Canadian Will Planning

This Tax Topic discusses the planning and creation of wills.

Note: these tax topics are distributed on the understanding that neither Life-Quotes.ca nor Manulife Financial is engaged in rendering legal and accounting advice.

Last updated: March 2012

There are numerous components to a well-made estate plan. This includes the preservation and protection of assets during the testator’s lifetime, the orderly and tax-effective transfer of assets to beneficiaries during the testator’s lifetime and at death, and often the continued preservation of property when it is transferred to beneficiaries.

This Tax Topic considers the will as a component of estate planning.

The Will – Formal Statutory Requirements

The formalities of creating a valid will arise from provincial legislation. All provinces with the exception of Quebec, Prince Edward Island and Ontario have separate legislation that specifically deals with formal statutory requirements. In Ontario and Prince Edward Island, the provincial legislation that deals with the formalities is contained within legislation that also addresses other matters. In most provinces, the testator may by will dispose, devise or bequeath of real and personal property. In Quebec, succession devolves according to the prescription of law unless the deceased has by testamentary disposition, provided otherwise.

In most jurisdictions, a will can be created by a third party and must be signed by the testator in the presence of two witnesses. In Quebec, the Civil Code allows for a notarial will (made in the presence of a notary) or a will can be created by the testator or a third person but must be made in the presence of witnesses. In all jurisdictions, with the exception of British Columbia and Nova Scotia, the testator may also create a will entirely in their own hand, without witnesses being present. This is referred to as a holograph will.

While most provincial legislation is similar in terms of formal requirements, there appears to be a significant variation as to what age an individual can create a valid will. In Manitoba, Nova Scotia, Alberta, Ontario, Prince Edward Island and Saskatchewan the age is 18 (referred to in some jurisdictions as the age of majority). In New Brunswick and British Columbia it is age 19, and in Newfoundland it is age 17. In Quebec, a minor (under the age of 18) may not dispose of any part of his property by will, except articles of little value. Generally in all provinces, where an individual is married or in the Canadian Armed Forces, a will can be created without regard to the age requirements in the respective provincial legislation.

In most provinces, a will must be in writing and signed by the testator at the end of the document. Generally, two witnesses, both of whom must be at least 18 years of age, must witness the testator’s signature and be competent at the time of witnessing. The British Columbia Supreme Court decided in Kraus v. Toni, (1999) 28 E.T.R. (2d) 225 to admit a will to probate that had just one signature. Traditionally courts have placed a great deal of emphasis on compliance with respect to the signing and execution of a will. This is a bigger issue for British Columbia and Ontario because these provinces do not have substantial compliance sections in their respective legislation. The Kraus case is significant because the court did consider decisions where there was a lack of compliance with form.

A similar review of the case law occurred in Ontario in Sisson v. Park Street Baptist Church, (1998) 71 O.T.C. 35, (1998) 24 E.T.R. (2d) 18. The court came to the same conclusion as in Kraus. Therefore it appears a will can be admitted to probate, notwithstanding the statutory provisions. One further note with respect to witnesses is warranted. Generally a witness cannot be a beneficiary under the will or the spouse of a beneficiary, as that voids the gift to that beneficiary.

In most instances, an individual will have a will created by a lawyer or in the province of Quebec, in the presence of a notary. It is always recommended that a lawyer with expertise in the areas of estate planning be consulted. As mentioned, a holograph will can also be created entirely in the hand of the testator.

Wills that are referred to in some jurisdictions as "stationary wills" are available through various retail outlets. Here, a pre-set form provides paragraphs with blanks for the testator to complete regarding various bequests and distributions under the will. While stationary wills have grown in popularity in recent years, the user should be aware of potential problems with interpretation and non-compliance with provincial statutory requirements. In Loty v. Magill, [2004] O.J. No. 5227 the deceased had prepared a will using the stationary form and then later changed it. The changes did not comply with requirements under the Ontario succession law reform act and as a result the court determined a partial intestacy of the deceased’s estate existed.

With a stationary will, such issues cost the estate private fees and delay distributions out of the estate.

The Purpose and Content of a Will

A will is a tool by which the author (testator/testatrix) expresses his or her final wishes as to the distribution of his or her property on death. Ideally, the will is structured in a manner that ensures those wishes are carried out.

The will performs several functions. It designates the person or institution that will administer the estate. It sets out the scheme of distribution of assets to particular individuals or organizations, and controls when and how those assets are to be distributed. It will determine the age at which any minor or adult beneficiary is to receive a bequest. It can make appropriate provisions for a disabled minor. It can specify whether debts owed to the testator are to be repaid or forgiven. In addition, having a well drafted will can minimize the cost of administering the estate, and help to reduce or postpone tax liabilities arising at death. From a practical perspective, it also eases the issues that grieving relatives and friends must deal with at the time of death of a loved one.

Generally, a will can be up-dated, periodically either through the use of a Codicil (a testamentary document which makes one or more minor changes to a will) or a new will when new circumstances warrant a change in the estate plan. Provincial legislation governs formal requirements in creating such a testamentary document.

A will is a revocable instrument. The testator must at all times have the ability to amend any portion of the will by codicil or testamentary document or revoke the will in its entirety without the influence or duress of another party. If any provision of the will is irrevocable that portion will fail.

With the exception of Quebec, in most other provinces, marriage revokes an existing will, unless the will specifically states that it is made in contemplation of marriage and identifies the future spouse.

Intestacy

If a will does not exist at the time of death, or a will is determined invalid, an intestacy will result. An intestacy can cause a great deal of expense to the estate, further grief for the family of the deceased and an outcome that the testator may have never intended in terms of the final distribution of the estate. Each province has specific legislation and regulations dealing with the distribution of the 3 estate where there is an intestacy. A link to this Appendix A – Provincial Intestancy outlines the devolution of estates on an intestacy by province. In Alberta, Saskatchewan, British Columbia, Manitoba, Nova Scotia, the North West Territories, Nunavit and Ontario the spouse receives a preferential share of the estate. The amount of that preferential share varies greatly depending upon the province. As well, in Nova Scotia and in the North West Territories it includes $50,000 or the home in lieu or as part of the preferential share. Ontario has the largest amount for preferential share to a spouse. In Ontario, the preferential share is prescribed by regulation and is currently the first $200,000 of the estate (or the entire estate if its value is less than $200,000). In the provinces of New Brunswick, Prince Edward Island, Newfoundland and the Yukon there is no preferential share. In all provinces except Quebec, after the preferential share has been determined if applicable, the surviving spouse is entitled to a “distributive share” which varies in accordance with the number of children or issue surviving.

In Quebec, if a person dies intestate leaving a spouse and no children, the surviving spouse receives two-thirds of the estate and the deceased's parents receive one-third. If the deceased left a spouse and issue surviving, the spouse receives one-third of the estate and the children (or child), two-thirds. There is no preferential share. If a person dies without a spouse, or with a common law spouse surviving, and leaves children surviving, the children would take the entire estate. If the person dies without a spouse or children, the estate would be divided with 50% of the estate being distributed to the parents of the deceased and 50% to the siblings of the deceased.

It should be noted that the definition of spouse, may include common law spouse or same-sex spouses, depending upon provincial legislation.

Initial Steps

There are several steps involved in preparing a will. First, the testator must ascertain his or her assets and how title to each of those assets is held. Several questions must be asked of the testator. In most instances, a lawyer will have a checklist of appropriate questions to ask a testator to obtain information not only about the testator's assets and liabilities but also to glean from the testator his/her wishes for distribution of the estate. For instance, what assets does the testator have an interest in? Does the testator hold the asset alone, or with another person? If it is held with another person, is it held as joint tenants or as tenants in common? What is the percentage share held by the testator? Is the testator’s interest in the asset legal or beneficial (i.e. is it owned outright or held in trust for him or her)?

One of the issues that the testator must consider is how the estate will be divided. An analogy is often made that the estate is like a pie and pieces are cut out of it each time for such items as taxes, funeral expenses, specified bequests etc. What is left after the initial expenses and taxes have been paid, is what is referred to as the residue of the estate.

In determining the distribution of the estate, the testator should be aware of the rights of any beneficiaries or potential beneficiaries under the will. The rights of beneficiaries for the most part arise in provincial statute and in some jurisdictions, several pieces of legislation may affect a beneficiary's rights. For instance in Ontario, two pieces of legislation deal with the spouse of a deceased testator. The spouse may turn to both the Family Law Act (FLA) and also the Succession Law Reform Act (SLRA).

In Ontario the spouse of a testator may choose to elect an entitlement pursuant to what is allowed under the FLA or may instead simply take what is provided under the provisions of the will. The distinction lies in which would result in a larger entitlement. If the spouse determines that his or her entitlement under the provisions of the will is not satisfactory, then he or she can within six months of the testator's death, elect to an entitlement under the FLA. This is an absolute right. The entitlement is calculated in accordance with section 5 of the FLA. Essentially, all property owned by the testator and the surviving spouse, less any debts, exclusions and deductions provided for in the Act (known as 4 “net family property”) is valued as of the day immediately preceding the date of death, and an equalization payment equal to one-half of the difference between the two net family properties is made by the estate to the surviving spouse. Under the Ontario Succession Law Reform Act (SLRA) however, the surviving spouse has no absolute rights but may make a dependant’s relief claim if the testator has not adequately provided for his or her support and maintenance under the will. Children of the testator may also bring a dependant's relief claim under the SLRA.

Generally, provincial legislation ensures that dependants have the ability to make a claim where they have been inadequately provided for under the provisions of the will. In Quebec, the rights of the surviving spouse are determined by the parties’ marriage contract, if any, and the family patrimony regime under the Quebec Civil Code.

How to Benefit Others

Through the use of a will, there are many ways to ensure that one’s loved ones and/or favourite charitable organizations are benefited. Gifts of specific property, legacies (gifts of a fixed amount of cash) trusts and a gift of the residuary estate are all possible options.

Careful consideration to naming the proper registered charity in the will must be made otherwise the gift will fail. As well, before provisions are made within the will the testator should consider whether the estate will have the funds available to provide for the legacy. Life insurance may be one way for a testator to plan a charitable gift and to ensure funds will be available in the estate. An in depth discussion of the tax considerations regarding charitable giving must also be considered by the testator to ensure maximum benefit. For a review of the various tax implications on charitable giving, reference should be made to the Tax Topic "Charities and Life Insurance".

Use of Trusts

There are occasions when trusts are a desirable method of distributing the residue of the estate. Trusts can be created in the will for minor and adult beneficiaries, disabled beneficiaries (minor or adult), spendthrift spouses or children, or simply where tax deferral is desired. (However, when creating a spousal trust in Ontario, remember the election provisions of the Family Law Act discussed above.) Trusts can be discretionary in that the Trustee (which is often, although not always, the executor of the estate) has the power to decide how much of the income or capital of the trust will be paid out for the benefit of the beneficiaries; alternatively, or the specific amount to be paid out to the beneficiary(ies) at specific intervals can be fixed in the will. A “Henson” trust (named after the Ontario Court of Appeal decision in Ontario (Ministry of Community and Social Services) v. Henson (1989) 36 E.T.R. 192) can be incorporated into a will for disabled beneficiaries. In a Henson trust, the Trustee has absolute and sole discretion to maintain the trust funds. The beneficiary has no control over the funds. Any payments of capital or income that are made from a Henson trust will qualify for exemptions from income allowed for trusts exempt by regulation (i.e. the payments would not affect a disabled beneficiary’s government benefits). A discretionary trust used for this purpose will not work in every province (eg. Alberta) and therefore provincial disability legislation should be reviewed. A discretionary trust used for this purpose will not work in every province (i.e. Alberta) and therefore provincial disability legislation should be reviewed. Another form of trust is a sprinkling trust, which empowers the Trustee to “sprinkle” income among several beneficiaries, as he or she deems appropriate in accordance with their needs.

Trusts for Minor Beneficiaries

A gift of residue in a will to a minor beneficiary will be paid out to that beneficiary upon attaining the age of majority (defined in most provinces as the age of 18), unless a different age is specified in the will. The will should set out when and how the residue will be divided among minor beneficiaries. The Trustee must have appropriate powers to administer the Trust. These would include the power to pay income, the power to encroach on capital (if desired), the power to make payments to a parent or guardian of the minor beneficiary, and the power to pay the trust out in full if it is too small to warrant maintaining the trust. Appropriate investment clauses should also be included so as not to limit the 5 Trustee to investments authorized by statute (although many provinces are now subject to a broader “prudent investor” standard rather than a restrictive list of authorized investments).

When creating a trust for minors where the minors are to receive their property at an age other than the age of majority, it is important to consider the rule in Saunders v. Vautier, (1841), 4 Beav 115, 49 ER 282. This rule provides that, upon attaining the age of majority, a beneficiary can apply to Court to have his or her entitlement under the trust paid out to him or her. The solution is to draft the trust so that there is a gift-over to another beneficiary or beneficiaries (i.e. charity, issue, estate of beneficiary, etc.) if the beneficiary fails to attain the specified age. The Court will not order that the beneficiary’s interest be paid out upon attaining the age of majority; this is because it is unknown whether the beneficiary will survive to the stated age, and there are other beneficiaries who would have an interest in the trust if he or she does not survive.

Custody and Guardianship

Guardianship of any minor children of the testator is also a consideration in will planning. Each province has specific legislation to deal with issues of guardianship and custody. Custody and guardianship are dealt with in Ontario in the Children’s Law Reform Act. Under that Act, a person designated in a will, as the guardian of minor children must make application to the Court for custody of the minor children. The designation in the will is effective for ninety days following the death of the parent, and only if no other person is entitled. Although the designation of a guardian in a will is not binding on the Court, it is significant evidence as to what the deceased believed was in the best interest of his or her children. Where desired, the testator can name one person as custodian of the child, and a different person as guardian of the child's property.

In Quebec, the Civil Code is clear, a father or mother may appoint a tutor to his or her minor child by will. The right to appoint a tutor belongs exclusively to the last surviving parent. The tutor appointed by the parent assumes office upon accepting it.

Guardianship of children is often a consideration most individuals have not thoroughly discussed or reviewed with a spouse. This is especially true where individuals own assets jointly and have not considered the necessity of a will for other reasons such as guardianship of children. Careful consideration should be given to the individual or individuals who have guardianship of the children and who may eventually apply for custody of the children. In the event the testator and spouse die together, the guardian will step into the shoes of the parents. Selecting a guardian in the same province and with the same views and values will go a long way to preventing a disruption to the children's lives during a period of great emotional stress.

Life Insurance and the Will

A designation of a beneficiary of life insurance proceeds by declaration in a will is a valid designation in all provincial Insurance Acts. All Insurance legislation allows a designation to occur within the application for insurance and by way of another instrument. As well, pursuant to the various Insurance Acts, an "irrevocable" designation can be made. An irrevocable designation requires that the consent of the beneficiary be obtained prior to revocation. However, a will cannot contain irrevocable clauses. The testator must be able to revoke part or all of the will at any time without the consent or duress of a third party. The formal requirements found in provincial legislation are consistent on this point. Therefore, a purported “irrevocable” designation in a will is treated as a revocable designation.

There is another rather unusual formality that must be considered when an insurance designation is created within a will. For instance, a designation in a will where the will is subsequently found to be invalid is still valid. This is because the designation does not have the same formalities as will legislation prescribes. It will therefore continue to stand on its own.

It appears that there is always some confusion about which document takes priority when there is a designation in a will versus a designation in the insurance contract. The designation that stands, is the last one made to the extent of any inconsistency regardless of whether it occurred in the will or within the contract. Because a will becomes an instrument of use once the testator dies, it is often thought that the WILL takes priority and therefore the designation in the will is the last valid designation. However, it is the date of the will that is used to determine when the designation has been made and not the date of the testator's death.

As stated earlier, because a will is totally revocable, a designation in a will, which is revoked, is also revoked. A new designation in either the insurance contract or will must be made immediately after the revocation if the testator intends to designate a beneficiary.

When a minor is designated on an insurance policy as beneficiary, the insurance monies will be paid into Court and an application must be made to the Court by an individual to be appointed as guardian of the child’s property. If no such application is made, the Public Guardian and Trustee (in Ontario) will become involved to administer the property until the minor attains the age of majority. This scenario is generally the same in most provinces. This, in most cases, is not the desired result. To avoid this situation, an insurance trust can be created.

An insurance trust in a will can create a separate trust outside of the estate and constitute a valid insurance designation. (See the Tax Topic entitled "Insurance Trusts"). The insurance trust is the beneficiary of the proceeds of the policy. It arises as a consequence of death of the testator and is therefore treated as a testamentary trust.

The insurance trust can name the same trustee in the will, (which is often the case) or a different trustee. It can mirror the distribution in the estate dealing with the residuary or contain a different scheme for distribution. It can also delineate powers of the trustee that reflect those contained within the will or create different powers. It should be clear however that the insurance trust is not part of the residuary of the estate and is a separate trust. This not only simplifies the distribution of assets under the estate but it also ensures that Canada Revenue Agency will not treat the insurance proceeds received by the insurance trust as part of the other testamentary trusts of the estate.

An insurance trust within a will must be created carefully and worded in such a way so as to ensure the proceeds do not flow through the estate and become subject to probate fees and the claims of creditors of the estate. A lawyer with extensive will drafting experience will be able to determine how best to draft the appropriate clauses to avoid these problems.

Lapse

When a gift made in a will fails due to the death of an intended beneficiary prior to the testator’s death (and no alternate beneficiary is named), the gift is said to have lapsed. In Ontario, anti-lapse provisions are contained in the Succession Law Reform Act. The legislation provides that where the intended beneficiary was a child, grandchild, brother or sister of the testator, the gift will not lapse but rather will pass to the estate of the deceased beneficiary, unless a contrary intention is specified. It is important to be aware of this provision and where it does not accord with the testator’s wishes, to properly provide in the will for alternate beneficiaries. Unless the will contains this contrary intention, the anti-lapse provisions may result in the despised brother-in-law receiving the gift that was intended for the beloved (but deceased) sister!

In Quebec, if there is a lapse for instance in the scenario where a gift is left to the surviving children and one has died, that portion of the deceased child's share will be given to his or her surviving child (ren). This differs from other provinces. There is no limit to representation in the direct line of descendants, however the direct line does not include ascendants.

Survivorship Clauses

As a precautionary step, many wills contain clauses whereby there is a specific time period alluded to within the will regarding one spouse surviving the other. This is important when dealing with a married testator who has property that is not jointly owned with his or her spouse. The clause may use wording such as, “The residue of my estate to my wife, if she survives me for thirty full days”. This addresses the situation where it is not possible to determine whether one spouse survived the other. It avoids the double administration of each estate, which leads to a costly outcome. If this clause is not included in the will, and it cannot be determined which spouse died first, then the provisions contained within provincial legislation will determine the outcome. For instance in Ontario, the Succession Law Reform Act indicates each spouse’s will would be interpreted as if the other spouse had predeceased.

Tax Considerations

Tax considerations always play an important role in estate planning. Of greatest concern is usually the capital gains tax liability on death, which can be significant. The Income Tax Act (ITA) provides that generally upon death, any capital property owned by the deceased is deemed to be disposed of at fair market value. Half (50%) of any increase in value of the property from the time of its acquisition to the time of death is taxed at the individual's marginal tax rate. Capital property includes real estate (an exemption is provided for gains in respect of the principal residence), public company stocks, shares in a Private Corporation, etc. There is a separate provision of the Act, which includes values of RRSPs/RRIFs in the deceased's income. RRSPs/RRIFs are not capital property and are therefore taxed pursuant to specific provisions within the Act.

There are a variety of ways of minimizing or delaying taxes after death. The Income Tax Act provides rollover opportunities in certain situations. For example, if assets are transferred to a spouse or a testamentary spouse trust (provided certain conditions are met) s. 70(6) of the ITA, automatically applies to provide a rollover so that taxes are deferred until the spouse's death. However, it is important to ensure that using the rollover will not result in a wasting of any unused capital gains exemption of the testator. This can be avoided by the testator's legal representative(s) electing out of the rollover rule pursuant to s. 70(6.2) of the Act. In order to do so, the will must contain a specific provision authorizing the legal representative(s) to make such an election if desired.

Another method is by creating two separate spouse trusts in the will. The first trust would be a "tainted" spousal trust, in which someone other than the spouse (i.e. child) would be entitled to receive the income or capital of the trust during the spouse's lifetime (and thus it would not qualify for an automatic rollover under s. 70(6)). Assets with accrued gains equal to the deceased's unused capital gains exemption would be transferred to the tainted trust, and the testator's exemption would be used to offset those gains. All other assets would be transferred to the second "untainted" trust on a rollover basis.

Provisions within the will allowing for a trustee to encroach upon capital can provide planning opportunities that will benefit the beneficiary. Where provisions in the will provide for the administration of a testamentary trust over a long period of time, the power to encroach allows the trustee to time the triggering of the capital gain to the beneficiary. If the trust holds shares of a qualifying small business corporation (QSBC), the power to encroach can be timed in accordance with exemptions allowed to the beneficiary in relation to shares of a QSBC. The trustee will need to evaluate timing with the beneficiaries and in any event be prepared to deal with distribution of assets in the trust to the beneficiaries before 21 years. The power to encroach on capital in this scenario would not be applicable to a spousal trust.

As previously mentioned another method of reducing tax liability on death, for clients who are charitably minded, is through charitable gifts in the will. The donor can name his/her estate as beneficiary of the policy and provide for the donation to a charity in his/her will. The estate may 8 receive a tax deduction for the charitable bequest, which can help offset or reduce income taxes owed by the estate.

Conclusion

Although the will may be the most fundamental estate-planning tool, it is by no means a simple feat to ensure that all appropriate issues are considered and addressed, and that the document will withstand attack. As always, an experienced estate solicitor should be consulted.

* Please note:

  • the source material for these topics are various Manulife Financial articles, courtesy of Manulife Financial.
  • Life-Quotes.ca will strive to keep these articles updated and current.
  • these tax topics are distributed on the understanding that neither Life-Quotes.ca nor Manulife Financial is engaged in rendering legal and accounting advice.

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