Law Times

Page 8 OctOber 26, 2015 • Law times www.lawtimesnews.com First audits begin as estate tax survives challenges BY JUDY VAN RHIJN For Law Times hile estate lawyers and e x e c u t o r s get on with the practical business of trying to comply with the new filing and valuation re- quirements of the Estate Admin- istration Tax Act, an emotional challenge to the changes has come and gone in the legislature. "It was like Halley's Comet," says Barry Corbin of Corbin Es- tate Law in reference to a private member's bill brought forward by MPP Monte McNaughton. "It passed first reading on the 16th of September and failed second reading on the 24th of September." McNaughton has also orga- nized an online petition calling for a rollback of the require- ments that force grieving fami- lies to catalogue and value the deceased's possessions so soon after the death. Around the same time as the legislative challenge, Corbin made a freedom of information request that asked the Ministry of Finance for information on the number of estate informa- tion returns submitted and re- viewed so far. He also requested details of the cost of operating the system and specified that it would be a continuing request for access at six monthly inter- vals for a period of two years. The only answers he obtained was the number of returns sub- mitted or due after the 90-day waiting period and the total cost of all of the audit staff in the Ministry of Finance's advisory and compliance branch, which Corbin says is meaningless for his purposes. The government withheld all other information. While these battles con- tinue, lawyers are getting on with advising their clients on how to navigate the pro- cess of applying for probate with the correct fees and fil- ing the form within 90 days of the court's issue of the cer- tificate of appointment. And now that the first audits have begun, lawyers have been hoping for some feedback on the ministry's criteria. But ministry spokesperson Scott Blodgett will only say it uses a "risk-based approach" when selecting accounts for audit. "The ministry does not make public the selection criteria, nor the number of audit activities it initiates on a particular program." Given the lack of guidance, lawyers are advising their cli- ents to take a defensive ap- proach. "The government has said many times that they don't have the resources to review every single return," says Corbin. "If you want not to be one of the unlucky folks who are selected for closer review, and maybe worse — a notice of as- sessment — it's best that wher- ever there is room for doubt, hire someone with the right cre- dentials to give you a letter. The name of the game is to be that one where nothing looks wrong. If you have an appraiser's cre- dentials on every letter, that will be a pretty strong factor." Donna Neff of Neff Law Of- fice PC in Ottawa laments that no one knows how the minis- try chooses who to audit. "Is it a random selection of every 20th return or do they look at the re- turn and think there's something wrong with it or that the estate is worth a lot of money? My advice is to be overly cautious, not to have too little information, and have the executor on the hook." Markham, Ont., lawyer Charles Ticker points out that the calculations of value should jive with the amount paid for the certificate of appointment and recommends completing valu- ations before submitting the ap- plication for a certificate. Neff agrees. "If not completed in ad- vance, it may be necessary to file an affidavit and pay the miss- ing amounts, which, in turn, increases my bill. Most estate trustees agree to wait until all valuations are completed." There remains a question as to how formal the valuations need to be. "The problem is the government is not telling us what sort of evidence they think is suf- ficient," says Ticker. "I'm telling my clients they need to get evidence to support their figures. They can just get a letter of opinion or actually get an accredited appraisal. At least if the assessment is challenged, they have evidence that they did due diligence. I think the new standard will be that it won't be enough to get a letter of opin- ion. I tell them to do their best to have the best documentation they can." According to Corbin, ex- ecutors are under a tremendous amount of pressure. "It's all a question of your comfort level. In respect of a personal residence, if you want to be assured that the government won't choose you, get a formal appraisal done. With a condominium, it might be less of an issue. A real estate letter may be sufficient if there are enough good comparable sales. You will have a much tougher time with shares in a private corporation, certainly where it is operating an active business. If you don't have a proper appraisal, that would be a big, fat target. It's a matter of common sense." Ticker also recommends getting statements from the bank and approaching some- one who does content sales to quote what they think it might sell for. "I can't see an auditor arguing over the value of a bedroom set, but as things stand, you never know." Neff is also advising ex- ecutors they need to be very careful about how they de- termine value and have the backup to prove it. She insists that her firm should prepare and submit the form. "That way, we know they are not missing the deadline. We make it part of the retainer. Not a single executor has complained." Despite the ministry's re- luctance to provide details, the estate bar is still hop- ing for more guidelines. "I think much more detail needs to be provided as there is a good deal of uncertainty as to what is sufficient to satisfy an audi- tor in terms of valuation," says Neff. She identifies the main areas of uncertainty as joint as- sets held by the deceased and a non-spouse, some insurance- like assets such as superannua- tion death benefits, household goods, and personal effects. "I'd like a clear interpretation of the language — what's in and out. There are lots of things we're scratching our heads about." The issue isn't just the tax, she notes. "People need to think about penalties and interest, let alone the tax itself. When we do a quick calculation and ask: 'Do you want to worry for the amount of [tax] you're saving?' they inevitably say, 'Just put it in.' What would have been grey be- fore, we're pushing right in." LT 'I can't see an auditor arguing over the value of a bedroom set, but as things stand, you never know,' says Charles Ticker. FOCUS ON Trusts & Estates Law W Lawyers clarify misconceptions over U.S. rules BY JUDY VAN RHIJN For Law Times he purchase of U.S. property should come with warning bells that point to a possible li- ability for U.S. estate tax. While testators will often find the actual amount owing is negli- gible or non-existent, there are hoops to jump through and misguided attempts to avoid liability may prove to be costly and unnecessary. Canadian citizens who are also U.S. citizens or who own U.S. property are subject to the U.S. estate tax regime, but thanks to the Canada-U.S. tax treaty, no levy is payable if the individual's worldwide estate is less than US$5.43 million. Christopher Kostoff of O'Sullivan Estate Lawyers PC says that for non-U.S. citizens, the amount may be higher. "It depends on the value of the individual's U.S. situs property relative to his or her worldwide estate, while for married indi- viduals, the exempt amount can be doubled if certain conditions are satisfied." Michael Cirone and Veronika Chang of Morris Kepes Winters LLP see two types of clients: people who don't even realize they have an issue and those who ex- pect to have one but usually don't. Cirone says that to be on the safe side, people should get advice before they buy property or enter into any kind of disposition. "If you get advice later, your hands may be tied." Having said that, Chang says that more than half of the people who call their firm aren't likely to have a financial liability. "People think of U.S. property and immediately think that the U.S. is so litigious, but half the calls we get don't need to do anything. It's only Ca- nadian tax residents that have a net worth in excess of the $5.43-million U.S. estate tax exemption that may need to do special cross-border planning." Wendy Templeton of Templeton Law agrees that this complicated area can be a landmine for the unwary. One glaring problem is that many Canadians have U.S. citi- zenship and the corresponding obligations without realizing it. "You need to have a conversation to be as- sured they are not treated as a permanent resident of the U.S. There are a lot of closet U.S. citizens. It may be ac- cidental — they happened to be born while Mum was passing through — or they may have a green card. There are people with no real feeling of connection to the U.S. who f ly under the radar, but they are actually subject to a whole lot of obligations. Canadian lawyers are not trained to be alert to that. With increased scrutiny by the U.S. tax authorities and the U.S. reporting requirements, you need to be clear: What is your status?" The rules will affect non-U.S. citizens who own U.S. property if the value exceeds $60,000. "Technically, un- der U.S. law, you have to file a U.S. estate tax return," says Templeton. "Then the unified tax credit eliminates or reduces the tax if assets are $5,430,000 in total and less." The scheme has several challenging aspects, how- ever. The first is the requirement to file a U.S. estate tax return to trigger the exemption. "Although it's usually T See Filing, page 11

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