Law Times

Law Times • December 8, 2014 Page 7 www.lawtimesnews.com COMMENT Estates law developments Budget signals big changes for testamentary trusts By andrea dickinson and cindy chiu For Law Times he last federal budget contained proposals calling for significant changes to the taxa- tion of trusts and estates. These changes will have a major impact on estate planning, especially for high net-worth Cana- dians, but they should not come as a surprise. The federal government declared its intent to consult on possible measures to eliminate the tax benefits aris- ing from taxing grandfathered inter vivos and testa- mentary trusts as well as estates at graduated rates when it released the 2013 budget. On Oct. 23, the federal government tabled bill C-43 as its notice of ways and means motion to im- plement certain provisions of the 2014 budget. The bill is currently at the committee stage. Changes to the taxation of trusts and estates would apply to both existing and new arrangements for the 2016 tax year and later. It is important that lawyers who advise cli- ents in this area are aware of the potential implica- tions. Currently, testamentary trusts — which generally speaking are trusts created on or as a consequence of an individual's death — are subject to graduated tax rates. However, inter vivos trusts created during an individual's lifetime are subject to tax at the top marginal rate of 29 per cent federally plus the pro- vincial portion. In a nutshell, the proposed changes will eliminate the graduated tax rates for trusts and certain estates but with two exceptions. Testamentary trusts, whose beneficiaries include those eligible for the disability tax credit, will still have access to the graduated tax rates as will gradu- ated rate estates that will be testamentary trusts for not more than 36 months after the date of death of the individual. It is important to note that a benefi- ciary who is eligible for the disability tax credit can have only one testamentary trust. This prevents each parent of a person with a disability from creating tes- tamentary trusts. Note that a Henson trust is a testamentary trust created for a beneficiary receiving benefits under the Ontario Disability Support Program that allows the individual to continue receiving those payments af- ter the death of the testator. Individuals should take care to ensure a Henson trust meets the exception in the new rules as eligibility for the disability tax credit is not a requirement to receive benefits under the Ontario Disability Support Program. Why is the government making this change? The government noted its concern about promoting fairness, neutrality, and protecting the tax base. Of particular concern were tax-motivated delays in es- tate administration and tax-planning opportunities available through multiple testamentary trusts for the purpose of income splitting. By distributing the estate assets to a number of testamentary trusts rather than outright to the ben- eficiaries, individuals could reduce the total tax bur- den because each trust has access to its own marginal tax rate. Instead of beneficiaries having to add income from an inheritance to their own total income, it can be subject to tax at a lower rate in a testamentary trust. In other words, a beneficiary would have access to more than one set of graduated rates. Whether or not the proposed changes will achieve the government's policy objectives is debatable. Dur- ing the consultation period, the national wills, estates, and trusts section of the Canadian Bar Association prepared a submission. It said the current tax treatment of testamentary trusts does not, in fact, raise questions of tax fairness and neutrality and the overwhelming majority of those who incorporate testamentary trusts into their estate planning do not do it for tax-planning reasons. Nevertheless, in light of these proposed changes, legal counsel should review whether or not to create a testamentary trust as part of a client's estate plan. De- pending on the client, it may still be beneficial, from a tax perspective, to set up a graduated rate estate in order to access progressive tax rates for 36 months. But thereafter, consider whether to maintain the tes- tamentary trust or distribute the assets to the benefi- ciaries and ensure the estate trustees have the requi- site power so they can determine the best course of action at that time. There may also be other non-tax reasons for set- ting up or keeping assets in a testamentary trust. These could include limiting amounts available to spendthrift beneficiaries, protecting an inheritance from the creditors of beneficiaries or in the event of a marriage breakdown, and controlling the distri- bution of the inheritance after death. For example, through a testamentary trust, testators can leave property to a surviving spouse for use during his or her lifetime and to children thereafter. However, if the motivation for using the testamentary trust was primarily for tax reasons, the changes will soon eliminate these benefits. LT uAndrea Dickinson and Cindy Chiu are associ- ates at Morris Kepes Winters LLP in Toronto. Both of their practices focus on personal and corporate tax planning, corporate reorganizations, implementation of tax-driven transactions, and estate planning. Time to reconsider consideration in employment law By david harris For Law Times he typical analysis of the effectiveness of a new contractual term that has arisen in the context of an ongoing employment relationship is one using the traditional contract model of offer, acceptance, and, most importantly, consideration. The usual battleground centres on a one-sided sever- ance term the employer has provided once the relation- ship is in full swing. The real motivator, the arguments go, is there's an element of unfairness in the unilateral imposition of an unfair term on an employee in a vulnerable state whose ability to negotiate is modest. The search for consideration is likely not the right tool to use to right this wrong. This is more apparent with a look at the converse cir- cumstance. What becomes of the claim of an employee offered enhanced retirement benefits, an improved ben- efit plan, a better bonus, stock options or even a raise in the course of employment? Consideration then becomes an awkward, uncertain argument. It is now a well-heeled position that contin- ued employment will not pass the test for the employer's argument to enforce a new contractual term, as the On- tario Court of Appeal expressed in 2004 in Hobbs v. TDI Canada Ltd., when it stated that there must be "increased security of employment," and repeated in 2008 in Braid- en v. La-Z-Boy Canada Ltd. The cases do not show such a bright line in the con- verse circumstance when it is the employee who seeks recovery of an enhanced employment benefit. In 2008, the B.C. Court of Appeal ruled on the is- sue in Ciric v. Raytheon Canada Ltd., a case in which the employee sought and lost her claim for promised sever- ance benefits. The court found that had the employee been willing to resign and withdrew it, there would be consideration, presumably as a form of forbearance. The B.C. Supreme Court, however, came to the op- posite conclusion in its 2012 decision in Lacey v. Wey- erhaueser Company Ltd., a case in which the retired em- ployees sought to enforce an enhanced retirement ben- efit plan. It found there was consideration in continued employment. The reality is that the search for consideration should be a mirror image no matter which side seeks to plead such a contract. It is also apparent that the consideration argument is an unwieldy instrument when used to undo the wrong of a one-sided severance term, one that is com- pletely illogical and unfair when f lipped to the other side. The dissent of Justice Frans Slatter in the 2011 deci- sion of the Alberta Court of Appeal in Globex Foreign Exchange Corp. v. Kelcher came to the conclusion that the search for consideration in an ongoing employment relationship is nonsensical. An employee, the decision argued, should be es- topped from denying the covenant, due apparently to the tacit acceptance of the term, presumably with evidence of prejudicial reliance by the employer. The dissent continued to argue that consideration re- quired for a contractual variation in an existing relation- ship is nothing but a legal fiction. Certain decided cases would mean, as noted in the dissent, that any improved employment benefit given in the course of employment does not create a contractual obligation. Does this mean a salary increment or an im- proved bonus or benefit plan is not a binding obligation? This is illogical. The reality check is that the employee should demonstrate the unfairness of the employment contract through an argument of unconscionability. This is a much more difficult test to pass but it likely should be the real barrier. The degree of unfairness must be manifest to succeed in this plea, but it does appear to be a much more logical test. This was the reasoning used in Daley v. Golden Child Care Society. The court referred to my text, Wrong ful Dismissal, in noting that the employment relationship creates a "special relationship" and hence a presumption that a contract was the product of undue inf luence. So at its discretion, the court may set aside an unfair notice provision. Toronto employment law mediator Barry Fisher sug- gests a better way of promoting fairness in such termi- nation clauses is to introduce the doctrine of informed consent. "We start with the implied term of reasonable notice. If the employer wants to limit that entitlement, especially to the Employment Standards Act minimums, then the employee should first be aware of what rights he or she is being asked to give up. Furthermore, the law should require the employer to spell out exactly what the termination provisions are and not evade the issue by an oblique referencing to the statute. Perhaps the law should provide that if an employee is being asked to give up his or her right to reasonable notice, the employee should be required to obtain independent legal advice before this term can be enforced. This would ensure that the employee who voluntarily limits his or her termination rights does so with informed consent and not through ignorance of their legal rights." LT uDavid Harris, a former lawyer, is publisher of Employ- ment Law Books (e-mploymentbooks.com) as well as author of Wrongful Dismissal, published by Carswell. u SPEAKER'S CORNER T T

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