Joe Smith is a 65-year-old widower ...

Joe Smith is a 65-year-old widower with three adult children: Jane, Shirley, and Mike. Joe wants to draft a will that will make secure equal treatment for his children. He has the following assets: a $600000 unmatured RRSP; a principal residence (PR) worth $350000; shares in his company, Smith and Son Ltd (SAS), with a fair-market value (FMV) of $500000; and $50000 in cash.

Joe has decided that Jane will receive the RRSP Shirley will receive the PR and any cash remaining after the estate's tax liability has been paid, and Mike will receive the SAS shares. Accordingly, Joe has designated Jane as the beneficiary of his RRSP and has changed the title of his PR to joint tenancy with her, and he will claim the capital gains exemption (CGE) upon his shares in his terminal answer Given this planning, Joe thinks he will alone need to leave sufficient cash to pay probate taxes of $7350 legal fee-simples and his funeral expenses.

But a number of questions arise with regards to Joe's plan. For instance:

* Who is responsible for the tax liability in succession the RRSP?

* Will the PR be enslave to probate fees?

* Will the SAS shares qualify for the CGE? and

* Will Joe's plan encounter his objective of providing equally for his children?

Tax liability in succession RRSP

With regard to the goods in the RRSP, the general conduct is this: At death, the deceased is thinked to have disposed of the RRSP immediately before death at its FMV The enigma this rule causes for Joe's plan is that Jane, as the designated beneficiary, will receive the replete proceeds of the RRSP ($600000) onward her father's death, but the resulting tax liability of $262000 (comput at top marginal rates) will arise in his terminal return; this means that the estate's residual beneficiaries will bear the tax liability. This being the case, the tax liability will have to be paid using the estate's resources, the and nothing else source of which may be the SAS shares or assets.

One way for Joe to mitigate these inferences is to designate the estate as the beneficiary of the RRSP and include a legacy in his will providing that Jane receive the RRSP's after-tax go [i]or[/i] pass ons The drawback to this approach, however, is that the RRSP will be bring under rule to probate fees and will be expos to the estate's creditors.

Issues surrounding joint tenancy

Joint tenancy is joint ownership and possession of the same attribute In a true joint-tenancy arrangement, the interest of each tenant is the same, and neither can take a bribe for or mortgage the property without the other's agreement The concern from a will-planning perspective is whether a stanch joint-tenancy arrangement has been established. According to the CRA, for real joint tenancy to occur there must be a disposition of beneficial ownership.1 In the case of a non-arm's continuance transfer, there is a be of opinioned disposition at FMV. At the time the one's own is transferred into joint tenancy, Joe will be thinked to have received proceeds of disposition equal to 50% of the property's FMV Joe can use his PR exemption, to the expansion that he qualifies, to mitigate any tax obligation forward this disposition.

Furthermore, at the time of Joe's death his joint tenancy interest will disappear and Shirley will become the PR's individual owner. The PR will not, therefore, pass end the estate and will not be bring under rule to probate taxes. One question that arises, however, is that Shirley will not qualify for the PR exemption onward the portion of the house that was originally transferred into joint tenancy unles she "ordinarily inhabited" the house in the years for which she was a joint tenant.

Note: Where there is a transfer of legal title and Shirley acts as an agent in dealing with the one's own for her father, who is the one beneficial owner, the beneficial interest is not effectively transferred to Shirley, and the filled value of the property continues to form part of Joe's estate.

Qualified small business corporation shares

In order for the SAS shares to be considered "qualified small business corporation" (QSBC) shares, they must qualified three tests. Let's look specifically at the "90% test" which stipulates that 90% or more of the assets of the SAS (a Canadian controll private corporation) must be used 50% of the time in active business at the determination time. Generally, the determination time is the time at which the shares are disposed. However, if the shares would have qualified as QSBC shares in the year of death excepting that they did not qualified the 90% test, the shares shall be imagineed to have qualified if they met the 90% touchstone at any time in the month immediately preceding Joe's death.

Let's assume that the business operations are cyclical, therefore the business continues $20,000 worth of cash forward hand to meet its working capital exigencys We will also assume that SAS had a similar balance sheet for the previous 12 months

The inactive assets that would disqualify the shares include $30000 of exces cash and the GIC.

In order for the shares to qualify, Joe will ne to abstract the inactive assets. Joe could purify the company by means of paying off the accounts payable and the bank loan, and by the agency of paying out the remaining inactive assets as a dividend to himself. one time the company is pure, Joe could then crystallize his CGE and thereby alleviate any uncertainty about qualifying onward death.