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David Allard

Can executor be a non-resident?

Does it matter if your executor is a non-resident of Canada?

The answer is definitely, yes - the residence of your executor affects the residence of your estate for income tax purposes. As a result, appointing a non-resident of Canada to be the sole executor of your estate would cause your estate to be a non-resident of Canada too and trigger some potentially negative tax consequences:

• A non-resident estate would lose the preferred tax treatment for capital gains and Canadian source dividends that are flowed through to the Canadian resident beneficiaries.

• A non-resident estate may not have the potential benefit of being able to split the tax burden between the estate and its Canadian resident beneficiaries, as is often the case with a Canadian resident estate.

• If a Canadian resident sole executor ceased to be resident in Canada, the estate would be subject to a deemed disposition of all of its assets at the fair market value at the date of departure and subject to tax on any deemed capital gains.

• A non-resident estate could be subject to tax in the country where the executor resides. In certain situations the estate could be considered resident in both countries and subject to tax in both jurisdictions.

 

If you want to appoint a non-resident of Canada to be your executor, how do you prevent your estate from becoming non-resident? The Canada Revenue Agency Interpretation Bulletin IT-447 Residence of a trust or estate states, “Normally residence of a trust is dependent upon residence of the trustee or trustees who can exercise management and control of the trust.” They also state that the trustee who has management and control of the trust is the person with most, or all, of the following powers or responsibilities:

a) control over changes in the trust's investment portfolio,

b) responsibility for the management of any business or property owned by the trust,

c) responsibility for any banking, and financing, arrangements for the trust,

d) control over any other trust assets,

e) ultimate responsibility for preparation of the trust accounts and reporting to the beneficiaries of the trust, and

f) power to contract with and deal with trust advisors, e.g., auditors and lawyers.

 

Therefore, to prevent your estate from becoming non-resident you should appoint an executor or co-executor that you can be reasonably assured will always reside in Canada, like a corporate trustee, and specifically assign management responsibilities to them in your will. That way, you will be able to achieve the best of both worlds.

 

This publication has been prepared by ScotiaMcLeod, a division of Scotia Capital Inc.(SCI), a member of CIPF. This publication is intended as a general source of information and should not be considered as personal investment, tax or pension advice. We are not tax advisors and we recommend that individuals consult with their professional tax advisor before taking any action based upon the information found in this publication. This publication and all the information, opinions and conclusions contained in it are protected by copyright. This report may not be reproduced in whole or in part, or referred to in any manner whatsoever, nor may the information, opinions, and conclusions contained in it be referred to without in each case the prior express consent of SCI. Scotiabank Group refers to The Bank of Nova Scotia and its domestic subsidiaries. ™ Trademarks of The Bank of Nova Scotia.





An income investment you may have overlooked

Investors seeking income often limit their selection to bonds and give little or no consideration to preferred shares. They usually ignore preferreds simply because they don't know much about them.

Perhaps the easiest way to think of preferred shares is that they are shares which behave like a bond. A preferred share represents an ownership interest in a corporation, just as common stock does. But it also produces a reliable stream of income -- in the form of a pre-set dividend -- very much like the interest paid on a bond. The price of a preferred moves with interest rates, like a bond's price. When interest rates rise, the price of the preferred falls, and when rates fall, the price rises.

The same independent services that rate bonds, namely, Canadian Bond Rating Service Inc. and Dominion Bond Rating Service Inc., rate many preferred issues -- from highest quality (P-1 or PFD-1) to speculative (P-5 or PFD-5). And, like bonds, most preferred shares can be "called," or retired, by the issuer. In most cases, the call price is above the par value (price at which shares are originally issued).

Preferreds are well-suited to relatively conservative investors. They are also useful for more aggressive investors who want to balance a portfolio heavily weighted towards growth stocks. The income from preferreds can boost the current yield on shares of companies that usually reinvest their earnings in their fast-growing businesses rather than pay dividends.

 

Preferred shares offer the following attractions:

• High Yield Preferred shares typically yield one to three percentage points more in dividends than common stock issued by the same company. Since dividends are paid quarterly, many investors purchase three or more preferred issues with different payment dates to assure themselves a monthly dividend cheque.

• Liquidity Many preferred issues are listed on the major stock exchanges, making them easy to buy and sell. Most preferred shares are issued at par values of $25, putting them well within the reach of individual investors. Older issues trade above or below their par value depending on interest rates and other market conditions.

• Safety Preferred shares rank senior to common shares -- that is, preferred shareholders' claims for dividends and corporate assets (in the event the company is liquidated) come before common shareholders' claims. If a company runs into serious financial problems, the board of directors may vote to reduce or skip the preferred dividend without placing the company in default. But most preferred stock is "cumulative," so missed dividends accumulate and must be paid to preferred shareholders before any dividends are paid to common shareholders. (Keep in mind, though, that preferred stock is junior to all the company's debt. Bond interest payments take priority over preferred dividends and bondholders would get paid off first if the company were dissolved.)

 

The dividend on some preferred issues can be increased by the board if the company does especially well and the common stock dividend rises to a certain level. Such issues are called "participating" preferreds and usually command a premium price. Most preferreds are "non-participating"; their dividends never change, regardless of how high the common stock dividends rise.

Retractable preferreds have a fixed term which means the investor has the right to sell the shares back to the issuing corporation at a certain price on predetermined dates. The investor is, therefore, guaranteed a selling price. These shares are most attractive to investors who require a steady income and are concerned about the preservation of capital.

Convertible preferred shares offer income-oriented investors a chance at capital appreciation, too. These are preferred shares that can be exchanged for a specified number of common shares. The trade-off is that prices of convertible preferreds typically fluctuate more than those of non-convertible issues. They are probably not for investors who value a relatively stable share price.

One major advantage of investing in preferred shares is the dividend tax credit which eases the tax burden on dividend income. Essentially, all dividends collected on Canadian companies are eligible for this tax credit.

With this in mind, quite often preferred issues are an excellent alternative for producing income as compared to other interest-bearing investments which are fully taxed.

If you think preferred shares may have a place in your portfolio, check with your ScotiaMcLeod advisor. Because of all the variables associated with these securities, expert advice is essential to choose both the right type of preferred share and the right issue.

 

This publication has been prepared by ScotiaMcLeod, a division of Scotia Capital Inc.(SCI), a member of CIPF. This publication is intended as a general source of information and should not be considered as personal investment, tax or pension advice. We are not tax advisors and we recommend that individuals consult with their professional tax advisor before taking any action based upon the information found in this publication. This publication and all the information, opinions and conclusions contained in it are protected by copyright. This report may not be reproduced in whole or in part, or referred to in any manner whatsoever, nor may the information, opinions, and conclusions contained in it be referred to without in each case the prior express consent of SCI. Scotiabank Group refers to The Bank of Nova Scotia and its domestic subsidiaries. ™ Trademarks of The Bank of Nova Scotia.

TM Trademark used under authorization and control of The Bank of Nova Scotia. ScotiaMcLeod is a division of Scotia Capital Inc., Member CIPF.



What is a Trust?

A trust is an equitable obligation binding a person (the trustee) to deal with property over which he/she has control (called the trust property) for the benefit of persons (who are called the beneficiaries) of whom he/she may themselves be one and any of whom may enforce the obligation. The person who creates the trust is referred to as the settlor that transfers legal title to the property to the trustee. This transfer of title to the trustee imposes a fiduciary duty on the trustee.

 

Classification of Trusts

1. Testamentary Trusts: a trust or estate that arises upon and in consequence of the death of an individual. It includes a trust created under the terms of a will or by an order of a court pursuant to dependants’ relief legislation.

2. Intervivos Trust: any other trust other than a testamentary trust, set up during the settlor’s lifetime.

 

Uses of Trusts in Estate Planning

As a trust possesses several unique features it is the perfect tool for estate planning. Some of the features are:

  • the separation of legal and beneficial ownership
  • the ability to create successive beneficial interests and thereby control the property over a considerable number of years
  • the flexibility that can be provided by conferring a variety of discretionary powers which may affect the selection of beneficiaries, types and timing of benefits and the investment and management of the trust property.

 

Common uses of trusts in estate planning are:

1. To provide for the maintenance and education of infants without powers of control or management

2. To provide a degree of financial independence for an adult child while postponing the time at which the child will obtain full management and control over the property

3. To provide for the care and maintenance of individuals who are unable, for medical or other reasons, to manage their own affairs

4. To provide for the care and maintenance of a spouse during their lifetime while controlling the disposition of the trust property on the spouse’s death

5. Tax planning objectives such as income splitting capital gains with minor beneficiaries or splitting dividend income from small business corporations to a lower marginal tax rate spouse or child.

 

This publication has been prepared by ScotiaMcLeod, a division of Scotia Capital Inc.(SCI), a member of CIPF. This publication is intended as a general source of information and should not be considered as personal investment, tax or pension advice. We are not tax advisors and we recommend that individuals consult with their professional tax advisor before taking any action based upon the information found in this publication. This publication and all the information, opinions and conclusions contained in it are protected by copyright. This report may not be reproduced in whole or in part, or referred to in any manner whatsoever, nor may the information, opinions, and conclusions contained in it be referred to without in each case the prior express consent. Scotiabank Group refers to The Bank of Nova Scotia and its domestic subsidiaries.





Executors and their duties

There will be a time when you will need to decide who you should appoint as executor of your Will. As well, there may be a time when you will be asked by someone to act as the executor of his or her Will. In either situation, it is important to be clear on the duties of an executor before making your decision. This article will briefly outline the basic premise behind having a Will, and will then explain in more detail what an executor is, the duties of an executor, and what factors need to be considered when choosing an executor.

 

The Importance of Having a Will

A Will is probably the most basic of estate planning tools. A Will allows you to demonstrate how you wish your estate to be distributed upon your death. It also allows you to choose who will administer the assets that form your estate, and to specify how much authority will be granted to this individual (the executor). This individual may have to deal with a variety of issues such as family problems, unique assets, and determining who will look after minor children. If you do not have a Will then you will die "intestate." In this event, the "rules of intestacy" in any given jurisdiction will determine how your estate will be distributed. These decisions may be totally contrary to your wishes and this process will also undoubtedly significantly delay the settling of your estate.

 

What is an Executor?

An executor is someone appointed in a Will that is responsible for settling an individual’s estate after his or her death. An executor can be a person, one or more persons, or a trust company.

An executor may also appoint a trust company to do the administrative work of an estate on his or her behalf. It would not be unusual to appoint your spouse as executor, however, it would be prudent to appoint an alternate executor in the event that your spouse is unable or unwilling to act. The duties of an executor can be demanding and time consuming. In addition to dealing with considerable paperwork, it may also mean having to cope with tax laws, inheritance laws, family property laws and court procedures. At the same time, the demands of beneficiaries may have to be addressed as well.

 

Duties of an Executor

The duties of an executor, if listed item by item, could take four or five type written pages to outline. For the purposes of what may be helpful for you to know in order to make an informed decision, the common duties are as follows:

  • Locate the Will and contact all the beneficiaries.
  • Prepare an inventory of assets and liabilities forming the estate (assets must be listed by class with their value and full particulars noted which may involve arranging for appraisals of real estate or other personal property).
  • Obtain last 6 years tax returns and prepare and file any T1 returns that were not previously filed within 6 months after the date of death.
  • Notify all relevant insurance, health and pension benefit providers and file related claims.
  • Complete application for probate and make provision for any fees that may be applicable. (Note: If the deceased owned property outside of Canada, the executor must also determine if there is a valid Will for the jurisdiction the property is in. If there is no such Will, the applicable legislation must be determined. Any foreign tax liability, irrespective of whether there is a Will in place or not, must be identified as well.
  • Review the Will and determine an appropriate plan for the distribution of assets to beneficiaries.
  • File a Terminal T1 tax return and any other returns with Canada Customs and Revenue Agency and request a Clearance Certificate. (Note: Terminal period returns must be filed by April 30th of the year following the date of death, or by 6 months from the date of death, whichever is later.)
  • Review post-mortem tax planning opportunities, i.e. spousal trusts, income splitting opportunities, unused expenses etc.
  • Advertise for creditors and settle all claims and debts.
  • Prepare accounts for passing of assets and write to beneficiaries for approval.
  • Distribute assets to beneficiaries with a final report on all aspects of administration. One more thing to consider in this decision is the fact that an executor is dealing with the principles of common law and, in so far as he or she is in breach of trust, is liable for any mistakes or errors that may occur.

 

Selecting an Executor

If you appoint an individual as your executor you need to consider someone who has the ability to successfully complete all the related duties. You may also want to consider an individual who will be sensitive to the needs of your family. It is also wise to consider that when appointing an individual, he or she could predecease you. Unless you remember to update your Will, there would not be a valid executor at your death in this situation.

For these reasons you may want to consider appointing a trust company to act as your executor. These companies have the expertise to handle the duties and are "perpetual" so you need not worry if they will be there at your death.

Any executor may charge up to 5% in fees. This fee can be charged against the gross value of the assets that comprise your estate. This is the maximum amount as set out in the Trustees Act. However, most trust companies will negotiate the actual amount charged, and it will likely be determined by the size of the estate, its complexity and the success the executor has in settling it.

 

Making an Informed Decision

As you can see, there are many factors to consider when determining whether to appoint an individual or a trust company as your executor (and when determining whether or not to accept to act as an executor yourself). As long as you are aware of the complexities and duties that can be involved, your final decision will at least be an informed one.

 

This publication has been prepared by ScotiaMcLeod, a division of Scotia Capital Inc.(SCI), a member of CIPF. This publication is intended as a general source of information and should not be considered as personal investment, tax or pension advice. We are not tax advisors and we recommend that individuals consult with their professional tax advisor before taking any action based upon the information found in this publication.

This publication and all the information, opinions and conclusions contained in it are protected by copyright. This report may not be reproduced in whole or in part, or referred to in any manner whatsoever, nor may the information, opinions, and conclusions contained in it be referred to without in each case the prior express consent. Scotiabank Group refers to The Bank of Nova Scotia and its domestic subsidiaries.



Read more Navigating Your Wealth articles




About the Author

Jeff Stathopulos, CIM, CFP, Portfolio Manager

After two decades in the financial services industry, Jeff's experience as an advisor and branch manager define his approach to providing customized financial planning, estate planning, and managed income solutions. Key to this approach is a thorough understanding of the unique challenges and goals that exist in every client's life. He is a partner in Navigation Wealth Management.

Jeff holds the Certified Financial Planning and Chartered Investment Manager designations. He lives in Kelowna with his wife Tanya, and their two (almost adult) enterprising children.

 

You can contact Jeff by email at [email protected]

Website:  www.yourlifeyourplan.ca







The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet presents its columns "as is" and does not warrant the contents.



These articles are for information purposes only. It is recommended that individuals consult with a financial advisor before acting on any information contained in this article. The opinions stated are not necessarily those of Scotia Capital Inc. or The Bank of Nova Scotia. ScotiaMcLeod is a division of Scotia Capital Inc., Member CIPF.


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