LIFE INSURANCE PLANNING

Many times, when life insurance is purchased, not enough thought is put into the tax planning for the payment of the proceeds on death. For Canadian tax purposes the proceeds are usually tax-free (US citizens note that life insurance proceeds are included for estate tax purposes) so the first step is to ensure that there is a named beneficiary. This will avoid probate. However, if there is a concern about asset protection, if the insured has substantial liabilities or potential liabilities or if the insured is a US citizen, green-card holder or resident then the next step may be to name a life insurance trust as the beneficiary. This kind of trust is one that is created on the death of the insured so it is considered a testamentary trust that is subject to income tax at the graduating personal tax rates.

This will avoid probate, provide asset protection from creditors and provide additional privacy to the estate because it does not become part of the public record. It should be made certain that the trust is testamentary and not a pre-existing trust that will be subject to high tax rates.

FAMILY TRUSTS – US BENEFICIARIES

There has been an increase in the number of children who go to the US to attend school and end up staying to establish their careers and have a family. The problem emerges when these children are beneficiaries of Canadian family trusts that were established previously for estate planning and income-splitting purposes. Many of these trusts are approaching the 21-year anniversary. Generally, when all beneficiaries are residents of Canada, the trustees may distribute the assets of the trust to the beneficiaries on a tax-free basis. However, this rollover is not available to non-resident beneficiaries so the transfer of assets is deemed to take place at fair market value to the non-resident, resulting in a tax liability for the trust. In addition the trust may have to withhold tax on the disposition to the beneficiary as it is considered a disposition of an interest in a trust.

An option to avoid these problems is to have the US resident transfer their interest in the trust to an unlimited liability company (ULC). This would be a tax-free rollover in Canada and the US would disregard the transfer on the basis that the ULC is a flow-through vehicle under their tax statutes. The trust can then make a tax-free distribution to the ULC of the capital of the trust.

US TAX ISSUES

As we become more and more concerned with dealings in the US a decision by the US Supreme Court is of much concern to Canadian business with sales or providing services in the US. While Federal rules are relatively clear to deal with, we have stated in previous issues, our concern with the aggressive actions of some individual states, many of which do not adhere to the tax treaty. Two recent cases involving New Jersey and West Virginia have established the US position that each state has the jurisdiction to determine Nexus or connection to the state. In these cases the states’ position that they can tax out-of-state businesses that do not have a physical presence in the particular state. The Court had previously decided that physical presence would be required for sales tax but that income tax does not require meeting the presence test.

This is all the more reason to tread carefully and ensure that you have considered the potential tax impact of making sales or doing business in the US.

In a related note, those businesses having any activity in Michigan should be aware that the new Michigan Business Tax has replaced the Single-Business Tax. Because this tax is not considered an income tax it will levy a tax on any business or person that has a presence in Michigan for 1 day in a year or if it has Michigan-based gross revenue over $350,000 in a year and the tax is calculated gross revenue less cost of sales at a rate of 0.8%. This can be an onerous matter and should watched closely.

N THE COURTS – LEARNING DISABILITIES

An interesting decision in the Hoare case where the court determined that the fees paid to educate children with severe learning disabilities in the home with a private tutor were acceptable medical expenses because a medical practitioner had recommended the supplementary services for the children. The court allowed the salary and payroll deduction for the tutor who was qualified. The court however did not allow the expenses paid to a clinic providing a remediation program because they were not a medical practitioner or other qualified party. The lesson from this is that, while the court will be flexible with regard to these type of expenses, you must ensure that the service providers meet the criteria. A written confirmation from the service provider and a quick check with our office may save problems later.