December 2019 Newsletter

Overview

Estate planning encompasses a number of areas:

  • You should have a will that takes into account both your desires and tax considerations.
  • You may wish to consider steps to minimize probate fees (called Estate Administration Tax in some provinces) on your death.
  • You should carry enough insurance to meet your family’s needs on your death.
  • If you hold assets in other jurisdictions or if you are a U.S. citizen, you must consider the effects of foreign estate taxes.
  • If you are leaving assets to your children who are or may be married, you can plan around the provincial family laws that apply on marriage breakdown.

In this article we focus on the tax aspects of estate planning, and specifically on “estate freezing” techniques that can be used to reduce the tax cost of death.

What happens for tax purposes if you leave your job — voluntarily or by being terminated — and your employer gives you additional money?

Typically, you might receive one or both of the following kinds of payments:

  1. An extension of your salary during a period while you are still officially employed. For example, you might be given 12 months’ notice of termination, and your salary and benefits continue during that period — whether or not you actually continue coming to the workplace.
  2. A severance payment. For example, you might get 12 months’ salary. This might come in one of several ways:
    • Your employer offers you an “early retirement” package which you accept.
    • You are fired and accept an offer of 12 months’ severance.
    • You are fired and you do not accept your employer’s offer. Instead, you consult a lawyer, who threatens to sue your employer for wrongful dismissal. Perhaps you even start a lawsuit. You eventually reach a settlement, with your lawyer’s assistance, and the employer pays you the equivalent of 12 months’ salary.
    • You are fired and you sue your former employer. The case does not settle before trial, and the Court awards you 12 months’ salary for wrongful dismissal.

“House hopper” loses out

Wall v. The Queen (2019 TCC 168) is a recent case of a so-called “house hopper” who repeatedly built and sold new homes, purporting to move into each one as his principal residence. He was assessed for both income tax and GST, and he lost his appeal to the Tax Court.

Wall was a real estate agent and developer in Vancouver. He sold homes in 2006, 2008 and 2010, for a total of $5.8 million (and apparent profit of $2.2 million) without reporting the profits as income and without remitting any GST. Wall took the position that each home was his principal residence and therefore the principal-residence exemption applied.

Wall was assessed for income tax on his profits of $2.2 million, plus gross negligence penalties. (The $2.2 million was after expenses for which the CRA generously gave him credit based on estimated construction costs; he had not kept any records or invoices.) He was also assessed for GST not remitted out of each home sale. As well, he was assessed for income tax and GST on the sale of a vacant lot. The total GST assessment, including interest and failure-to-file penalties, was almost $600,000. He appealed the assessments to the Tax Court of Canada.