AUTHOR: Trevor Smithers, CPA, CMA
There are legislative and administrative changes which you should be aware of which will impact the filing of your 2014 income tax returns and challenge both current and future estate planning strategies using testamentary trusts.
Bell Aliant Privatization Transactions
On October 3, 2014, BCE announced the successful completion of its offer to purchase all outstanding Bell Aliant publicly held common shares. The privatization of Bell Aliant was completed on November 3, 2014.
This will have tax consequences for Bell Aliant shareholders who held their Bell Aliant shares outside of a registered plan such as an RRSP, RRIF, TFSA or RESP accounts.
If you received cash for the shares then you will either have a capital gain or a capital loss and you will have to report the transaction in your 2014 income tax return.
If you received a combination of cash and BCE shares or strictly BCE shares as part of the privatization transaction then you have the option to file a tax election with the Canada Revenue Agency (“CRA”) to defer any capital gain that you would otherwise be subject to.
The first step is to determine the adjusted cost base (ACB) of your Bell Aliant shares. If the value of the BCE shares and any cash consideration is greater than the ACB of your Bell Aliant shares then you would be eligible to file the tax election to defer the capital gain.
If the value of the BCE shares and any cash consideration is less than the ACB of the Bell Aliant shares then you would have a capital loss and the tax election would not be required.
Some shareholders may choose not to file the election to take advantage of capital losses that have been carried forward from prior tax years or to offset current year capital losses.
To assist shareholders with the filing of the tax election BCE has created an internet tool located here.
Since the tax election is a joint election that requires a signature by BCE, the completed election form must be sent to BCE by January 5, 2015. Once BCE has signed the tax election it will be sent back to you for signature. The tax election must be filed with the CRA by your tax filing due date. This would be April 30, 2015 for most personal tax filers. For self-employed individuals the filing due date for the election is June 15, 2015.
If you have any questions on the Bell Aliant Privatization transaction and how it will impact your 2014 tax return, please contact your McCay Duff advisor.
Foreign Property Reporting Update
Once again the CRA has updated the information requirements for taxpayers who are subject to the reporting of specified foreign property.
The CRA has worked with various interest groups to try to make the latest version of form T1135 more user friendly while still allowing them to accumulate the information that they require to administer the Canadian tax system.
The CRA requires taxpayers who hold specified foreign property to disclose details on these assets if the aggregate cost exceeded $100,000 at any time in the tax year.
Specified property includes assets such as:
- foreign stocks, mutual funds and bonds held outside of Canada or within a Canadian non-registered investment account;
- funds deposited in foreign bank accounts;
- foreign rental properties;
- other assets that are located outside of Canada (i.e. gold and silver bullion)
The reporting requirements for 2014 and later taxation years are as follows:
For assets held in an account that is managed by a Canadian Registered Securities Dealer (i.e. a broker’s account or discount brokerage account) the following information must be disclosed on a country by country basis for each account that holds foreign securities:
- the name of the registered security dealer/Canadian trust company;
- the country where the asset is located (i.e. for shares of Adidas - the country would be Germany; for shares of Microsoft – the country would be the United States);
- the maximum fair market value of foreign property held during the year on a country-by-country basis – the CRA has indicated that you can use a monthly account statement to determine the maximum value per country during the year;
- the fair market value at year-end on a country-by-country basis (this would be the December 31, 2014 value);
- the gross income (or loss) from the assets on a country-by-country basis;
- the gross gain (or loss) on disposition from the assets on a country-by –country basis
This only covers the information requirements for assets that are held in an account with a Canadian registered securities dealer or a Canadian trust company. Foreign assets that are physically located outside of Canada require additional reporting that usually takes time and effort to accumulate by either the taxpayer or their investment advisor.
The Investment Dealers Association of Canada continues to work on strategies to minimize the effort that needs to be taken by account holders in obtaining relevant information to assist in the preparation of T1135 filings.
As noted above, the T1135 information reporting can be quite onerous and time-consuming. The change for 2014 results in more detailed reporting than 2013 and now must be done on a country by country basis. If you owned specified foreign property during 2014 and you think that you have to file the T1135 form, please contact your McCay Duff advisor for more information.
New Rules for Testamentary Trusts
Starting with the 2016 taxation year, testamentary trusts, estates and grandfathered inter vivos trusts will be taxed at a flat rate equal to the top marginal tax rate.
Other changes include:
- All trusts must have a calendar year-end,
- All trusts must remit quarterly instalments,
- All trusts cannot claim the $40,000 basic exemption when calculating alternative minimum tax.
The above changes do not apply to:
- A “graduated rate estate” (“GRE”) which is defined to be an estate that is a testamentary trust, for the first 36 months after the date of death.
- A “qualified disability trust” (“QDT”) which is defined to be a testamentary trust with a beneficiary who qualifies for the disability tax credit.
For both of these exceptions an estate must designate itself as a GRE and the trust and a beneficiary must jointly elect for the trust to be a QDT.
Surprises for Estates and Trusts
Taxable capital gains that arise in spouse trusts, joint partner trusts or alter ego trusts on the death of certain individuals will be deemed to be payable by the deceased individual in the year of death. This could be an advantage if the deceased individual’s marginal tax rate is lower than the trust’s top marginal tax rate. However, there appear to be many negative implications as follows:
- It initially appears that net capital losses of the trust cannot be carried forward or back to the taxation year of the deemed disposition to reduce the deceased’s deemed capital gain.
- Many post mortem tax plans rely on the ability to use capital losses on the wind-up of corporations after the death of the deceased shareholder. These plans may no longer be effective.
- If the trust does not permit a distribution to the deceased individual’s estate to fund the tax resulting from the deemed payment of the taxable capital gain, the deceased individual’s other assets will have to be liquidated to fund the tax. This could create inequities if the estate and trust beneficiaries are not the same.
- No grandfathering has been provided in the proposals for trusts or estates which currently exist. It may be difficult to change the provisions of these trusts and estates to address inequities that may arise.
Commencing in 2016, there will be more flexibility in the tax treatment of charitable donations made upon an individual’s death after 2015. Donations made under a Will, will now be deemed to have been made by the individual’s estate at the time the property is transferred to a charity. If the donation is made by a GRE, the trustee will have the flexibility to allocate the donation among:
- The taxation year of the estate in which the donation is made,
- An earlier taxation year of the GRE,
- The last two taxation years of the individual.
We recommend that you review your current Wills or the provisions that govern trusts and estates currently in existence to assess the impact these changes will have. Please contact your McCay Duff advisor if you require our assistance with this review.