What are some of the trips and traps to be aware of from an estate planning viewpoint if you are a Canadian, but you have assets or other connections south of the border?
In this blog, I will give a few concrete examples drawn from my experience of the problems that can arise if proper advice is not obtained and proper planning is not put in place.
Case Study 1: Florida
Myra and Ted bought a condo in Florida about twenty years ago, where each year they spend several months enjoying the sunshine, golf and the beach. They have Ontario wills and powers of attorney that they just recently updated.
While in Florida, unexpectedly Myra is taken to hospital after suffering a heart attack. Ted shows the hospital Myra’s Ontario power of attorney for personal care which appoints him as her attorney. The hospital is reluctant to rely on it, as it is not in Florida form.
When Ted later goes to the local bank to be added to Myra’s account from which all their Florida expenses are paid, the bank refuses to recognize Myra’s Ontario power of attorney for property appointing Ted as the attorney, and Ted is told they will have to refer the matter to their national online legal department, and it might take several weeks to get an answer.
Problem: It is difficult to have a foreign power of attorney recognized outside of one’s home jurisdiction. Florida law only allows for recognition of a power of attorney prepared in another U.S. state.
Solution: Myra and Ted could have avoided these problems by having Florida powers of attorney prepared. It is generally advisable to have a power of attorney for property and for personal care in each jurisdiction in which you have assets or spend time.
Case Study 2: California
Sandy was born and raised in Ottawa. Several years ago, he left his job as a computer programmer to work in Silicon Valley at a start-up software company which has become very successful, and his shares in it are now very valuable. Many of his assets are still in Ontario, including his insurance, RRSP, cottage and his home which he rents out.
Sandy consults a California lawyer for help on his estate planning, who recommends that Sandy transfer his assets to a revocable trust to avoid the expensive and drawn out California probate system, and that he have a California will which will transfer all property Sandy owns at death not already in the trust to it.
The California lawyer suggests he may limit the will only to assets in the U.S., as he is not sure about Canadian law.
Problems: If Sandy transfers his appreciated Canadian real estate to the revocable trust, it will trigger a Canadian capital gain, because the Canadian rules are different than the U.S. rules and the trust is treated as a separate entity.
If Sandy is not considered a non-resident of Canada for a required period of time under our tax rules, the trust could also be deemed resident in Canada for tax purposes, and subject to Canadian taxation.
If the California will deals with all of Sandy’s assets, on his death it is problematic to transfer his Ontario assets to a revocable and amendable trust, including because of recent case law developments, and as a result these provisions in the will with regard to the Ontario assets could be invalid.
If the California will is restricted only to U.S. assets, this will create a partial intestacy, leaving Sandy’s non-U.S. assets to pass to his closest next of kin, and without a named executor, which is clearly not what he wishes and an entirely unsatisfactory result.
Depending on who Sandy appoints as executors under his California will, if it deals with all of his property and it is necessary to probate it in Ontario to deal with Sandy’s Ontario assets, there could be the requirement to post a bond with the Ontario court.
As well, if the California will is not probated in California because there is no need to, if original probate is sought in Ontario, all of Sandy’s directly owned worldwide assets except real estate outside of Ontario will be subject to Ontario Estate Administration Tax (“probate fees”) of approximately 1.5%.
Solution: Canadian tax advice and Ontario legal advice is necessary to effectively coordinate planning between California and the U.S. tax regime to avoid unintended consequences. Estate planning cannot be done in a vacuum, and it requires experienced advisors who are knowledgeable about cross-border issues.
Consideration should be given to having a separate Ontario will and Ontario powers of attorney to deal with Sandy’s Ontario assets, including his real estate to transfer them on death under his will to ensure there is no immediate triggering of capital gains, to avoid an intestacy of his Ontario assets, to ensure the transfer of his Ontario assets on his death are valid, to possibly appoint Ontario resident executors to avoid any bonding requirement, and to minimize exposure to probate fees in Ontario, as well as a host of other matters.
In each of these examples, some of the complexities and the pitfalls that arise when Canadians have U.S. connections are highlighted. In any cross-border situation, it is critical to get proper professional advice to ensure a coordinated plan, to avoid any minefields, and to obtain optimal results.
— Margaret O’Sullivan