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 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 available to limit the taxes payable by a family. However, 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 1985, c 1 (5th Supp). 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.

Exemptions may apply to prevent trusts from being taxed at the highest graduated tax rate, including:

• 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 that 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, which 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 subject to taxation in Canada. However, 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

Even though 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 or territory. Manitoba, Quebec and the Yukon do not require payment of probate fees – although it may be necessary to pay a filing fee to obtain probate. Since 2020, small estates valued at less than CAD50,000 are exempt from probate fees in Ontario. In other provinces and territories, probate fees must be paid 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. By way of example, in Ontario, probate fees are calculated at a rate of CAD15 per CAD1,000 for the value of the assets exceeding CAD50,000. In Alberta, the Northwest Territories and Nunavut, probate fees are capped for estates valued at CAD250,000 or more, however.

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. Previously, taxes were calculated on 50% or 100% of the value of a capital gain – depending on whether or not the affected asset was in a registered account – and could vary or be deferred depending on to whom the asset is bequeathed. Starting from June 2024, the capital gains inclusion rate increased to 66.7% for capital gains of CAD250,000 or more for individuals, and on all capital gains for corporations and most types of trusts.

Certain exemptions apply to estate assets. By way of example, the sale or transfer of real property typically results in a significant capital gain, but 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. Historically, only half of the capital gain resulting from the disposition of qualified property had to be included in the deceased’s taxable income; however, as of June 2024, 66.7% of capital gains of CAD250,000 or more must be included in the deceased’s taxable income. There will be some relief for entrepreneurs starting in 2025, though, as the sale of qualifying small business shares worth up to CAD2 million may qualify for a new tax incentive that is specific to entrepreneurs and only taxes 33.3% of capital gains.

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 underage 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 inconsistent with the spirit of the law and typically in contravention of the Income Tax Act and the general anti-avoidance provision located therein. Tax evasion goes further in disregarding 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 has the power to audit tax filings by Canadian taxpayers. It also monitors trends in tax avoidance and consults the Canadian Department of Finance in order to enhance the efficacy of new prohibitions against tax avoidance strategies.

Non-citizens and non-residents who purchase real property in Ontario must pay a 25% non-resident speculation tax (NRST). Agreements for the purchase of real property entered into before 25 October 2022 were subject to a 20% NSRT, and the NSRT was 15% for agreements entered into prior to 30 March 2022 in certain regions. Agricultural land and commercial property are exempt, as is the transfer of property to foreign spouses of Canadian citizens and to 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 for 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%.

Income Tax

The overarching tax legislation in Canada, the Income Tax Act, has been in force since 1 January 1949. While the Income Tax Act appears to be permanent, the way Canadians are taxed tends to change incrementally each year as a result of changes to the law implemented through the federal budget and other bills.

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 a primary last will addresses the distribution of real property and/or other assets for which a grant of probate is required, whereas a secondary last will addresses the distribution of all other assets of a person’s estate. A tertiary last will may also 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 exposing 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 an estate plan includes joint ownership, it is important that the testator’s intention to provide beneficial ownership to the joint holder of the property is clearly expressed. If assets pass to the testator’s adult child by right of survivorship, those assets will be impressed with a resulting trust in favour of the estate under the common law, unless there is evidence of an intention to gift the beneficial interest in the property to the survivor.

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 that may be distributed using beneficiary designations. 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. 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.

The OECD’s Crypto-Asset Reporting Framework is also being implemented in Canada in 2024. This requires crypto-asset service providers to provide mandatory annual reporting related to crypto-asset transactions and customers.

In November 2023, legislation was passed that requires the creation of a federal beneficial ownership registry in Canada, applicable to federal corporations. 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 (the Northwest Territories, the Yukon, and Nunavut).

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 ageing. As baby boomers die, the largest transition of wealth from one generation to the next is anticipated. However, given that 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 will not apply to bequests to Canadian residents. Each jurisdiction has its own rules relating to estates and the treatment of testamentary and inter vivos gifts; 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. By way of 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.

While most Canadian jurisdictions recognise testamentary freedom, testators’ legal and moral obligations may restrain their right to benefit whomever they choose after death. Moral obligations typically take a backseat to legal obligations.

An example of a legal obligation that may restrict testamentary freedom is the requirement for testators to provide for their surviving married spouses 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, in the absence a valid and rational reason not to do so, requiring the courts to consider evidence regarding the reasons for not benefiting 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

Contracts can be used by married spouses and common-law partners 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 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. Given that 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 comprise 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 (eg, cryptocurrencies).

The applicable property laws vary by province. In Ontario and British Columbia, executors are not expressly authorised to administer and distribute digital estate assets, making it unclear whether they have the authority to administer digital assets without a court order.

The legislation in some other provinces directly addresses access to and the administration of digital assets. In Saskatchewan, New Brunswick, Prince Edward Island and the Yukon, legislation has been enacted that expressly gives fiduciaries the right to access and administer digital assets. There is also legislation in Alberta that authorises executors to administer “online accounts”.

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. By way of 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 order to promote 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.

Trust arrangements where the settlor is the sole trustee, retains significant discretion with regard 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 does not permit taxpayers 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 the country can expose that trust, and its income beneficiaries, to significant tax liabilities.

Typically, when dealing with irrevocable trusts, the trust property is incapable of reverting to the settlor’s possession and the trust cannot be amended or revoked after it is settled. However, the trust document may 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 conflict related to family business succession planning, it is advisable to clearly communicate relevant intentions with regard to the business to business partners and family members. Business owners may also wish to consider business succession planning in order to limit disruptions to the business that may result from retirement, incapacity or death.

Insurance is the most common means of asset protection 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 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 should be considered in determining the extent of insurance required. Examples include:

• 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 the business will require additional paid help following incapacity or death.

A number of options exist with regard to disability or life insurance policies 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 ensure the business can continue to operate during emergencies. 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 – to ensure that client and firm resources are not inaccessible owing to the unexpected absence of the partner. It is also important to keep clear records and files to ease the transition in cases of emergency or planned succession.

For smaller businesses, a buy-out between an incoming owner and the original owner may be advisable. 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 limit the taxable capital gain resulting from the sale of a business in a given year. Starting in 2024, the tax consequences will be further reduced for genuine intergenerational business transfers that are either immediate (made within 36 months) or gradual (made over five to ten years).

If the family business is a partnership, a partnership agreement may specify 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 for transferring corporate business interests to family members or the future sale of a business. Estate freezes can be used to transfer future increases in value of a business to family members, who will subsequently receive the business interest. Although 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 if no one is authorised to 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.

It appears that several demographic trends are currently driving an increase in wealth disputes in Canada.

Second marriages and common-law relationships are one such demographic trend. Disputes can 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.

As the value of Canadian homes continues to rise owing to inflation, a house, condominium, or other interest in real property is often the primary asset of the average Canadian estate and may justify estate litigation, depending on the property’s value. In metropolitan areas such as Toronto, the average price of a detached home exceeds CAD1 million.

Today, more Canadians are also living longer lives and may require assistance from family members or professional caregivers. Parents may wish to provide a greater benefit to relatives who assist them on a regular basis and to give less to family 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 be 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 may be entitled to a constructive trust in respect of certain estate assets.

Where joint assets 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 an estate – for example, 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 the fiduciary has failed to exercise their duties diligently and in good faith.

Canadian trust companies may 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 be 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 from 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, and must invest and administer trust assets in the best interests of the beneficiaries.

Standards are imposed by industry-regulating bodies and provincial legislation. In Ontario, for example, a trustee is subject to the Trustee Act and the common law. A fiduciary’s investment of assets is not regulated by federal law.

Financial advisers in Canada may or may not be held to a fiduciary standard; different standards of care are 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. Accordingly, trustees may be held liable for failing to invest trust property when it would have been reasonable to do so, or if the trust assets have not been maximised for the benefit of the beneficiaries.

Legislation enables parties with a financial interest in trust property to compel 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. However, a suitability standard 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:

• were born to 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
• 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, using 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 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 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 (consisting of the Canada Experience Class programme, the Federal Skilled Workers programme and the Federal Skilled Trades programme, which all assist in obtaining permanent resident status more quickly);
• urgent processing (the processing time is shortened 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. By way of example, a parent who did not contribute to the Canada Pension Plan (CPP) while caring for a child under the age of seven may be entitled to CPP benefits. 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

For Canadians who pursue post-secondary education, there are certain tax benefits available to help fund tuition and living costs for students while they attend university, college, or other training.

A RESP is a popular and tax-effective tool to save for a child’s future. Contributions to a RESP are held in trust for the child and 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 a 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

High-income parents could establish trusts for the benefit of their children while they are minors; inter vivos trusts are used less frequently than testamentary trusts. Family trusts may be especially useful for high-income families by deferring taxation and 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. By way of example, Canadians with “severe and prolonged” disabilities may qualify for disability benefits through the CPP. In 2023, the federal government also passed legislation establishing a guaranteed, tax-free income supplement to working-age Canadians who are living with disabilities. Payment to eligible Canadians is expected to begin in July 2025.

Social assistance may also 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 a 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.

Henson Trusts

When providing a bequest to an adult beneficiary in a will, the testator may wish to structure the gift as a Henson Trust so as to avoid negatively affecting the beneficiary’s eligibility for government benefits. 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 SA v Metro Vancouver Housing Corp, 2019 SCC 4.

If a person possesses the 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. OAS is available to Canadians who reside in Canada and are aged 65 and over. 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. As many Canadians no longer have defined-benefit plans, the CPP is being enhanced to increase the annual payout to 33% of pre-retirement income. The portion of income covered by the 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 that adopted children have the same rights as biological children, and that biological children 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 regard 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 in excess of 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 exceeding 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 it may be associated with further tax advantages compared with 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. By way of 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 regard 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 payout. 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, even though 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.