommodate. 

Lifetime capital gains exemption (LCGE)

Likely the most commonly known capital rule for farmers and fishers is the LCGE on qualified farm or fishing property (QFFP). Its value was raised from $813,600 to $1 million in 2015. It is shared with the LCGE on small business shares (i.e., the maximum is $1 million in total). The latter continues to be annually indexed from that 2015 value, and once it exceeds $1 million, the two will index in lockstep once again.

QFFP covers capital property used and owned by the taxpayer, spouse or common-law partner, including

  • real property, such as land and buildings;
  • shares of the capital stock of a family-farm or fishing corporation;
  • interest in a family-farm or fishing partnership; or
  • eligible capital property, such as milk and egg quotas.

Transfer to a child

When farming or fishing property is transferred to a child, the transferor may postpone tax on any taxable capital gain and any recapture of capital cost allowance until the child sells the property. To qualify, the child must be resident in Canada, and the property itself must be in Canada and have been actively engaged in farming or fishing activity on a regular and ongoing basis before the transfer. 

The transferee may be one’s child or that of a spouse or common-law partner, and further includes 

  • a natural or adopted child;
  • a grandchild or great-grandchild;
  • a child’s spouse or common-law partner; or
  • another person who is wholly dependent on the transferor for support and who is, or was immediately before the age of 19, in that person’s custody and control.

Extended reserve claim

The general rule for recognizing capital gains is that they are recognized in the year of disposition. If payment is deferred, the taxpayer may elect to recognize the gain across as many as five years, being the year of closing plus four years. 

For disposition of a family farm, a fishing property or small business corporation shares to a child (using the same extended definition outlined above for transfers), the reserve period may be as long as 10 years. 

CRA guides

Beginning in 2017, CRA Guide T4004, Fishing Income, will no longer be published. It will be replaced by Guide T4003, Farming and Fishing Income. The T4003 will include tax information for both farmers and fishers. [Postnote – As of 2018, guide T4003, Fishing and Farming Income, is no longer published. Instead, use guide T4002, Self-employed Business, Professional, Commission, Farming, and Fishing Income.]

Applying a multiple will strategy for probate reduction and privacy

At issue

While we most often speak of a person’s last will and testament in the singular, the practice of using multiple wills has a long history.  There are a number of reasons why a testator might want to have more than one will, most commonly:

  • Reducing probate tax in jurisdictions where that is a material concern,
  • Protecting the privacy of the deceased and beneficiaries by shielding against potential disclosure of the nature and value of assets in public/court documents and processes, and
  • Providing for less costly, more timely and generally less complicated procedures for dealing with real estate outside the deceased’s home jurisdiction.

In a purely domestic arrangement, the usual process is for the lawyer to concurrently prepare a primary will that deals with the estate generally, and a secondary will that carves out certain assets.  This secondary will is often called the ‘non-probate’ will, assuming probate reduction is a prime motivation.  Though probate is a small percentage cost to an estate, where multi-million dollar assets such as private corporation shares are involved, the absolute dollar cost can be substantial. 

Where foreign real estate is added to the mix, things can be even more challenging.  Coordination is not only required among documents, but also from one lawyer’s office to another.  

Clearly, informed intentions and coordinated professional advice are critical to reaping the benefits of this sophisticated strategy.

Granovsky Estate v. Ontario, 156 DLR (4th) 557

Heard in 1998, this case involved a carefully executed dual will strategy isolating $25 million of private corporation shares in a secondary will.  The Ontario government sought to add the shares to the $3 million in the primary will for calculation of the probate fee (now known as estate administration tax).  This would increase the probate fee by $375,000 (in 1995 dollars).

Ontario Estates Act section 53(1) required that probate fees were to be paid “upon the value of the whole estate, including the real estate as well as the personal estate.” [emphasis added]  However, section 32(3) allowed for a limited grant of probate allowing an applicant to “set forth in the statement of value only the property and value thereof intended to be affected by such application or grant.” [again, emphasis added]

The court considered multiple wills cases as far back as the late 1800’s, reviewed the evolution of the current statutory provisions, and even marked the origin of probate fees in 1358.  Those fees originally applied only to personal property, not real estate.  

With respect to the Ontario legislation, the judge noted that “[it] was later added as real property within the jurisdiction, and this would account for the “whole of the estate” in s. 53 of the Act.”  So while s.53 extends the probatable estate to include real estate, s.32(3) allows a testator to select which assets will be governed by a given will, including using a secondary will for assets that do not require probate. 

McLaughlin v. McLaughlin, 2014 ONSC 3162, 2014 ONSC 5046, 2015 ONSC 3491, 2015 ONSC 4230, 2016 ONSC 481

In an effort to reduce probate/estate administration tax, a testator’s secondary will purported to deal with one parcel of real estate separate from other assets.  Unfortunately there were some clerical drafting errors that duplicated bequests from the primary will, and there was no residue clause.

The case serves as a lesson as to the need for carefully coordinated drafting.  As well, it illustrates how longstanding family conflict (over 20 years in this case) can carry through to estate turmoil, with the family returning to court five times, though in fairness two of those dates were to address costs rulings.  

Practice points

  1. Granovsky enables the use of multiple wills to reduce probate (estate administration tax) in Ontario, and it has been followed in some provinces.  However, some provinces specifically disallow the strategy, so a qualified lawyer should be consulted.
  2. Bear in mind that establishing the strategy and keeping it up-to-date requires some cost and effort.  The documents must be drafted such that they do not revoke one another, and so that no conflicting double-dealing arises.  
  3. As well, the wider the variety of assets referred to in the documents and the more frequent those change, the greater the cost of re-drafting and the possibility that something may fall between the cracks. 

Financial and tax supports for persons with disabilities

People with physical and mental disabilities often face serious financial challenges related to inherent earning limitations or direct out-of-pocket expenses.

Fortunately, government support is available, but it can be a dizzying journey to understand the type, value and interaction of tax measures and direct financial assistance designed to assist persons with disabilities. As well, the disabled individual and related family members often need to take coordinated financial and estate planning steps to optimize those public sources.

To get started, it helps to understand what direct financial assistance and relieving tax measures are available. Unless noted otherwise, all figures expressed are for the year 2014. [Dollar figures that may change on an annual or periodic basis are underlined.]

Direct financial assistance

Canada Pension Plan / Quebec Pension Plan

The CPP/QPP disability benefit is available to people who have made recent CPP/QPP premium payments while they worked.  The disability must be both:

  • Severe, where a person is incapable of regularly pursuing any substantially gainful occupation, and
  • Prolonged – the disability is long-term and of indefinite duration or is likely to result in death.

The maximum monthly disability benefit a qualifying person can receive is $1,236, plus a maximum monthly benefit of $231 for each dependent child of a disabled contributor.  These are related but separate applications that must be made using forms available through Service Canada.

Child disability benefit

Based on family net income, the federal government will pay as much as $221 per child each month to families with children qualifying for the disability credit (see below).  Tax form T2201 must be completed and approved by CRA in order to qualify, and the payment is then delivered as part of the monthly Canada Child Tax Benefit payment.

Provincial support programs

Some provinces have standalone disability support programs, while others recognize disability as a special qualification within the overall social support system. Generally, the disability must be certified by a licensed physician using provincially prescribed criteria and forms.

Entitlement is reduced or eliminated where earnings or assets exceed regulated thresholds, though some provinces will disregard assets held in a discretionary trust for the disabled person.  (See discussion of discretionary or ‘Henson’ trusts below.)

Provincial approaches vary in terms of service offerings, cost reimbursements, rates for family size and composition, and of course direct financial assistance. On a single person basis, maximum annual direct support ranges from under $10,000 to just under $20,000.

Individual income tax relief

Tax measures commonly available to assist persons with disabilities fall into three categories. These include:

  • Deductions: Qualifying items reduce the taxable income upon which relevant federal and provincial tax rates are applied to arrive at initial tax liability.
  • Non-refundable tax credits: Once tax liability is calculated, these credits directly reduce that liability but cannot take it below zero.  The qualifying amount is multiplied by the applicable federal or provincial rate (usually the lowest bracket rate) to arrive at the credit value.  The federal rate is 15%.
  • Refundable tax credits: These may result in an amount payable to the individual even when tax liability has been reduced to zero.

The following is an outline of the key items and their potential dollar values (often income-dependent), though it does not cover all possibilities. For a comprehensive view, including detailed qualification criteria, consult Guide RC4064 “Medical and Disability-Related Information”, available through the Canada Revenue Agency website.

Disability credit

This is a non-refundable credit, available both federally and provincially. Using tax form T2201, the disability must be certified by a qualified medical practitioner as being both severe and prolonged.

  • Severe: Blindness, conditions requiring life-sustaining therapy, a marked restriction in speaking or hearing, walking, feeding, dressing, elimination or a marked restriction in everyday mental functions.
  • Prolonged: Lasting, or expected to last, continuously for at least 12 months.

The basic federal amount is $7,766.  A supplement worth as much as $4,530 may be available for children under age 18, though the value is reduced if certain child and attendant care expenses are claimed for the child.  Taken together, the maximum possible federal credit is $1,844.

The maximum basic credit at the provincial level ranges between $375 and $1,372.

Disability supports deduction

A disabled individual may deduct qualifying, out of pocket expenses incurred to work, go to school, or conduct grant-supported research. The individual may not deduct amounts already claimed under the medical expense credit (whether claimed by the individual personally or on his or her behalf as a dependant), or amounts already reimbursed by health insurance plans or through other non-taxable payments.

Generally the deduction cannot exceed the person’s earned income for the year, calculated using CRA Form T929.

Medical expense credit

An individual may claim eligible medical expenses paid, whether incurred in Canada or elsewhere, in any 12-month period. Special rules apply to attendant care expenses, whether the care was received at-home or in a care facility.

This is a non-refundable tax credit, equal to expenses that exceed the lesser of:

  • $2,171, (indexed annually) or
  • 3% of the disabled individual’s net income.

This number ranges between $1,637 and $2,298 in different provincial formulas.

Eligible expenditures can be claimed either under this medical expense credit calculation or as a disability support deduction, but not both. Accordingly, a test calculation should be run to determine which of the two yields the best net tax result.

Refundable medical expense supplement

This is a refundable credit designed to assist people with very low incomes who claim either the disability supports deduction or the medical expense credit. Subject to a clawback where family net income exceeds $25,506, this federal credit can be worth as much as $1,152.

Income tax relief for dependants

Caregiver amount

This non-refundable credit is designed for individuals providing in-home care to an immediate family member or certain close relatives.  If this credit is claimed by anyone, the infirm dependant 18 or older credit (which is of equal value) may not be claimed.  Furthermore, this credit is reduced when the eligible dependant credit is claimed for the same live-in person.

The federal reference amount is $4,530, allowing for a credit of up to $680; provincial credits range in value from $210 to $1,130, though they vary significantly in criteria and interaction with other credits.

Family caregiver credit

This non-refundable federal credit may be claimed as an enhancement to certain dependency-related credits, where the dependency is due to mental or physical infirmity:

  • Spouse or common-law partner credit
  • Child credit
  • Eligible dependant credit
  • Caregiver credit

The credit is based on a reference amount of $2,058, for a potential value of $309.

Child care expenses   

The calculation of this credit can be complicated, even without disability issues to consider. For present purposes, be aware that there are provisions to guard against double counting where concurrent claims are made for the disability amount or the medical expense credit.

Children’s fitness tax credit and Children’s arts credit

These non-refundable federal credits each allow for a credit claim of $500 spent on eligible expenses for a child.  For disabled children, the eligible amount parents can claim is doubled to $1,000 for each of these credits, making the credits worth as much as $300 taken together.

Transferred amounts

An individual may be able to claim certain amounts, notably the disability credit and the medical expense credit, transferred from a spouse, common-law partner or dependant.

GST/HST relief

Many goods and services used by persons with disabilities are not subject to goods and services tax/harmonized sales tax, whether by exemption or rebate. These include:

  • Most health care services
  • Personal care and supervision programs while a primary caregiver is working
  • Prepared meal delivery programs
  • Public sector recreational programs designed for persons with disabilities
  • Medical devices, supplies and specially-equipped vehicles

Coordinate private planning options

In order to optimize access and use of government financial and tax supports, individuals and families must conscientiously manage their income and assets. This includes family estate planning, up-to-date wills, informed beneficiary designations, executing powers of attorney and the considering establishing appropriate trusts.

Registered Disability Savings Plan (RDSP)

An RDSP may be established for a person under 59 who qualifies for the disability tax credit.  The maximum lifetime contribution amount is $200,000, complemented by government support of up to $20,000 in free bond money and up to $70,000 in matching grant money.  The government support is subject to the person’s net family income, or family net income when the person is under 18.

Contributions may be made directly from after-tax funds, as an RESP transfer, or by beneficiary designation from a parent’s RRSP/RRIF.  All contributed amounts grow tax-free, and are eventually paid out to or for the disabled beneficiary.  Taxable amounts are reported by the beneficiary, which generally will mean very little tax is paid.  All provinces disregard RDSP withdrawals when calculating provincial support entitlement.

Discretionary or ‘Henson’ trusts

A fully discretionary trust allows a trustee alone to decide the amount and timing of payments to a disabled beneficiary.  As the beneficiary has no legal right to compel distributions, most provinces will disregard such trust property when determining provincial support entitlement.  This is often known as a “Henson trust” for the Ontario case first litigated on the issue.

If the intended beneficiary does not qualify for provincial support, such a power may be unnecessary, and may in fact be a hindrance.  A qualified trust lawyer familiar with disability issues can advise on whether and how to use trusts, taking a view of the totality of circumstances.

Testamentary trusts

The 2014 Federal Budget followed through on the elimination of marginal tax bracket treatment for testamentary trusts.  Comparatively, inter vivos trusts (those created during lifetime) are subject to top bracket rate taxation on every dollar of income.

The original scope of the changes was modified somewhat based on consultations conducted after the initial proposal in the 2013 Budget.  In particular, marginal tax bracket treatment will continue for trusts for a beneficiary entitled to claim the disability tax credit.  An up-to-date Form T2201 will be necessary to prove such qualification.