Canada’s New Eligible Capital Property Tax Regime and What It Means for Canadian Controlled Private Corporations

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By , October 11, 2016 3:42 pm

Beginning on January 1, 2017, Canada’s current tax regime for eligible capital property (ECP) will be replaced by a new capital cost allowance (CCA) class. This change was proposed in the 2016 Federal Budget in an effort to simplify the existing tax rules related to ECP.

tax raise conceptual meter The new regime may have a significant impact on Canadian controlled private corporations (CCPCs) and the amount of tax they will pay with respect to ECP beginning January 1st. Before looking at the impact of the new ECP rules on CCPCs, it is helpful to first understand how the existing regime operates and how it will change in 2017.

The Current ECP Regime in Canada

Generally speaking, intangible assets that are connected to the business and are not depreciable property in a particular CCA class are considered ECP. This can include items like trademarks, client lists, licenses, franchise rights, and goodwill. The cost to acquire ECP is known as an eligible capital expenditure and the proceeds earned on the disposition of ECP are known as eligible capital receipts.

Under the current regime, 75% of all eligible capital expenditures are placed in a cumulative eligible capital (CEC) account. Similarly, 75% of all eligible capital receipts acquired on the sale of ECP will reduce the CEC account. Each year, the business can claim a 7% deduction (on a declining balance basis) on the present value of the CEC account. Continue reading 'Canada’s New Eligible Capital Property Tax Regime and What It Means for Canadian Controlled Private Corporations'»

City of Ottawa Nears Completion of Coach House Consultation

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By , June 14, 2016 1:59 pm

house model on green grass fieldThe City of Ottawa may be loosening the rules regarding “Coach Houses”, a type of secondary dwelling unit (SDU). Coach Houses are essentially small apartments or suites in the backyard of a home or along a laneway. Generally speaking, these types of SDUs are used to infill and support urban intensification goals by providing opportunities to introduce more dwellings in established neighbourhoods and broaden affordable housing options. The City of Ottawa defines SDUs as:

a separate dwelling unit subsidiary to and located in the same building as an associated principal dwelling unit; and its creation does not result in the creation of a semi-detached dwelling, duplex dwelling, three-unit dwelling or converted dwelling.

The province of Ontario, through the Strong Communities through Affordable Housing Act, 2011 requires municipalities to authorize second units in detached, semi–detached and row houses, as well as in ancillary structures. The current restrictions and limitations for all SDUs are set out in the City’s Bylaw found here. The City of Ottawa currently permits SDUs within primary residential buildings in all residential zones, but not as accessory structures as-of-right, like a detached garage.

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Recent Changes to Your Auto Insurance Policy

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By , June 7, 2016 11:56 am

??????????????????????????????????????????????????????????????????On June 1, 2016, the Ontario government introduced changes to automobile insurance coverage intended to help make insurance premiums more flexible and affordable. All owners of vehicles in Ontario must purchase a standard auto insurance policy (AIP). Generally the content of these AIPs is governed by the Insurance Act, which defines the benefit amounts required in standard policies sold in the province of Ontario. The changes, which apply to all AIPs with an effective date or renewal date of June 1, 2016 or later, allow policies to become more tailored to an individual’s needs.

What is the same?

 All AIPs will continue to include coverage regarding Third Party liability, uninsured automobiles, direct compensation-property damage and accident benefits. However, if you have previously chosen to purchase optional benefits, check your policy. Depending on the benefit, the amount of that benefit may have changed to reflect amounts available in the new options. Continue reading 'Recent Changes to Your Auto Insurance Policy'»

Legal & Tax Implications of Out of Province Estate Trustees

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By , May 31, 2016 11:24 am

Estate PlanningWhen a testator is preparing their estate plan, specifically their last will and testament, one of the most important decisions is who will be responsible for the administration of the estate, namely who will be the executor. In considering such an important selection the testator should be picking someone who the testator trusts, someone who is good with money, someone who is organized, someone who is reliable, and someone who is willing and able to commit their time and energy. Another important factor to consider is the residency of the executor.

The residency of the executor has both practical implications as well as legal and tax implications. An executor who resides in a different province or country to where the assets of the estate are held will need to devote more time and, likely, more in terms of expenses in order to administer the estate. As a matter of practicality, being in close vicinity to the assets can be beneficial.

It is important to note that where an executor has been appointed under the will and resides in Ontario there is no need to post a bond during the administration of the estate. However, there are statutory requirements, especially under the Estates Act, RSO 1990, C.E.21, for the posting of a bond. This Act states that letters probate shall not be granted to a person who is a non-resident of Ontario or elsewhere in the Commonwealth unless the person has given security, as is required from an administrator in case of intestacy.

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No Work Goes Unpaid: Contributions to Property and Constructive Trust Claims

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By , May 24, 2016 10:04 am

Division of property. Yellow warning tapesAccording to the Family Law Act in Ontario, a husband and wife are entitled to a claim to half of the increase in their spouse’s property accumulated during the marriage (between the date of marriage and date of separation). This is true whether the property is owned jointly or whether it is held solely by one spouse. Where not owned by the spouses together, there is no compensation in the legislation to any increase in value of that property between the date of separation and trial (i.e. the non-owner spouse presumptively loses out on the increase). But not in all cases is the owner spouse entitled to this windfall. In some cases, despite ownership as registered on title or despite a shareholder agreement in a business, the courts can award an ownership interest to the non-owner spouse by way of “constructive trust”.

A constructive trust is an equitable remedy (based on fairness) in which the court “constructs a trust” in favour of the non-owner spouse.

In Rawluk v. Rawluk, a 1990 Supreme Court of Canada decision, the Rawluks were married and had lived and worked together for 29 years. They had a farm and a farm equipment sales and service business. The wife had assumed a large role in the operation of the farm and business. On the date of separation the couple had a number of properties, which were mostly registered in the name of the husband. In the time between separation and trial the value of the properties had risen dramatically.

The trial judge, the Court of Appeal and the majority of judges in the Supreme Court of Canada held that the property in question was impressed with a constructive trust, which entitled the wife to participate as an owner in the increase in the property after separation.

These constructive trust principles are applicable in cases where a non-owner spouse has made contributions to a family business or to property owned on title by the other spouse (whether for convenience, tax reasons or otherwise)

It is particularly applicable where a spouse has provided services, without compensation or at undervalue to a property (financial, labour, etc.) or in a business (akin to an employee). The courts do not distinguish domestic services from other contributions made by a spouse to the business.

The court’s finding of constructive trust requires the claimant to prove three elements:

  1. An enrichment (to the owner spouse);
  2. A corresponding deprivation (to the non-owner spouse); and,
  3. No juristic reason for the enrichment (an exception for which the courts do not feel the enrichment should be returned, such as where the enrichment was a gift).

With respect to the third element, the Honourable Justice Dickson (as he then was) noted in the Supreme Court decision of Becker v. Pettkus, 1980 CanLII 22 (S.C.C.):

I hold that where one person in a relationship tantamount to spousal prejudices herself in the reasonable expectation of receiving an interest in property and the other person in the relationship freely accepts benefits conferred by the first person in circumstances where he knows or ought to have known of that reasonable expectation, it would be unjust to allow the recipient of the benefit to retain it.

Once the court finds unjust enrichment it must decide if a constructive trust or monetary damages are appropriate. The starting point is monetary damages. Where it is not possible to adequately compensate the spouse by way of monetary damages, the court will impose a constructive trust (i.e. interest) in the property/business, diluting ownership of that asset.

In order to award a constructive trust, it is necessary to find a nexus between the contribution of the non-owner spouse and the property which is to be the subject of the constructive trust. For example, the court would not impose an interest by constructive trust in a business or property that the person did not contribute to (i.e. where their contributions were to a different business or property).

We can see these principles applied in the case of Tracey v. Tracey, 1998 CanLII 14893 (Ont. S.C.), in which the wife contributed to the running of the family business (a dairy) for a decade without compensation, or minimal in the form of income splitting. The court concluded:

[14]           From the evidence at trial which I accept, I am also satisfied that Betty Tracey made a significant personal contribution to its success. In 1980, she mortgaged her interest in the matrimonial home to secure bank financing for Ken’s acquisition of the business in the amount of $52,500.

[15]           She also made day to day contributions to the work of the business. She made aprons and kerchiefs for the staff. She made drapes for the dairy bar. She cleaned the floors and the rest of the dairy bar prior to government inspections. She assisted in staff training. She worked on the production line as needed. She packed ice cubes when required. She assisted in the office work – collecting retail accounts receivable and cash, maintaining ledgers, filing payroll. She made meals for the staff.

[16]           She held no management position in the business. However, there was evidence that she participated with Ken in an important meeting with a creditor (Brum’s Dairy) and that they discussed business plans and events until the late 1980’s. As the business grew, the need for her personal participation on a day-to-day basis lessened. In my view, however, her overall direct contribution to Centreside Dairy 80 during the decade leading up to her separation from Ken in June 1990 was both solid and substantial in the context of this family business. Essentially, she received no compensation for her services to the business, except amounts received as part of an income splitting scheme devised by Ken on the advice of his tax accountants. These amounts were no measure of her contributions.

[17]           Although she held no management position in the business, it is clear from the evidence that she held a senior management position in the family as spouse to Ken and mother to 11 children. She carried the major burden of managing the household throughout the marriage.

[18]           In these circumstances, I am satisfied that Ken’s interest in the corporation has been enriched and Betty correspondingly deprived of an interest in the corporation without juristic reason. I am satisfied that Betty aided her husband in the manner I have outlined in the reasonable expectation of receiving an interest in the business and that Ken was aware of her expectations. His manoeuvres to divest himself of legal ownership of most common shares of the corporation on August 1, 1990, less than two months after their separation, is evidence of that.

 [19]           The doctrine of constructive trust may be applied to determine ownership of property of married spouses under the Family Law Act. In my view, this is an appropriate case to impose a constructive trust. When the parties separated in June 1990, Ken owned 100% of the common shares of the corporation. A constructive trust is imposed on 25% of the common shares of the corporation in favour of Betty. If, as I understand, there are now 100 common shares issued and outstanding, then 25 of them are declared to be the property of Betty Tracey.

These situations are important to consider as they may result in intended consequences to spouses on separation in spite of ownership, shareholder agreements, etc. The law with respect to constructive trusts can be contracted out of by way of cohabitation agreement or marriage contract.

These cases demonstrate the importance of these agreements to guard against constructive trust claims preserving a person’s interest in their property or business (for themselves and shareholders). They are a good idea even if a non-owner spouse has not or is not currently contributing to property, as the contracting out of these rights is easier to negotiate before these contributions are made.

MeghanO'HalloranMeghan O’Halloran


But, what about the family dog? Possession of Family Pets on Separation

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By , April 15, 2016 11:56 am

Until one has loved an animal, a part of one’s soul remains unawakened.” – Anatole France

Courts encourage parties to settle disputes over pets without use of the court system where possible, and if not, with proportionality in terms of court resources required to resolve the issue.

Courts encourage parties to settle disputes over pets without use of the court system where possible, and if not, with proportionality in terms of court resources required to resolve the issue.

Pets are often an integral part of family life to which parents and children become attached. It is not easy on separation to divide household contents, let alone to decide what will happen with the family pet.

When parties can’t reach an agreement, the courts may be asked to resolve a dispute over pets. The cases that go to court on this issue are few and far between, not unexpectedly considering the cost involved in litigating the issue.

The courts are sensitive to the use of the court system (judicial resources) in pet disputes. In the 2010 Saskatchewan case of Ireland v. Ireland, 2010 SKQB 454, the parties had a 7-year relationship. The court action included a claim for division of family property. During their relationship, the David and Diane London purchased a dog together, a chocolate Labrador retriever, named Kadi. The court accepted that both parents derived companionship from Kadi – David in running with her 3-4 times a week and Diane in walking and exercising Kadi including playing with a Frisbee.

The parties were unable to agree on who should possess and care for Kadi following their separation leading to an interim application to the court to determine care and custody for Kadi. This led to an order directing David and Diane to share Kadi’s care and custody on a one week on, one week off basis.

The court characterized these weekly exchanges which had resulted from that previous order as “awkward and problematic”. David and Diane returned to court to ask a judge to order a new arrangement on the basis that the previous one was not working.

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House Flipping, Real Estate Agents and Disclosure Requirements

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By , April 6, 2016 3:24 pm
Sellers are concerned that their home will be flipped are advised to insist on a ‘no assignment clause’ in their Purchase and Sale Agreement.

Sellers concerned that their home will be flipped are advised to insist on a ‘no assignment clause’ in their Purchase and Sale Agreement.

A sales technique dubbed “shadow flipping” was recently exposed by the Globe and Mail in British Columbia. Shadow flipping can be done by anyone, but its exploitation by realtors specifically is creating uproar in the real estate industry. Essentially, shadow flipping creates a mechanism whereby realtors are able to collect 2 or 3 times the standard commission on the sale of a single house by flipping the property multiple times before the sale is completed. This controversial method is technically legal since buyers in a Purchase and Sale Agreement have the right to “assign” the contract before the deal closes and there is no law in place that says a realtor cannot facilitate this process. In some circumstances, realtors are finding initial buyers, taking a commission on that sale, and then flipping the property to a second buyer for a higher price by assigning the contract of sale before the deal closes and taking an additional commission for that second sale.  Realtor may do this multiple times, collecting commissions along the way.  In other instances, realtors are purchasing the property themselves with the intention of reselling to a new buyer before closing or to sell at a later date when property values have risen.

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Protecting your share of shares: The importance of cohabitation agreements/marriage contracts

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By , March 31, 2016 8:46 pm
Business interests are included as property when calculating a spouse’s net family property for the purposes of calculating the equalization payment.

Business interests are included as property when calculating a spouse’s net family property for the purposes of calculating the equalization payment.

A cohabitation agreement/marriage contract is a contract setting out what would happen in the event a common law or marriage relationship ends.

These agreements can be drafted narrowly in scope (dealing with specific property or assets) or more broadly. It is important that they be tailored to the unique needs and circumstances of the parties involved. These agreements give certainty to parties to know how assets, debts and property will be dealt with on separation and can help to avoid litigation.

These agreements can be made before or after cohabitation or marriage. Section 53(2) of the Family Law Act states that if the parties to a cohabitation agreement marry each other, the agreement shall be deemed a marriage contract. It is important to consider a cohabitation agreement/marriage contract as they can obviously save a great deal of time and money down the road.

Without an agreement, the law entitles a spouse to a claim to interest in all of their spouse’s property acquired during the course of the relationship/marriage.

Business interests are included as property when calculating a spouse’s net family property for the purposes of calculating the equalization payment. This includes the increase in value of a business in which a spouse owns shares or otherwise has an interest.

In the event there is no cohabitation agreement or marriage contract on separation, a spouse’s interest in a business must be valued and included in the property calculation. This often requires the assistance of an expert such as a certified business valuator. Further, the company itself often may become embroiled in the family law proceedings either with disclosure requests (often of confidential/sensitive information) or as a party to the proceeding.

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Post-Secondary Education and a Parent’s Child Support Obligations

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By , March 9, 2016 4:17 pm

Black Mortarboard and canadian dollarThere is a considerable amount of case law interpreting both the Divorce Act and the Family Law Act in respect of the eligibility for child support for adult children who are enrolled in post-secondary studies and the appropriate approach to calculating child support in those circumstances.

The Family Law Act provides as follows:

Obligation of parent to support child

31. (1) Every parent has an obligation to provide support for his or her unmarried child who is a minor or is enrolled in a full time program of education, to the extent that the parent is capable of doing so.

Similarly, the Divorce Act states:

Child support order

15.1 (1) A court of competent jurisdiction may, on application by either or both spouses, make an order requiring a spouse to pay for the support of any or all children of the marriage.

“Child of the marriage” is defined as a child of two spouses or former spouses who, at the material time,

a) is under the age of majority and who has not withdrawn from their charge; or,

b) is the age of majority or over and under their charge but unable, by reason of illness, disability or other cause, to withdraw from their charge or to obtain the necessaries of life;

The courts have interpreted post-secondary studies to be one such “other cause”.

A finding of eligibility for support does not necessarily mean that the court will order support for a child who is enrolled in full-time post-secondary studies.

Even if support is ordered, the court can deviate from the amount set out in the Child Support Guidelines where the Child Support Guideline amount is “inappropriate” in view of the facts in a particular case.

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Digital Life: After Death

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By , January 27, 2016 2:40 pm

Doorway in landscape with binary streamingNot all that long ago, the topic of digital life would not have been a concern when it came to estate planning or estate administration. As it is becoming more common to be consumed with our digital lives, it is also becoming more important to consider your digital life after death, especially when one’s assets, including photos, music, and books are more likely to be in digital format, then physical form.

Your digital life can be divided into two parts: digital assets and digital accounts. Digital assets include files saved on a computer, emails, financial documents, digital photos, tweets, Facebook albums and posted YouTube videos. Digital accounts are the credentials used to access such digital assets.

A digital account like iTunes is different than most digital accounts. Every time a customer purchases a song, book or movie from iTunes, they are subscribing to the use of the media for their own personal use. They are not actually buying the media, and as such do not own it. This means that it may not be possible to distribute these items to beneficiaries.

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© Kelly Santini LLP 2012.