Private Wealth 2023 Comparisons

Income Tax

All income earned by Canadians is subject to taxation. Canadians pay federal tax rates that increase with income levels, ranging from 15% to 33% of gross income, plus applicable provincial taxes. Depending on the province, it is not unusual for high-income earners to pay tax approaching a rate of 50% of their income.

Until recently, income splitting was a common tool for limiting the taxes payable by a family. Most types of family income splitting have now been eliminated by the federal government.

Taxation of Trusts

Trusts and estates are both considered as individual taxpayers under Canada’s income tax legislation, the Income Tax Act, RSC 1995, c 1. Accordingly, income earned by a trust or estate is taxable. Currently both inter vivos and testamentary trusts that are resident in Canada are typically taxed at the highest marginal rate.

Several exemptions from the taxation of trusts at the highest graduated tax rate may apply, as follows:

• graduated rate estates, which are taxed at marginal rates for a period of 36 months following death (following which they will be exposed to the highest marginal rate);
• qualified disability trusts, being testamentary trusts for which the beneficiary or beneficiaries are eligible for the Canadian disability tax credit; and
• subject to certain restrictions, grandfathered inter vivos trusts (those which were settled before 18 June 1971).

Overview of Tax Credits and Deductions

The Canada Revenue Agency (CRA) is the body that oversees the taxation of Canadians, and recognises deductions and tax credits for various types of expenses related to family and childcare, medical expenses, education, and saving for retirement. Tax deductions have the effect of reducing taxable income, whereas tax credits are deductions from the tax that is otherwise owing. For the most part, tax credits are non-refundable, meaning that they do not create a tax refund independently, and income tax must be paid during the relevant year in order to effectively claim the credits (subject to any carry-forward allowances by the CRA). Tax credits and deductions can significantly impact the quantum of income taxes that are ultimately payable by a Canadian.

Taxation of Gifts and Bequests

Gifts and testamentary gifts typically are not ordinarily subject to taxation in Canada, although if either type of gift increases in value or earns income, the increase in value or income earned may, in some circumstances, be taxable.

Taxation of Estates

While there is no Canadian estate or inheritance tax, assets that are distributed in accordance with a Canadian will or codicil that is admitted to probate may be subject to estate administration taxes (also known as “probate fees”). The applicable probate fees vary depending on the province. Manitoba and Quebec do not require payment of probate fees, and since 2020, small estates valued at less than CAD50,000 are exempt from probate fees in Ontario. In other provinces (including Nova Scotia, Prince Edward Island and Saskatchewan), probate fees are applied whenever a will is admitted to probate. Generally, the amount of probate fees payable increases with the total value of the assets distributed under the probated will. Some provinces (such as Alberta) also cap the probate fees after they reach a maximum amount, while in others, they can represent a notable estate expense. For example, in Ontario, probate fees are calculated at a rate of CAD15 per CAD1,000 for the value of the assets exceeding CAD50,000.

Taxes must also normally be paid on the income earned by the deceased up to the date of death unless an exemption applies. On the date of death, assets will generally be deemed to have been disposed of by the testator at fair market value. The deemed disposition of certain assets may trigger a capital gains tax. Taxes are calculated on 50% or 100% of the value of a capital gain, depending on whether or not the affected asset is in a registered account and may vary or be deferred depending on to whom the asset is bequeathed.

Certain exemptions apply to estate assets. For example, the sale or transfer of real property typically results in a significant capital gain; however, a principal residence exemption allows the transfer or sale of a property where an individual ordinarily resides without triggering a taxable capital gain. A capital gain tax will typically apply, however, to any additional residences owned by the deceased.

A cumulative lifetime capital gains exemption also applies to the disposition of qualified property, such as small business corporation shares. Only half of the capital gain resulting from the disposition of qualified property must be included in the deceased’s taxable income.

Estates are also exempt from paying capital gains taxes on property transferred to the deceased’s spouse or common-law partner (or a trust established for their benefit) that would otherwise arise if the fair market value of the property is greater than its adjusted cost base. The taxes will be deferred until the sale of the asset or the death of the second spouse.

A similar exemption applies to registered investments, including Registered Retirement Savings Plans (RRSPs) and Registered Retirement Income Funds (RRIFs), that are transferred to an eligible person, such as:

• the deceased’s spouse or common-law partner;
• a financially dependent under-age child or grandchild; or
• a financially dependent child or grandchild who is also mentally or physically infirm.

The CRA distinguishes between tax planning, tax avoidance, and tax evasion. Tools that can be used to minimise the tax burden of an individual or an estate in a way that is consistent with the Income Tax Act include:

• Registered Education Savings Plans (RESPs) – taxes are deferred on income set aside in RESPs for post-secondary education-related costs;
• Tax-Free Saving Accounts (TFSAs) – funds put in TFSAs are not taxed, and any income or capital gains earned from an investment in a TFSA are not taxed when the funds are withdrawn;
• spousal RRSPs – one spouse may contribute to the other spouse’s RRSP account, thereby income splitting (this is a particularly useful strategy if one spouse is in a higher tax bracket than the other); and
• income splitting pension income between spouses – the spouse who earns more income may share up to 50% of their pension income with the other spouse, with the exception of the Canada Pension Plan (CPP) and Old Age Security (OAS).

Tax avoidance is considered to be tax planning that is inconsistent with the spirit of the law, typically in contravention of the Income Tax Act and, specifically, the general anti-avoidance provision located therein. Tax evasion goes a step further in the disregard of the requirements of the Income Tax Act, and may include under-reporting income or falsely reporting tax credits or deductions. Tax evasion is criminally punishable in Canada.

The CRA conducts audits with respect to tax filings by Canadian taxpayers to identify potential issues of tax avoidance and/or evasion, monitors trends in tax avoidance, and consults the Canadian Department of Finance to enhance the efficacy of new prohibitions against tax avoidance strategies.

Non-citizens and non-residents who purchase real property in Ontario must currently pay a 25% non-resident speculation tax (NRST). Agreements for the purchase of real property entered into before 25 October 2022 are instead subject to a 20% NSRT, and the NSRT is 15% for agreements entered into prior to 30 March 2022 in certain regions. Agricultural land and commercial property are exempt, as are the transfer of property to foreign spouses of Canadian citizens, and certain foreign nationals. A rebate of the NRST may be available if the purchaser becomes a permanent resident within four years, or is a foreign national working in Ontario.

In specific regions of British Columbia, including Vancouver, an NRST of 20% is payable.

There is also a 5% non-resident deed transfer tax in Nova Scotia that applies to residential properties if the purchaser does not move to the province within six months.

As of 1 January 2023, non-citizens and non-residents may not purchase residential property within Canadian metropolitan areas for two years, although there are exceptions, including temporary residents, work permit holders, refugees, and non-Canadian spouses and common-law partners. The prohibition also does not apply to vacant land.

The federal government also enacted a 1% nationwide tax on vacant property owned by non-resident non-Canadians that came into effect in June 2022. British Columbia also requires non-residents to pay a similar vacant home tax of 2%.

Common Practices to Limit Tax Payable on Death

Practices to limit or altogether avoid triggering the payment of estate administration taxes are a common feature of estate planning in Canada.

Multiple wills

In order to avoid the payment of probate fees on all assets being distributed in accordance with one’s estate plan, many clients will use multiple wills, often including a primary last will, which addresses the distribution of real property and/or other assets for which a grant of probate will be required, and a secondary last will, which addresses the distribution of all other assets of a person’s estate. A tertiary last will may be used to deal with a person’s corporate interests.

The authority of an estate trustee named in multiple wills to distribute assets in accordance with a will not admitted to probate will typically be recognised if they have been issued a grant of probate in respect of one of the other wills.

Joint ownership

Another common mechanism for transferring assets without the need to expose an estate to probate fees is the use of joint ownership. Assets that are owned jointly will pass by right of survivorship to a surviving joint owner.

When using joint ownership as part of an estate plan, it is important that any intention by the testator to provide beneficial ownership to the joint holder of the property is clearly expressed. In the case of assets passing to an adult child by right of survivorship, the common law establishes that the joint assets are impressed with a resulting trust in favour of the estate, unless there is evidence of an intention for the survivor to retain the beneficial interest in the property.

Beneficiary designations

Beneficiary designations allow certain types of assets to “pass outside” of an estate to the intended beneficiary, without being distributed in accordance with a testamentary document that is admitted to probate and triggering estate administration tax. Life insurance policies, tax-free savings accounts, and RRSPs are some of the assets for which beneficiary designations are typically made. Tax benefits may be related to naming a married or common law spouse as the designated beneficiary for a registered savings plan.

Canada is part of the growing list of countries that have entered into the Foreign Account Tax Compliance Act Intergovernmental Agreement (FATCA IGA), which is designed to increase disclosure by other government revenue services to the US Internal Revenue Service (IRS). Currently, the FATCA IGA relieves the CRA from direct compliance with FATCA and instead requires domestic banks to report accounts with US indicia (such as American-born account holders or US dollar bank accounts) to the CRA, which thereafter forwards relevant information to the IRS.

Canada has also adopted the OECD’s Common Reporting Standard (CRS) to combat cross-border tax evasion as Part XIX of the Income Tax Act, RSC 1985, c 1. Holders of accounts with Canadian financial institutions (including corporations) can be required to certify or clarify their residence status for tax purposes and/or produce related documents. Combined with the Multilateral Competent Authority Agreement on Automatic Exchange of Financial Account Information (signed in 2015), the CRS facilitates the exchange of account information with other tax jurisdictions.

In March 2023, legislation was proposed to create a federal beneficial ownership registry in Canada, requiring federal corporations to make details regarding their beneficial ownership public. The intent of the registry is to increase transparency and deter financial crimes. Most provinces already have their own beneficial ownership transparency regimes in place, with the exception of Alberta and the three Territories.

Canada has a range of family structures, including common-law relationships, marriages involving second spouses (due to either death or divorce), and lone-parent families.

Canada’s population is also aging. As baby boomers die, the largest transition of wealth from one generation to the next is anticipated. However, since Canadians are also living longer, additional funding for personal care may be needed, resulting in less disposable income being available to gift to loved ones.

Technology is prominent in Canada. Individuals of all ages are accumulating digital assets, which should not be neglected when creating or amending estate plans (see 2.7 Transfer of Assets: Digital Assets).

Estate planning should include consideration of where beneficiaries are located and whether benefiting foreign beneficiaries with interests in a Canadian estate will expose them, or the estate itself, to taxation or other liabilities that are not relevant in respect of bequests to residents of Canada.

Each jurisdiction has its own rules relating to estates and the treatment of testamentary and inter vivos gifts, and just because a transaction or corporate interest does not trigger taxation in Canada does not mean that it will be exempt from taxation in another jurisdiction. For example, if a testamentary gift is made to an individual living in a region where inheritance tax is payable, it may be subject to inheritance tax there.

Various Canadian jurisdictions recognise testamentary freedom. The most notable restraints that may be imposed upon the right to benefit whomever one chooses after death are the testator’s legal and moral obligations. Moral obligations typically take a backseat to legal obligations.

An example of a legal obligation that may restrict testamentary freedom is the requirement that Canadians provide for their surviving married spouse upon death. Provincial legislation operates to provide a surviving spouse with the opportunity to claim their share of their combined family property, even if there is a will purporting to do otherwise.

Legislation in British Columbia also recognises the rights of adult children to inherit the assets of their parents’ estates, absent a valid and rational reason not to do so, requiring the courts to consider evidence regarding the reasons for not benefitting family members. Courts are also authorised to make an order varying the distribution of an estate on this basis.

In Ontario and other eastern provinces, adult children have no right to benefit from their parents’ estates, although children who are disinherited may be able to seek relief from an estate if they qualify as a dependant of the deceased. An adult child may also inherit the parent’s estate by successfully challenging the parent’s will.

Prenuptial and Postnuptial Agreements

Marriage contracts can be used in Canada to manage spousal disputes that may arise in the future. However, such contracts may not prevent claims being brought against the estate of a surviving spouse.

If both parties to a marriage contract do not obtain independent legal advice when the agreement is executed, it may not be enforceable.

Marital Property

In all Canadian jurisdictions, married spouses have enforceable rights in respect of family property, including assets that are accumulated during the spousal relationship, subject to certain exemptions.

On separation, married spouses have the right to an equalisation of net family properties, being the equivalent of one half of the marital property. The matrimonial home typically constitutes an asset of the marriage, even if it was owned by one spouse alone prior to marriage.

In most provinces, surviving spouses have the option of inheriting under the deceased’s last will, or electing to receive an equalisation payment. An equalisation payment will be particularly helpful if the deceased left the spouse inadequate financial support.

In several jurisdictions (Ontario, British Columbia and the Yukon), bequests left to the deceased’s spouse may be void if the parties were separated at the time of death. A bequest will also be revoked in Ontario, British Columbia, Alberta, Saskatchewan, Manitoba and the Yukon, if the deceased and their spouse were divorced.

As previously noted, the transfer of capital property from the deceased to a married spouse will not trigger capital gains tax (see 1.2 Exemptions).

Property may be transferred outright to an individual or a trust, or by adding another person as a joint tenant or tenant in common.

Joint ownership is a common mechanism for transferring property to the next generation on a tax-deferred basis. Unless the beneficiary of the property by right of survivorship makes the joint property their primary residence, the capital gain on the property will eventually be taxable at the time of its sale or deemed disposition at fair market value, which may occur at the time of death of the other joint tenant.

Depending on the Canadian jurisdiction in which the property is located, land transfer taxes may also apply upon a transfer of title.

In addition to gifts, assets may be transferred through joint tenancy and testamentary documents, trusts and corporations.

Since trusts offer a number of advantages when estate planning, from deferring taxes to sheltering assets from creditors, trusts are being used with increasing frequency throughout Canada. However, when trusts are utilised in estate planning, it is important to remember that, if not properly constituted, the trust may be deemed void, and the intended advantages of the trust may be lost.

For the purposes of succession, digital assets are treated as personal property throughout Canada. Digital assets may be comprised of records that are created, transmitted or stored in digital or other intangible forms by electronic means, such as emails, contact information and written documents. Certain digital assets also carry significant monetary value, such as cryptocurrencies.

The applicable property laws vary by province. In Ontario and British Columbia, estate trustees are authorised to administer and distribute estate assets, including personal property, but the legislation does not refer to digital assets specifically, making it unclear whether an estate trustee has authority to access and/or administer digital assets without a court order.

The legislation in some other provinces directly addresses access to and the administration of digital assets. For example, legislation in Alberta specifically references “online accounts”, indicating that that an estate trustee is authorised to administer digital assets. In Saskatchewan, New Brunswick, and Prince Edward Island, legislation has also been enacted which expressly gives fiduciaries the right to access and administer digital assets.

Digital Estate Planning

Where provincial legislation fails to provide clear authority for estate trustees to administer digital assets, the estate trustee may nevertheless have authority to manage digital assets if this power is included in the deceased’s will or codicil.

Some digital service providers also permit limited digital estate planning. For example, Apple now permits iPhone users to designate “Legacy Contacts” who receive access to the user’s Apple account, including all of the user’s data, after the user dies. Facebook users and Google users may also designate legacy contacts.

Various types of trusts are employed in Canada as parts of an estate and/or tax plan. The types of trusts that appear most frequently, both during the settlor’s lifetime and in the form of testamentary trusts, include:

• family trusts, for which one or multiple beneficiaries are family members of the settlor who are entitled to distributions of capital and/or income;
• Henson Trusts, which are described in further detail in 8.1 Special Planning Mechanisms;
• insurance trusts, which are most commonly testamentary trusts used to assist in succession and to limit income tax and probate fees payable on death; and
• spousal trusts, which benefit married or common law spouses and can be used to protect the interests of surviving spouses.

Foundations are more common within civil law jurisdictions in promoting philanthropic goals. In Quebec, a foundation can exist as a trust or as a legal person, and its use must be related to a cause that is beneficial to society.

To establish a valid trust in Canada, “three certainties” must be present: the certainty of intention, the certainty of subject matter, and the certainty of objects. The settlor must have the intention of divesting themselves of the trust property, and must also intend it to be held in trust for the beneficiaries identified in the trust document.

Trust arrangements whereby the settlor is the sole trustee, retains significant discretion with respect to the management of the trust property, and/or appoints a trustee who will be compliant in following the settlor’s instructions should be treated with caution so as not to give rise to a “sham trust”.

The Income Tax Act specifically speaks to the inability of a taxpayer to avoid income tax consequences through the use of trusts in situations where the settlor retains a right of reversion in respect of the trust property and/or the right to direct the distribution of the trust property.

Trusts are deemed to be individuals under Canadian tax legislation. Accordingly, if a trust is resident in Canada, or deemed to be resident in Canada, it is required to pay tax on its worldwide income. An otherwise non-resident trust will be deemed resident in Canada if there is a “resident contributor” to the trust or a “resident beneficiary” under the trust. The involvement of a Canadian as a beneficiary or trustee of a trust resident outside of the country can expose that trust, and its income beneficiaries, to significant tax liabilities.

Normally, irrevocable trusts are irrevocable, meaning the trust property is incapable of reverting to the settlor’s possession. An irrevocable trust cannot, typically, be amended or revoked after it is settled. The trust document may, however, permit the modification of the trust by the trustee and beneficiaries under certain terms, including the termination of the trust.

Changes to the market or other factors may render the continued administration of an irrevocable trust in accordance with the terms of the trust instrument irrational. In some circumstances, it will be possible to vary the terms of an irrevocable trust, but the consent of all trustees and beneficiaries and/or a court order may be required.

To reduce the possibility of family conflict related to family business succession planning, it is advisable to clearly communicate relevant intentions with respect to the family business to business partners and family members. Business owners may also wish to consider strategies to facilitate business succession and limit any disruption in the business that may result from their retirement, incapacity or death.

Insurance is the most common tool for asset protection planning in Canada. Life and/or disability insurance can be used to satisfy the liabilities (including tax liabilities) of a business in the event of the incapacity or death of a business owner, thereby facilitating the succession of a business.

Inattention to asset protection planning as part of the estate planning process may frustrate a succession plan. If the tax liabilities on the deemed disposition of the business interest exceed the liquid assets available to an estate, the succession of the business may not be possible, and its dissolution may be required.

A number of factors – such as whether there is an intention for the owner’s interest to be bought out in the event of their death, whether insurance is intended to benefit beneficiaries who are not receiving an interest in the business (and who may wish to otherwise challenge the gift of the company that has the effect of disinheriting them), and whether additional paid help will be required by the business following incapacity or death – should be considered in determining the extent of insurance required.

A number of options exist with respect to the structure of a disability or life insurance policy intended to protect the assets of a business. Any of the surviving family members, the deceased’s estate, the company itself, or a surviving shareholder can be the beneficiaries of such a policy. The insurance policy can be owned by the business owner or by the corporation itself.

The individual managing a business should create an alternative signing authority on business accounts to prevent barriers restricting the activities of the business in case of emergency. Using the example of a law firm, the managing partner should provide a licensed lawyer or paralegal signing authority for the firm’s bank accounts, including its trust account, in order to ensure that client and firm resources are not rendered inaccessible by the unexpected absence of the partner. It is important to keep clear records and files in order to make the transition easier in the case of emergency or planned succession.

With smaller businesses, one of the easiest ways to pass the business on is by orchestrating a buy-out between the incoming owner and the original owner. A buy-out that is planned over an extended period of time may have fewer tax consequences than an immediate buy-out. The use of a promissory note payable over a number of years may also assist in limiting the taxable capital gain resulting from the sale of a business in a given year.

If the family business is a partnership, the most common mechanism for succession is a partnership agreement which specifies how the business will be divided upon the dissolution of the partnership or the retirement, incapacity or death of one partner. If the business is operated through a corporation, a shareholders’ agreement may accomplish the same objectives. Where no such agreement exists, the terms of the Canada Business Corporations Act, RSC 1985, c C-44 (or provincial equivalents) and provincial partnership legislation may apply instead.

An “estate freeze” is another option with respect to the transfer of corporate business interests to family members or the future sale of a business. Estate freezes can assist in transferring future increases in value of a business to family members, who will receive the business interest. While estate freezes can be complex and expensive, they can be utilised to facilitate business succession and avoid the issue of insufficient funds for the next generation to purchase the interest, while spreading tax liability on the disposition of the business over several years.

Inattention to one’s business succession plan may result in unintended consequences, such as the failure of the business during a time in which no one is authorised to effectively manage it, or the sale of the family business if liquid assets are required.

When valuing interests in companies, if the rights associated with different classes of shares and different proportions of shares differ, the value of any given share in a company may not be the same as others in respect of how much control the shareholder can exert. The fair market value of a minority interest in a corporation in Canada, even when considered on a pro-rata basis, is worth less than the same number of shares that are part of a majority interest.

The term “minority discount” is used to refer to the difference between the fair market value of shares and their pro-rata value. The reduced market value results from the inability of a minority shareholder to unilaterally elect the majority of directors, to direct the payment of dividends, and to make most major decisions affecting the corporation.

Several demographic trends have resulted in increasing incidences of wealth disputes in Canada in recent years.

One such trend is the increasing frequency of second marriages and common-law relationships. Disputes may arise between a surviving spouse and adult children from an earlier relationship or between a surviving partner and a spouse from whom the deceased was separated but not legally divorced.

With the value of the average Canadian home continuing to rise, a house, condominium, or interest in other real property will often be the primary asset of the average Canadian estate, with the average price of a detached home in metropolitan areas such as Toronto exceeding CAD1 million. In light of increasing property values, even Canadians who appear to be of limited means may leave an estate of sufficient value to justify estate litigation.

Today, more Canadians are also living longer lives, during which they may require assistance from family members or professional caregivers. Parents may wish to provide a greater benefit to a relative who provided assistance on a regular basis, over others whose involvement has been limited. Disgruntled beneficiaries who would otherwise have received a greater share of the estate may commence legal proceedings:

• to challenge the validity of the deceased’s will or the validity of inter vivos gifts; or
• to require the family member who assisted the deceased to account for transactions attended to on the deceased’s behalf.

Various remedies may become available to the parties involved in wealth disputes, depending on the nature of the dispute and the assets available to fund the compensation or damages ultimately payable to the successful party.

Parties who are successful in asserting unjust enrichment, quantum meruit, and/or joint family venture claims can become entitled to a constructive trust in respect of certain estate assets.

In situations of joint assets that pass by right of survivorship to a surviving joint tenant, a beneficiary of the estate may assert that the presumption of resulting trust applies and that joint assets are held in trust for the estate by the survivor.

On hearing applications for dependant’s relief, Canadian courts can make a variety of orders, including awarding an interest in assets that would otherwise pass outside of an estate, such as the proceeds of a life insurance policy or other assets subject to a beneficiary designation.

In passings of accounts, courts may make a number of orders against the fiduciary if they have failed to exercise their duties diligently and in good faith.

Canadian trust companies are authorised to, and do, act as estate trustees, estate trustees during litigation, and attorneys for or guardians of property in Canada. The rate at which trust companies are compensated may differ from the rate that fiduciaries are typically able to claim on a passing of accounts, and is often set out in the fee schedule, which normally appears as a schedule to the testamentary document or order appointing the trust company.

Trustees may be personally liable for any loss to the trust property resulting from a breach of fiduciary duty.

Trustees acting in good faith may also be held liable for acting honestly upon mistaken facts or misunderstanding, but the extent of the personal liability is typically limited to the value of the trust property.

Piercing the Corporate Veil

In some situations, it may become unreasonable to limit liability for the operations of a corporation to the corporation itself. Canadian courts may “pierce the corporate veil” to hold shareholders and/or directors of a corporation liable for the consequences of the actions of that corporation. Courts may be more likely to hold the directing mind(s) behind the corporation accountable in situations where fraud, breach of trust, and/or an intentional tort has/have been committed by the corporation’s principals, or where the corporation is deliberately undercapitalised relative to the legitimate damages sought against it.

Mechanisms to Protect Fiduciaries from Liability

Errors and omissions insurance may be available to trustees, including estate trustees. Such insurance policies typically cover trustees for the costs of defence and indemnity for damages awarded against them, personally, that arise out of errors and omissions committed during the administration of the trust.

Exculpatory and indemnity clauses purport to protect fiduciaries from personal liability relating to loss resulting from their administration of a trust or estate. They frequently appear in trust documents and refer to the protection of trustees from liability for the exercise of their authority in good faith.

Canadian courts have considered the validity of exculpatory clauses on numerous occasions. Almost without exception, clauses that protect trustees from liability are valid, but are not interpreted to protect fiduciaries from fraud and/or dishonesty.

Canadian fiduciaries are bound by the prudent investor rule and the best interests standard, meaning that they must invest and administer trust assets in the best interests of the beneficiaries.

Standards are imposed by industry-regulating bodies and provincial legislation, without any federal law that specifically regulates a fiduciary’s investment of assets. In Ontario, for example, a trustee is provided with guidance under the Trustee Act and the common law.

Financial advisers in Canada may or may not be held to a fiduciary standard, with different standards of care imposed depending on the type of assistance provided to clients.

Trustees have an obligation to take care and act reasonably and prudently when investing trust property. However, they can also be held liable for failing to invest trust property when it would have been reasonable to do so, and if the trust assets have not been maximised for the benefit of the beneficiaries.

Legislation provides mechanisms whereby parties with a financial interest can require fiduciaries to apply to pass accounts (essentially a court audit of their administration of the trust). On a passing of accounts, a beneficiary who is displeased with the administration may seek damages against the fiduciary.

As trustees in Canada are guided by the “prudent investor” rule, trust property should not be exposed to unnecessary risk. Investments should involve low risk with steady returns, and allow the trust to be administered in accordance with the trust document (for example, the investments should not limit the liquidity of the trust during times at which distributions ought to be made). The investment of trust property should be diverse, and should consider the requirements imposed by the trust document and the nature of the trust property, as well as the current market conditions. The risk of an investment portfolio is considered in its entirety, rather than individual aspects. Diverse portfolios are typically associated with lower risk levels.

Other Applicable Investment Standards

Modern portfolio theory is a standard of risk-averse investment and uses balanced portfolios to optimise expected return based on a given level of market risk, emphasising that risk is an inherent component of a potential increase in rate of return.

The fiduciary standard may attach to any investment professional who is required to act in their client’s best interests, such as brokers and insurance agents. A suitability standard, however, applies when financial professionals act in a sales capacity, and requires one to act in service of a client’s stated needs and objectives.

Domicile in Canada

For an individual to be domiciled in Canada, the common law requires that they either (i) were born with parents domiciled in Canada (in which case their domicile of origin will be Canada) and failed to acquire a domicile of choice not subsequently abandoned; or (ii) acquired a province as a domicile of choice by unequivocally intending to reside there permanently, without a specific and/or temporary reason for doing so.

Courts may consider a variety of factors in determining where one is domiciled, including where family is located and where real property is owned or rented.

If an individual is domiciled in Canada at the time of death, their estate will be administered in accordance with the law of the province in which they were domiciled. The province would also be the appropriate place to apply for probate of that person’s estate, unless the deceased held real property in another jurisdiction.

Residency in Canada

Permanent residency is granted on the basis of a points system, which takes into account the education, age, language skills, and work experience of the applicant. Different programmes may be available to different categories of applicants who are interested in becoming permanent residents of Canada.

Canadian Citizenship

Canadian citizenship is required in order to obtain high-level security-clearance jobs or to vote or run for political office in Canada.

There are several requirements that must typically be met in order for a citizenship application to be successful, including attaining permanent resident status, demonstrating a settled intention to reside in Canada, and successful completion of the Canadian citizenship test.

To qualify for citizenship status, an individual must normally have been physically present in Canada for at least 1,095 days during the five years immediately prior to the date of application.

If an individual satisfies the other citizenship requirements referred to in 7.1 Requirements for Domicile, Residency and Citizenship, the following mechanisms may be available to assist individuals in expediting the citizenship process:

• express entry (which consists of the Canada Experience Class Program, the Federal Skilled Workers Program and the Federal Skilled Trades Program, which all assist in obtaining permanent resident status more quickly);
• urgent processing (a shortening of the processing time in circumstances where citizenship may be required to apply for/retain employment or attend school in Canada); and
• ministerial discretion under Subsection 5(4) of the Citizenship Act, RSC 1985, c C-29.

Minors

A variety of tax credits and other government benefits may be available to supplement the cost of caring for minor children in Canada. One such benefit is the ability to seek Canada Pension Plan (CPP) benefits with respect to the time during which a parent has not contributed to the CPP while raising a child below the age of seven. The Child Rearing Dropout Provision provides that the Canadian government will contribute to the CPP during an absence from the workforce while raising a minor child on one’s behalf.

Registered Education Savings Plans

It is common for Canadians to pursue post-secondary education. As a result, planning to fund tuition and living costs for one’s children while they attend university, college, or other training from early on in the child’s life is popular, and brings with it certain tax benefits.

An RESP is a popular and tax-effective tool to save for a child’s future. Contributions to an RESP are held in trust for the child. The federal government will match 20% of contributions (to a maximum of CAD500 on an annual basis or CAD7,200 during the child’s lifetime) as part of a programme known as the Canada Education Savings Grant. Contributions to an RESP may also be made by the Canada Learning Bond. RESP contributions are not tax deductible. Tax on income generated by the plan is deferred until the withdrawal of the funds, typically in the hands of the child, who is often in a lower tax bracket than parents or other contributors.

Trusts benefiting minors

Some high-earning parents may wish to consider establishing trusts for the benefit of their children while they are minors. Inter vivos trusts are used far less frequently than testamentary trusts benefitting children. Family trusts may be especially useful for high-income families to defer taxation and to benefit from having income taxed in the hands of family member beneficiaries who are in lower income tax brackets.

Planning for Adults with Disabilities

Government benefits are typically available to adults with disabilities who are unable to work. For example, Canadians with “severe and prolonged” disabilities may qualify for disability benefits through the CPP. In addition to benefits through the CPP, social assistance may be available for adults with disabilities who are unable to work and have limited assets. Disability benefits received through the government are typically considered to represent taxable income.

In addition to benefits and grants available to adults living with disabilities, Canadians may be eligible for a variety of tax credits and deductions related to disability.

Registered Disability Savings Plans

Registered Disability Savings Plans (RDSPs) operate similarly to RRSPs and RESPs. Contributions to an RDSP are not tax deductible, and funds held within the plan increase on a tax-deferred basis. RDSPs are also associated with the receipt of government grants and bonds to which adults with disabilities may be entitled, which can assist in maximising the funds available to adults with disabilities.

Prospective legislative update

The federal government has also introduced new legislation which, if enacted, will provide a guaranteed, tax-free income supplement to working-age Canadians who are living with disabilities.

Henson Trusts

When providing a bequest to an adult beneficiary in a will, the testator may wish to consider how best to structure the gift to avoid negatively affecting the beneficiary’s eligibility for any benefits to which they may otherwise be entitled.

Henson Trusts allow the settlor or testator to provide a benefit to a beneficiary with a disability without negatively affecting their eligibility for government benefits and subsidies. The use of Henson Trusts to preserve disability-related benefits was endorsed by the Supreme Court of Canada in S.A. v Metro Vancouver Housing Corp., 2019 SCC 4.

If a person possesses mental capacity to appoint a power of attorney for property and/or personal care, the appointment will have a legal effect similar to appointing a guardian, without the related cost and time associated with a court application seeking such an appointment.

Guardians appointed by court order are supervised by the courts, and may be required to bring an application to pass their accounts in respect of the management of the incapable’s property on a periodic basis. As fiduciaries, guardians are accountable for all transactions attended to on behalf of the incapable person, and may be personally liable for any breach of their duty to the incapable.

In December 2022, New Brunswick became the first province in Canada to enact legislation that permits individuals to appoint different levels of decision-making support.

Government Assistance in Respect of Financial Planning for Longer Lives

Canada Pension Plan

During working years, contributions to the CPP are deducted from employment income payable to Canadians. These benefits are normally received from the age of 65 onwards. Individuals who have worked in Canada can elect to begin receiving CPP payments (of a reduced amount) as early as the age of 60, or can defer receipt of benefits through the CPP beyond the age of 65 and receive higher payments.

Spouses can choose to split CPP benefits, so that lower income is allocated to each spouse in situations where one spouse receives considerably greater CPP payments than the other.

The government is also doing more to protect employees’ pension contributions. In April 2023, the Pension Protection Act was enacted to ensure that if an employer goes bankrupt, pension plan deficits will be paid in priority to most other creditors.

Old Age Security

Two other income sources may be available to seniors through the federal government, depending on their level of income. Old Age Security (OAS) is available to Canadians who reside in Canada and are aged 65 and above. The amount of the OAS benefit received will reduce with higher levels of net income.

Guaranteed Income Supplement

The Guaranteed Income Supplement (GIS) may be available to supplement OAS payments for low-income seniors. The income of the applicant and their spouse will be considered in determining eligibility for GIS.

For Canadians without a private pension or assets generating investment income, CPP, OAS and GIS payments may represent the bulk of annual post-retirement income.

Recent and Proposed Changes to Assist Older Canadians

CPP expansion

When the CPP was first established, a higher percentage of Canadians had defined-benefit pension plans, upon which they could rely for a regular, monthly cheque following retirement. Since many Canadians no longer have defined-benefit plans, the CPP is being enhanced to increase the annual pay-out to 33% of pre-retirement income. The portion of income covered by CPP is also increasing, which will allow Canadians with higher income levels to earn greater CPP benefits. To fund the CPP expansion, contributions from employers and taxpayers are being increased gradually between 2019 and 2025. The Quebec Pension Plan, available to Canadians who only work in Quebec, is being enhanced in a similar manner.

Continued income splitting for seniors

Notwithstanding the elimination of most forms of income splitting, post-retirement income splitting remains an option for Canadian families who wish to limit the rate at which their income is taxed. Seniors remain capable of splitting eligible pension income with a spouse. After the age of 65, withdrawals from registered retirement income funds and life income funds represent eligible income for splitting.

While adoption is a matter of provincial jurisdiction, Canadian law recognises adopted children as having the same rights as biological children, who do not have any priority over adopted siblings in respect of child support and/or entitlement to a share in a deceased parent’s estate on intestacy.

When a child is adopted, their ties with the biological family are severed and they wholly become a member of the adoptive family. Adopted children have no rights with respect to the estates of biological parents, although biological parents may leave testamentary bequests to their adopted children.

Similarly, children born outside of marriage do not have fewer rights relative to those who are born to married parents. The law, including the federal Child Support Guidelines, does not meaningfully distinguish between children who are natural, adopted, or born inside/outside of marriage.

Same-sex marriage has been recognised in Canada since July 2005, when the Civil Marriage Act, SC 2005, c 33, was introduced. Same-sex married spouses are afforded all of the same rights as heterosexual married spouses in respect of family and estate law.

The rights of common law spouses vary significantly by province. While British Columbia, Alberta, Saskatchewan and Manitoba permit common-law partners to assert rights in respect of family property, other provinces do not. As such, it may be advisable for common-law couples to enter cohabitation agreements to protect their interests in assets accumulated during the relationship, and to ensure that comprehensive estate plans are in place to benefit a surviving spouse after death.

Making charitable donations can provide both the charitable cause and the taxpayer with considerable benefits. The recipient of the donation must be a registered charity in order to receive the desired tax savings.

Federal tax credits of 15% are received for the first CAD200 of a donation, and 29% is typically received for the value of the donation above CAD200. If an individual earns taxable income in excess of CAD200,000, a 33% tax credit may apply in respect of the amount of the donation over CAD200 and up to the extent of the donor’s taxable income exceeding CAD200,000. For these reasons, it may be more advantageous to carry forward donations to receive higher tax credits on the funds above the initial CAD200, particularly if the donor’s taxable income is greater than CAD200,000.

Gifting Capital Property

Donations to charities need not necessarily consist only of cash. Capital property is another class of asset that many charities will accept, and which may be associated with further tax advantages than gifts of funds.

When gifting capital property that has increased in value since its acquisition, the taxpayer can receive a tax credit for the full market value of the property without having to pay tax on the related capital gain. For example, if stocks or mutual funds are donated to a registered charity, no tax is payable on the increase in value.

Gifts Pursuant to a Last Will and Testament

Naming a charity as a residuary beneficiary of an estate may complicate its administration. In Ontario, for example, legal proceedings involving a registered charity may necessitate the involvement of the Office of the Public Guardian and Trustee (PGT). The PGT, or the charity itself, may require the estate trustee to apply to pass their accounts with respect to the administration of the estate, and has the right to raise objections regarding how estate assets were managed. The beneficiary of a specific bequest or general legacy typically has no such right, and it may be an easier way to provide a designated benefit to a charitable cause and attract the related tax benefits.

Life Insurance

Several options exist for naming a charity as the beneficiary of a life insurance policy, the simplest being to name the charity as the beneficiary of the life insurance policy. The result will be a significant pay-out. Depending on how the policy is structured, it can be used to provide the individual and/or their estate with significant tax savings.  Naming a charity as the beneficiary may be suitable if it is anticipated that income tax payable on the terminal tax return will be significant. The proceeds of the life insurance also will not be subjected to income or estate administration taxes.

Another option is to name the charity as the irrevocable beneficiary of the insurance policy. In such cases, the taxpayer may receive tax credits for the premiums paid into the policy. However, while the charity will ultimately receive the policy proceeds, the taxpayer’s estate will not receive the benefit from the donation for the amount of the proceeds in addition to the premium contributions.