1. Sean Rheubottom, BA, LLB, TEP Regional Vice-President, Wealth Planning United Financial, a division of CI Private Counsel LP 21-Year Deemed Disposition of Family Trust Assets Issues and Solutions January 2014

2. Outline The 21-year rule and exceptions Typical 21-year planning 21-year planning with high value assets Problems with new BC Family Law Act

3. 21-year deemed disposition Generally any trust, testamentary or inter vivos, is deemed to have sold its capital property for FMV proceeds on the 21 st anniversary of the creation of the trust, and every 21 years thereafter –some exceptions below Deemed disposition dates including exceptions to 21-year rule are set out in ITA 104(4)

4. Date the 21-year period begins IV trusts: when does the 21-year period begin? –IV trusts: when the three certainties are satisfied intention to create a trust, subject matter (property) of the trust, and objects (beneficiaries or purposes) of the trust. –Not necessarily the date the trust agreement is signed – look for date the trust property was transferred to the trustee Testamentary trusts: when does the 21-year period begin? –Difference depending on whether trust created (death) before or after coming into force of ITA 104(5.8) on February 11, 1991 –Appears that for a successive testamentary trust for remainder beneficiary where life tenant died after February 11, 1991 – date of testator’s death is start of the 21 year period See 2008 CTF paper: Timothy Youdan, Planning to Deal with the 21-Year Deemed Disposition Rule See 2007 STEP Canada National Conference, CRA round Table, Question 3

5. 21-year deemed disposition: Notable exceptions Trusts to which the “qualifying transfer” rollovers in 73(1),(1.01),(1.02) and (1.1) apply: –Qualified* spouse trust created by the will of deceased person –Qualified* spouse trust made during person’s lifetime  Disposition date is death of beneficiary spouse * Spouse entitled to all income for life, no one other than spouse may access capital during spouse’s life –Alter-ego or joint partner trust –Self-benefit trust  Disposition date is death of contributor or surviving spouse/partner

6. Trusts to which “qualifying disposition” rollovers in 107.4 apply: –Transfer to which 73(1) etc rollovers do not apply –Transfer by an individual to a trust –No change in beneficial ownership –Immediately after the disposition, no beneficiary other than the contributor/joint contributor has any absolute or contingent right under the trust –Rollover to trust subject to election b/t cost and FMV –Allows “protective” alter-ego self-benefit type trust for someone under age 65 –21-yr deemed disposition deferred until death of contributor A trust all interests in which have vested indefeasibly - 108(1)”trust” definition part (g) –Planning point? –Do trustees have discretion to irrevocably fix the beneficiaries’ interests? Would beneficiaries be able to invoke Saunders v Vautier to call for the property once interests indefeasibly vested? –See Catherine Brown, Taxation and Estate Planning, 5.4 – Deemed Realizations and Deferrals, 5.4.8(6) -- Vesting Indefeasibly (Taxnet Pro) –See Larry Frostiak, Practitioner's Guide to Trusts, Estates and Trust Returns, 6.2.1 -- Deemed Realizations at Twenty-One Years (Taxnet Pro) –See Pearl Schusheim “Trusts II” slides/notes from 2007 CICA Advanced O-M Tax course at p.2-04 21-year deemed disposition: Other exceptions

7. 104(5.8) - trust to trust transfer or “pourover” –21-year anniversary of transferee trust is deemed to be the date that would have been the 21 st anniversary of transferor trust 104(4)(a.2) - distribution from trust where it can reasonably be considered to have been financed by a liability of the trust and one of the purposes of incurring the liability was to avoid tax that would arise on the death of an individual –Where net effect of liability is intended to offset the value of the trust property –Deemed disposition occurs on day of distribution 104(4)(a.3) - transfer to trust on tax-deferred basis under 73(1) and it is reasonable to conclude that it was done in anticipation of transferor becoming non-resident –Deemed disposition occurs day after becoming non-resident 21-year deemed disposition: Anti-avoidance rules

8. Did you know? Separate insurance trust for spouse “Separate insurance trust” for spouse of deceased, that mirrors the qualifying spousal trust under the will: –is a testamentary trust –but is not “created by the will” (ITA s.104(4), 73(1)) of the deceased person –therefore IS subject to the 21-year deemed disposition

9. 21-year planning

10. FT FamilyCo Ltd. p/s Dad c/s Do nothing – allow deemed disposition, maintain trust management of assets Reduce value of shares –pay capital dividends if any CDA –Pay taxable dividends if RDTOH o Allocate dividends to beneficiaries Create ACB -- if any beneficiary disabled, consider PUC increase with preferred beneficiary election to bump ACB of shares before distributing –Dividend to trust; use preferred beneficiary election to allocate income to disabled person See 2008 CTF > Conference Report > Current Issues in Trust and Estate Planning (Daren Baxter, McInnes Cooper) 21-Year Planning

11. “Rollout” of shares to beneficiaries –Rollout to Canadian resident capital beneficiary –General caution re 75(2) – 107(4.1) would prevent rollout –May want to freeze the c/s before distributing to beneficiaries If any shares to be distributed to beneficiaries, require them to enter shareholders’ agreement FT FamilyCo Ltd. p/s Dad c/s Typical 21-Year Planning: Rollout to beneficiaries If trust holds real property – before 21 st anniversary convey to the capital beneficiaries a remainder interest while trust retains life interest -- CRA #1999-0013475

12. Case Study: Smith Farms Ltd. 21-year rollout; Drop-down freeze to new trust

13. FT SFL 51% c/s S 20% c/s FMV $5M L 29% c/s Shaun and Linda, early 50s 5 children, all late 20s, early 30s SFL was farm corp, now real estate development Facts and Issues Family Trust (“FT”) has 21-year anniversary in 3 years Beneficiaries: Linda, all children, not Shaun Problem: the 20% common shares held by the trust are worth about $5M (ACB $100) CGE not applicable here “Do nothing” option could cost $1 million in tax Or, distributing shares could cause problems for the children and the parents.

14. FT SFL 51% c/s S 20% c/s FMV $5M L 29% c/s “Rollout” of shares to beneficiaries –In this case would likely want to freeze the c/s before distributing to beneficiaries – let future growth accrue to a new trust Rollout to beneficiaries prior to 21- year deemed disposition Problem: freeze shares must be retractable –Otherwise the freeze is not tax-deferred Undesirable to give children in 20s retractable shares

15. FT SFL 51% c/s S 20% c/s FMV $5M L 29% c/s a)S, L and FT freeze their interests in SFL, SFL issues new c/s to new Family Trust (“FT2”) Bens of FT2: everyone; corporations; trusts SFL p/s S L c/s $100 p/s retractable $5M FT FT2 Rollout of non-voting, non-retractable shares to beneficiaries

16. b) FT transfers its $5M retractable p/s to Holdco in exchange for non-voting, non- retractable c/s of Holdco - isolation of retraction feature p/s retractable $5M Holdco p/s FT c/s $100 L SFL p/s voting c/s non- voting $5M FT2 p/s S Rollout of non-voting, non- retractable shares to beneficiaries

17. c) When assets of FT must be distributed, the $5M non-voting, non- retractable “frozen” c/s are transferred to various beneficiaries Holdco FT c/s $100 p/s c/s non- voting $5M FT2 Ben s p/s L S retractable $5M Rollout of non-voting, non- retractable shares to beneficiaries SFL

18. The second freeze: Avoid corporate attribution?

19. Problem: SFL will never be 90% “pure” (SBC def’n), so “corporate attribution” will apply Corporate attribution: Where an individual has transferred or lent property to a corp (as in a freeze), [and purpose test met] …and beneficiaries/shareholders include a spouse or minor related person The person who froze is deemed to receive interest income = “outstanding amount” (value of pref shares or s/h loan) x prescribed rate Punitive tax that must be avoided Holdco SGF T c/s $100 SFL p/s c/s non- voting $5M FT2 Ben s p/s L S retractable $5M Corporate attribution

20. Holdco SGF T c/s $100 SFL p/s c/s non- voting $5M FT2 Ben s p/s L S retractable $5M Express exception: any time corp is a 90% “pure” SBC –Exception not available here! Express exception: if use a “74.4(4)” trust –Would severely limit income / capital gains splitting –No ability to include either Mom or Dad as beneficiaries of trust Exception based on wording of 74.4(2): –If a corporation rather than an individual transfers assets to corp being frozen, corp attribution should not apply  “Drop-down freeze” Corporate attribution: Exceptions

21. This “looks” like a drop-down freeze. Can we make it fit within the 74.4 exception? Holdco FT c/s $100 SFL p/s c/s non- voting $5M FT2 Bens p/s L S retractable $5M

22. a)SFL transfers its assets “down” to New SFL in exchange for shares SFL 51% c/s S 20% c/s FMV $5M L 29% c/s FT SFL 51% c/s S 20% c/s FMV $5M L 29% c/s FT New SFL assets Drop-down freeze

23. b) SFL freezes its interest in New SFL, New SFL issues new c/s to FT2 SFL 51% c/s S 20% c/s FMV $5M L 29% c/s FT New SFL FT2 freeze p/s $5M c/s $100 Drop-down freeze

24. c)Later, when the FT must be terminated, the non-voting, non-retractable “frozen” common shares of SFL held by the FT are transferred to various beneficiaries of the FT. Consider waiting as long as possible, to retain control and minimize risk for as long as possible. When the transfer is done, it can take place on a “rollout” basis to any Cdn resident beneficiary. Encourage spousal and cohab agreements for adult beneficiaries! SFL 51% c/s S 20% c/s FMV $5M L 29% c/s FT New SFL FT2 freeze p/s c/s $100 Ben s Drop-down freeze

25. CORP 1 c/s CORP 2 FT freeze p/s c/s $100 assets Corporate attribution may be found to apply in the case of “back to back” transfer -- individual transferred assets to CORP 1 which later transferred assets to CORP 2 -- may be considered that the individual indirectly transferred assets to CORP 2 of which FT is a shareholder. 74.5(6) – 74.5(8) ITA ; CRA #2003-0018915 CRA #2002-0147325 (Jan 2003): “…generally speaking, in situations where controlling shareholder of Corp 1 approves a transfer or loan of property by Corp 1 to Corp 2 and the property transferred or loaned may be considered to come from Corp 1’s retained earnings (for example, internally generated cash or investments of Corp 1) such that the property would not represent property paid or transferred to Corp 1, directly or indirectly, by the individual, it is our view that the transfer or loan to Corp 2 would not be considered to have been made, indirectly, by the individual for the purposes of [the corporate attribution rule]” CRA views on drop-down freeze

26. Roll-out of trust assets to corporate beneficiary

27. Rollout to corporate beneficiary Opco (SBC) p/s Dad CashCo FT2 BenCo 100% c/s FT1 c/s Include potential to add new corporate beneficiary (BenCo) to FT1 –Amend trust to add corporate beneficiary? –Court application – interests of minor, unborn or unascertained beneficiaries –May result in disposition of other bens’ interests –See Pearl Schusheim “Trusts II” notes from 2007 CICA Advanced O-M Tax course at p.2- 023 In this case, CashCo is a beneficiary of FT1, but consider use of new BenCo to maintain SBC status... According to this plan, BenCo may be created immediately prior to 21- year anniversary BenCo owned by FT2

28. Rollout to corporate beneficiary FT1 distribute Opco shares to BenCo as beneficiary of FT1 May amalgamate Opco and BenCo FT2 has a fresh 21 years Possible to defer 21-year disposition indefinitely? Is it aggressive? GAAR? p/s Dad CashCo FT2 BenCo 100% c/s FT1 Opco (SBC) c/s In context of transfer to corporate beneficiary to which non-resident human beneficiaries have transferred their capital interests (to avoid deemed disposition because of 107(5)) – CRA says GAAR if corporation not already in existence – maybe relevant, maybe not? See Pearl Schusheim “Trusts II” notes from 2007 CICA Advanced O-M Tax course at p.2-023

29. Series of freezes

30. Series of freezes / trusts Do a second freeze well in advance of 21-year anniversary For growth going forward from time of second freeze, get a later 21-year date Could be useful if you are fairly sure you will NOT want to distribute shares to a certain beneficiary at 21-year anniversary –Limit the gain that will be realized in the trust FT2: 21st: 2031 c/s (issued in 2010) Opco (SBC) p/s (frozen in 2010) Dad FT1: 21st: 2017 p/s (frozen in 1996)

31. Appreciated assets owned directly by IV trust

32. Trust directly owns asset with FMV $10M, ACB $5M Trust transfers asset to Holdco under s.85 in exchange for: –PN equal to ACB of the asset – PN convertible to “A” redeemable / retractable prefs - redemption value and ACB equal to the PN ($5M) -- See 2008 CTF paper Timothy Youdan, Planning to Deal with the 21-Year Deemed Disposition Rule (fn 30) – see also Goodman on Estate Planning, vol. IX, no. 4 (Federated Press, 2001) –“X” pref shares with nominal redemption value but control (consider valuation of thin voting shares?) –“C” common shares for nominal consideration (a new freeze) –“B” redeemable / retractable prefs – redemption value equal to the accrued gain $5M Holdco FT “B” p/s retractable $5M, low ACB “X” p/s control “A” p/s $5M “C” c/s $100 Distribute to bens the retractable “B” p/s with accrued gains, keep other shares in the trust –Trust may continue to receive dividends on “A” shares

33. Appreciated assets owned directly by IV trust For control: Consider transferring retractable “B” p/s with accrued gains to Newco for non-voting non-retractable effectively “frozen” c/s –as in “Smith Farms” case study Roll these c/s out to bens Corporate attribution does not appear to be a problem in this particular case –Drop-down freeze as in case study? Holdco FT “B” p/s retractable $5M, low ACB “X” p/s control “A” p/s $5M “C” c/s $100 Newco Non- retractable non-voting “frozen” common shares Bens Voting p/s

34. Asset protection problems for trusts in BC?

35. 35 Trust His/her child Your Child His/her child See 2012 CTF paper Property Held by Discretionary Trusts (David Thompson, Thorsteinssons Vancouver) See 2013 paper Marriage and Cohabitation Agreements: Drafting and Setting Aside Agreements under the FLA (Anna Laing, Fasken Martineau DuMoulin Vancouver, Beatrice C. McCutcheon, Cook Roberts LLP Victoria) Trusts: asset protection in BC? Protection re-marriage breakdown of child BC Family Law Act (March 18, 2013) may affect “protection” aspect of trusts Is there less concern about testamentary trusts, more concern about IV trusts? Spousal agreements are meant to be harder to set aside

36. This material is general in nature and subject to change without notice. Every effort has been made to compile the information from reliable sources, however no warranty can be made as to its accuracy or completeness. Before acting on any of the information contained herein, please seek professional advice based on your personal circumstances. Assante Wealth Management’s advisory services are offered through Assante Financial Management Ltd., Assante Capital Management Ltd. and Assante Estate and Insurance Services Inc. Assante Estate and Insurance Services Inc. is owned by Assante Financial Management Ltd. and Assante Wealth Management (Canada) Ltd. ®The Assante symbol and Assante Wealth Management are registered trademarks of CI Investments Inc., used under licence. © 2014 United Financial, a division of CI Private Counsel LP. All rights reserved. Thank you