Estate Planning And Wills In Quebec For The New Millennium

What events have occurred in the recent past that should cause us to look at our estate planning and will drafting techniques, which have so adequately served the purpose until now?

Some are:

Changes to the Civil Law of Quebec brought about by the introduction of a new code, the Civil Code of Quebec1 (the "CCQ") on January 1st, 1994, and the judicial interpretation of some of its provisions that are relevant to the subject of our discussion.

Changes to the income tax laws.

The fact that many more of our clients may now own assets in jurisdictions outside of Quebec, for example, real estate in Florida.

In many cases, our clients' children have moved out of Quebec. The testator's wishes regarding their inheritances may be frustrated by the tax and civil laws of the jurisdictions in which they reside.

The effect of the family patrimony and partnership of acquest provisions of the CCQ and similar laws of other jurisdictions on property held in the name of one of the spouses.

This list is by no means exhaustive.

The topics that I intend to cover in this paper are the ones that I consider to be of a more immediate concern, notably:

Situs of estates and trusts.

Debts of the estate.

Common disaster provision.

Particular legacies.

Representation.

The family patrimony and partnership of acquests.

Certain registered retirement savings plan ("RRSP") and registered retirement income fund ("RRIF") problems.

Any reference in this paper to a Section of the Income Tax Act of Canada2 (as amended from time to time)(the "ITA") shall be deemed to include a reference to the corresponding Section of the Taxation Act of Quebec3 (as amended from time to time) (the "TA"). Separate reference will be made to the TA only in cases where its provisions differ significantly from the corresponding Sections of the ITA. Also, unless otherwise stated, all italics are those of the writer and has been added for emphasis.

I have, as do most professionals who do estate planning and will drafting, a few will forms that were developed by me over the years and to which I refer on an ongoing basis. All of those will forms or precedents are referred to in this paper, collectively, as "my Model", since the subject matter of the Clauses and paragraphs of wills that are considered here are generally common to all of them.

1. Situs Of Estates And Trusts.

No matter how many liquidators and trustees and alternate liquidators and trustees are named in a will, either the majority of them in cases where the majority rules, or the sole liquidator or trustee, or the ones wielding a veto power over the others, should most often, all be Canadian residents. Where a will provides for alternate liquidators or trustees to be named in the event of the inability of an original or substitute liquidator or trustee to act, the will should stipulate that the liquidator or trustee to be so appointed must be a Canadian resident within the meaning ascribed to those words for the purposes of the ITA.

These suggestions are made in order to settle for income tax purposes, the location of the residence of the estate and of any trusts that are created under the will.

Where there are several liquidators of an estate or several trustees of a trust, some of whom are non-residents of Canada, the residence of the estate or trust may be determined by analogy. For instance, a corporation is resident where its central management and control is located. The ITA4 provides that a reference to an estate or trust is to be read as a reference to the liquidator or trustee having ownership or control of the estate or trust property. If the sole or a majority of the liquidators or trustees is resident in Canada and if control over the estate or trust property is exercised there, the estate or trust will most likely be deemed to be resident in Canada.

However, if the sole or a majority of the liquidators or trustees are non-residents, and/or the ones who do reside in Canada do not exercise management or control over the estate or trust property, the estate or trust might be held not to be resident in Canada. In such case, the laws of the country in which the estate or trust is considered to be resident will exercise taxing (and possibly civil law) jurisdiction over its property. This is something that a testator may wish to avoid, especially if any such foreign jurisdiction imposes an accession tax or succession duty on testamentary transmissions, or more onerous taxes on trusts than we have in Canada.

In this connection, in a case that went before the court5, the following facts were established:

There were three trustees of a family trust, two of whom were residents of Bermuda while the third was a Canadian resident.

Under the trust deed, the Canadian trustee had sole power to appoint other trustees.

The Canadian resident trustee played an active role in the administration of the trust. But,

A majority decision on all matters involving trustee discretion was required.

All of the trust's assets were located in Bermuda.

The Minister argued that the trust had dual residence because of the fact that the Canadian resident trustee had sole power to appoint other trustees, and that he took an active part in the trust's activities. This argument was totally rejected.

The court did hold, however, that the trust was resident in Bermuda because a majority of the trustees were resident there and the trust document called for a majority decision with respect to all matters in which the trustees exercised a discretionary power.

In many wills, the liquidators and trustees are not the same persons. It is conceivable, therefore, that in any particular case the residence of the liquidators will determine the residence of the estate while the residence of a testamentary trust may be deemed to be elsewhere, depending on the residence of its trustees.

This begs the question of course, of why would it be so bad to have the residence of a trust in particular deemed to be located offshore in a low or tax-free jurisdiction? If the corpus of the trust is increased by an amount equal to the taxes that can be saved, wouldn't that mean that more funds will be available for distribution to the beneficiaries?

The answer to that question is, yes and no. The legislators have thought of that possibility and have dealt with it by enacting special income tax legislation to discourage any planning along those lines.

Although more funds may be made available for distribution to the beneficiaries if the trust is resident in a low tax or tax-free jurisdiction, there are provisions of the ITA that, in effect, make Canadian beneficiaries liable for the taxes that the off-shore trust would have had to pay had it been resident in Canada.

Under the "existing" rules of the ITA, the situation is covered in Section 94 and following. I stress the word "existing", because some amendments have been proposed, the enactment of which will probably occur during this year, 2001.

Section 94, as it now reads, sets out rules that tax the passive income earned by some non-resident trusts ("NRT"s). That Section may apply if a person, resident in Canada, has loaned or transferred property, including by way of a bequest, to a NRT that has one or more Canadian resident beneficiaries.

The Section taxes NRTs that are discretionary trusts differently from those that are non-discretionary. A discretionary trust is defined...