Alan Baggett
2014-05-06 11:10:20 UTC
Right accountant makes estate sing :CRA SOTW
Right accountant makes estate sing
By John Poyser, For The Calgary Herald
Mrs. L's husband died in 1988. The money in his estate was ultimately destined for his children, but the income was Mrs. L's for life under the terms of her husband's last will and testament. The estate itself must have been a sizable one, as the income generated for her was considerable.
In 1992, for example, she reported $143,244 in income on her tax return, and a full $86, 786 of that came from her husband's estate.
Income tax returns had to be filed each year both for the estate and for Mrs. L. She hired accountants --just not very good ones. All of the income she received from the estate was reported on her tax returns and every dollar was taxed in her hands at the highest income tax rates.
In 1994, she fired her old accountants and hired a new one. He reviewed the situation. He told Mrs. L that she did not have to include the trust income on her tax return where it was being taxed at the highest rates.
He advised her, instead, that the executors of the estate could have the income taxed on the tax return filed by the estate and see it taxed in the hands of the trust on a graduated basis. That meant that the first $35,000 or so of income in the hands of the trust would be taxed at the lowest rates, and so on up the various tax brackets towards the higher rates at the top.
Mrs. L still received the income, but the trust paid the taxes at low rates rather than Mrs. L at high rates. Overall this meant less money to Revenue Canada, as it was called then, and more money for her--much more.
The new accountant also recommended that Mrs. L file amended returns and seek refunds for prior years. She asked for some of her tax money back.
The government decided to fight her over the refunds. She won. Her court victory added a hefty tax refund to her bank accounts, on top of the future tax savings she began to achieve. This story is taken from the published decision of the court, omitting Mrs. L's name to save her embarrassment.
Why should we be interested? There is, firstly, a technical lesson to be learned here. Subsection 104 (13.1) of the Income Tax Act allows a beneficiary of an estate or trust to receive the income and spend it on cars and vacations and wine, but elect along with the trustees of the trust to have the income taxed in the hands of the estate or trust, often at low rates.
That is good news when the alternative is to have the income taxed in the hands of the beneficiaries at higher rates.
Moreover, as a result of Mrs. L's court case, a beneficiary can file amended returns retroactively if they missed the boat through an honest mistake or bad accounting advice along the way.
There is a second lesson to be learned here--one that is of some use to the average Joe.
A testamentary trust is like a piano. If you take a piano to someone who doesn't know how to play it you will be lucky if they plunk out chopsticks.
If you take a piano to someone who plays it for a living, who has studied it, who plays the piano on a regular and recurrent basis, then they will play beautiful music.
If you take a testamentary trust or any other legitimate tax avoidance structure to a professional who regularly works with those vehicles in their practice, then they, too, will play beautiful music for you.
They will wring the maximum tax-savings from the structure, and avoid potential pitfalls that await the unwary. Mrs. L's former accountants had been playing chopsticks.
Are you a beneficiary of a trust? Do you have an interest in a privately owned corporation? Have you implemented other structures in a bid to improve your family's tax positioning? If so, you owe it to yourself to find an accountant who can play Chopin.
Here is a third lesson. If you have a spouse, and if you like your spouse, you might consider amending your will to contain Mr. L's testamentary trust.
John Poyser Practices As A Wills And Estate Lawyer With The Wealth And Estate Law Group (Alberta). A Former Chair Of The Wills, Estates And Trusts Section Of The Canadian Bar Association, He Co-authors A Textbook For Lawyers And Accountants On Trust And Estate Taxation. Contact Him At (403)613-2128 Or ***@welglawyers.ca.
(c) Copyright (c) The Calgary Herald
-----------------------------------------------------------
Miss a Tax Tale Miss a lot!
Pop the link below into your browser to view the entire CRA SOTW Library!
http://canada.revenue.agency.angelfire.com
------------------------------------------------------------
Alan Baggett - http://www.taxcollectorsbible.com/ - Tax Collector's Bible
Right accountant makes estate sing
By John Poyser, For The Calgary Herald
Mrs. L's husband died in 1988. The money in his estate was ultimately destined for his children, but the income was Mrs. L's for life under the terms of her husband's last will and testament. The estate itself must have been a sizable one, as the income generated for her was considerable.
In 1992, for example, she reported $143,244 in income on her tax return, and a full $86, 786 of that came from her husband's estate.
Income tax returns had to be filed each year both for the estate and for Mrs. L. She hired accountants --just not very good ones. All of the income she received from the estate was reported on her tax returns and every dollar was taxed in her hands at the highest income tax rates.
In 1994, she fired her old accountants and hired a new one. He reviewed the situation. He told Mrs. L that she did not have to include the trust income on her tax return where it was being taxed at the highest rates.
He advised her, instead, that the executors of the estate could have the income taxed on the tax return filed by the estate and see it taxed in the hands of the trust on a graduated basis. That meant that the first $35,000 or so of income in the hands of the trust would be taxed at the lowest rates, and so on up the various tax brackets towards the higher rates at the top.
Mrs. L still received the income, but the trust paid the taxes at low rates rather than Mrs. L at high rates. Overall this meant less money to Revenue Canada, as it was called then, and more money for her--much more.
The new accountant also recommended that Mrs. L file amended returns and seek refunds for prior years. She asked for some of her tax money back.
The government decided to fight her over the refunds. She won. Her court victory added a hefty tax refund to her bank accounts, on top of the future tax savings she began to achieve. This story is taken from the published decision of the court, omitting Mrs. L's name to save her embarrassment.
Why should we be interested? There is, firstly, a technical lesson to be learned here. Subsection 104 (13.1) of the Income Tax Act allows a beneficiary of an estate or trust to receive the income and spend it on cars and vacations and wine, but elect along with the trustees of the trust to have the income taxed in the hands of the estate or trust, often at low rates.
That is good news when the alternative is to have the income taxed in the hands of the beneficiaries at higher rates.
Moreover, as a result of Mrs. L's court case, a beneficiary can file amended returns retroactively if they missed the boat through an honest mistake or bad accounting advice along the way.
There is a second lesson to be learned here--one that is of some use to the average Joe.
A testamentary trust is like a piano. If you take a piano to someone who doesn't know how to play it you will be lucky if they plunk out chopsticks.
If you take a piano to someone who plays it for a living, who has studied it, who plays the piano on a regular and recurrent basis, then they will play beautiful music.
If you take a testamentary trust or any other legitimate tax avoidance structure to a professional who regularly works with those vehicles in their practice, then they, too, will play beautiful music for you.
They will wring the maximum tax-savings from the structure, and avoid potential pitfalls that await the unwary. Mrs. L's former accountants had been playing chopsticks.
Are you a beneficiary of a trust? Do you have an interest in a privately owned corporation? Have you implemented other structures in a bid to improve your family's tax positioning? If so, you owe it to yourself to find an accountant who can play Chopin.
Here is a third lesson. If you have a spouse, and if you like your spouse, you might consider amending your will to contain Mr. L's testamentary trust.
John Poyser Practices As A Wills And Estate Lawyer With The Wealth And Estate Law Group (Alberta). A Former Chair Of The Wills, Estates And Trusts Section Of The Canadian Bar Association, He Co-authors A Textbook For Lawyers And Accountants On Trust And Estate Taxation. Contact Him At (403)613-2128 Or ***@welglawyers.ca.
(c) Copyright (c) The Calgary Herald
-----------------------------------------------------------
Miss a Tax Tale Miss a lot!
Pop the link below into your browser to view the entire CRA SOTW Library!
http://canada.revenue.agency.angelfire.com
------------------------------------------------------------
Alan Baggett - http://www.taxcollectorsbible.com/ - Tax Collector's Bible