TAX FREE ROLLOVERS: DIVORCE AND DEATH – NOT A GOOD MIX


Written on December 6, 2016 – 7:00 am | by Steven Frye

Recently, the Canada Revenue Agency (“CRA”) was asked to comment on a scenario involving the transfer of a RRSP and a capital asset between ex-spouses, and one the spouses dies before the rollover can be effected: Do the tax free rollover provisions found in the Income Tax Act (“ITA”) still apply?

In the scenario presented to the CRA, Mr and Mrs. Z are ex-spouses. They have a written separation agreement in which Mr. Z owes $500,000 to Mrs. Z. Mr. Z has committed to transferring a capital asset of $ 300,000 and an amount of $ 200,000 from his RRSP in settlement.

Mr. Z. passes away before the transfers can be completed.

With regard to the RRSP, the CRA was of the view that the relevant sections of the ITA only apply between former spouses who are living at the time of transfer. At the time of death, Mrs. Z. is no longer considered the spouse or common-law partner of Mr. Z. Therefore, the definition of premium refund in the relevant section of the ITA does not apply in a transfer to Mrs. Z because she is not considered to be an ex-spouse even if this transfer is in settlement of the rights arising from their union. The CRA concluded, therefore, that the tax-free rollover is no longer possible and that Mr. Z’s estate will have to pay taxes on the transferred property.

With regard to the capital asset, the CRA pointed out that normally the transfer of an asset under the ITA allows for the deferral of taxation at the time of transfer of the capital property if the requirements of the ITA are respected, including the transfer having been made by an individual (and not a trust). An estate is considered a trust pursuant to the definition of a trust under the ITA. Since Mr. Z passed away before completing the transfer of the asset, the transfer would have be made by his estate which is a trust and would not be, in the CRA’s opinion, in compliance with the requirements of the ITA for the deferral of taxation.

The unfortunate events outlined in this scenario led regrettably to more misfortune, but as an estate administrator or trustee, perhaps having some awareness of these rules might save you some grief in the long run.

Happy Reading.

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Time Matters in Philanthropy


Written on December 5, 2016 – 6:03 am | by Malcolm Burrows

SickKids Foundation’s year-end giving campaign has generated a lot of attention for its gripping “Vs” spots. Skillfully edited, the ad borrows fight, hip-hop and adventure movie imagery to dramatize the plight of the hospital’s young patients.  This campaign is highly effective and a great example of visceral, urgent annual fundraising.  Raw emotion has a place in charitable giving, but it doesn’t serve large “exceptional” donations at tax year-end and in estates.

At tax year-end, large donations are often enabled by major tax events. Capital gains tax is triggered by a sale of a business, real estate, or public securities.  For example, an executive at a public company exercises stock options within an insider trading window.  A donation can offset the tax liability, but the taxpayer often has no clear idea about what they wish to support, partly due to the large amount involved.  A major donation makes tax sense, but may not get completed due to lack of clarity about charities.

A similar scenario may exist with estate donations. The amount is large and the distribution date is distant.  It is easy to choose a charity based on current information and emotional appeal, and then hope for the best.

A more effective strategy with large donations is to separate the planning and tax receipting process from the ultimate choice of charities and terms of gifts. This requires an intermediate charity, such as a public foundation with donor advised funds.  Giving to an intermediate charity uncouples the tax receipt from the choice of ultimate charitable beneficiary.  In other words, it separates the gift from the eventual grant.  An intermediate foundation provides the donor with time to choose charities and negotiate a grant.

At Aqueduct Foundation, our experience has been that large exceptional gifts are most effective in achieving social and charitable goals when there is time to select projects and charities. That time could be six months or five years.  Aqueduct promises that its donors can make grants to any qualified donee, in any amount, at any time.  The Foundation provides the donor with charity research, due diligence, gift negotiation and even grant agreements.  The process is designed to increase philanthropic effectiveness and social impact by providing the time for thoughtful, passionate giving.

 

 

 

 

 

 

 

 

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