Are There Mulligans In Estate Planning?

Written on behalf of Arbesman Hamilton LLP

It stands to reason that most people want to make financial decisions in the most tax efficient manner possible. But what options are available to people who realize after the fact that they haven’t done so? A recent case heard before the Supreme Court of British Columbia looked at whether an estate could remedy a decision made by a business that resulted in unanticipated tax consequences.

Two pieces of advice

A married couple residing in Germany owned the business involved in the case. Their business was located in British Columbia. As of May 8, 2001, each of the spouses owned one common share, each with an adjusted cost base and paid up capital of $1. The business was a real estate holding company, which owned a property it rented out to a business called Flora Manufacturing and Distributing Ltd (“Old Flora”). The husband in the relationship managed Old Flora. The couple was in their 80s when they sought tax advice in regards to a reorganization of their Canadian holdings.

On February 18, 2013, the couple’s lawyer recommended they sell their shares in the holding company to Old Flora in exchange for preferred shares of that company The reason behind the suggestion was that doing so would allow them to avoid a requirement to pay taxes on what would be considered a deemed dividend under the Income Tax Act (the “ITA”). This advice was not acted on.

The wife died on May 16, 2013. At the time, the value of her share in the holding company was $1,951,458. On February 13, 2015, the estate followed the same lawyer’s new advice and sold its share in the holding company to Old Flora for $1 less than fair market value plus one preferred share in Old Flora (worth $1). It was the lawyer’s thought that the estate would not be required to pay tax on the sale since it did not have a gain.

The Canada Revenue Agency comes knocking

The Canada Revenue Agency (the “CRA”) ultimately assessed the estate for tax resulting in the receiving of a dividend from the holding company pursuant to section 212.1 of the ITA.

The estate then tried to correct its error, filing a petition that the estate had only received a promissory note in the amount of $1, as opposed to receiving the $1. Had this been the case, it would not have been obligated to the taxation imposed on it. The taxation tied to that $1 was significant. The estate petitioned that it could be liable to pay an additional $335,000 on top of $500,000 already paid in capital gains if the documents were not rectified. The estate argued this amounted to double taxation. Furthermore, the estate argued that had the lawyer’s 2013 advice been followed, the tax consequences would not have occurred, since the additional $1 would not have been paid.

Can you walk back a corporate mistake?

Section 229 of the Business Corporations Act (the “BCA”) allows for remedies to be made for corporate mistakes. However, the criteria for allowing a remedy are strict. The BCA states that an error, irregularity, omission or defect must have occurred as a result of:

  • (a) a breach of a provision of this Act, a former Companies Act or the regulations under any of them has occurred,
  • (b) there has been default in compliance with the memorandum, notice of articles or articles of the company,
  • (c) proceedings at or in connection with any of the following have been rendered ineffective:
    • (i) a meeting of shareholders;
    • (ii) a meeting of the directors or of a committee of directors;
    • (iii) any assembly purporting to be a meeting referred to in subparagraph (i) or (ii), or
  • (d) a consent resolution or records purporting to be a consent resolution have been rendered ineffective.

The court ruled that mistake was not captured by any of the required criteria listed in the BCA. Instead, the couple failed to act on the 2013 advice. The estate then decided to act on the 2015 advice. While the decision had undesirable tax consequences, it did not qualify for intervention from the courts.

Minimizing your risk and protecting your wealth is an important part of planning for your future. It is critical to review the possible adverse tax consequences associated with the administration of an estate. Proactive estate planning with the assistance of an experienced estate lawyer is the best way to guarantee your best interests are met. At Arbesman Hamilton LLP we help you plan beyond the preparation of a will or power of attorney, looking towards your long-term objectives, including the needs of your family after you’re gone. Please call us at 416-481-5604 or reach us online to talk today.