FIP507 Group Assignment NBB Case Study 3 and Questions Fall 2023 - Group 8

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Feb 20, 2024

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Group Assignment FIP 507 NBB Fall 2023 – Group 8 Riya Sanjay Parekh,166269217 Mohsin Saleem,115401226 Arjun Pareshbhai Patel,171196215 Aditi Jaswal,170575211 Shawn Doma, 138530233

Part 1: 16 marks 1. In your own words, what is an inter-vivos trust? (2 marks) An intеr-vivos or living trust is a legal arrangement established during one’s lifetime to hold assets on behalf of beneficiaries. In this type of trust, the assets are transferred into the trust by the settlor (in this case, Mr., and Mrs. Singh), managed by appointed trustееs (could be themselves or others), and intended to benefit the beneficiaries (their children, Hani and Gееta). The trust operates while the settler is alive and continues after their passing, providing a means to manage and distribute assets according to the terms set out in the trust dееd. 2. Why would putting the Rental Property into an inter-vivos trust be a good strategy in this case? (6 marks) The Singhs can use inter-vivos trust in many different ways to achieve their personal objectives, add flexibility to their estate planning, and benefit from financial and tax advantages during their lifetime. Some of the key reasons are explained below: a. Capital Gains Tax Deferral : The Singhs aim at deferring their capital gains tax and by transferring the Rental Property into an inter-vivos trust, the Singhs can potentially defer the capital gains tax. The trust structure allows for the avoidance of an immediate capital gains tax liability. As the family gets to enjoy the benefits of tax deferral, it will give them more control over when the capital gain tax is paid in future. It is crucial to note here that “to prevent indefinite postponement of tax on capital gains accrued on property in a trust, a disposition of trust assets is deemed to

occur every 21 years (referred to as the “21-year rule”), which results in taxes on the accrued capital gain. The tax can be delayed by transferring trust assets to the beneficiaries” (CIBC). It is important to plan for the finances to pay for taxes and most of the times it is difficult to huge amounts and then it acts as a burden, however, capital gains tax deferral will help the Singhs manage the burden of capital gains associated with their rental property. b. Reduction of Probate Fees : If the Singhs place the Rental Property in an inter-vivos trust, it can help the family to reduce the probate fees. Assets that are put in inter-vivos trusts generally do not go through the probate process, the value of the property is excluded from the calculation of probate fees. This will result in cost savings for the Singh family, and it will align with their goal of minimizing financial burdens associated with the rental property's transition to the children Hani and Geeta without worrying about the probate fees. c. Future Income Generation for Hani and Geeta : The Singhs' intention to pass down the Rental Property to their children is facilitated by the structure of an inter vivos trust. Trust can be designed to provide a steady income stream to the beneficiaries, Hani and Geeta, ensuring financial support for the next generation. Since the family wants a steady income for the children, inter vivos trust aligns with the family's objective to secure the property as a long-term income source for the next generation. d. Management of Family Dynamics : We understand that there is an existing issue in the family, specifically between Hani and Geeta. With the

establishment of an inter-vivos trust, the complications in the relationships within the family can be addressed and accommodated properly. An inter vivos trust will provide a legal structure for managing and distributing the rental property's benefits among the beneficiaries, Hani and Geeta. The establishment of a trust will help clearly define the terms of the distribution of the income from the rental property without getting involved in the complications of managing and distributing the assets. This can also help address potential conflicts and ensure a fair distribution of income from the Rental Property among the children. e. Ease of Transition to the next generation : The structure and functioning of an inter vivos trust allows for a smoother transition of assets and income to the next generation. The Singhs are worried how the property will be transferred equally among their children but with the establishment of an inter vivos trust, they need not worry about these complications, ensuring continuity even in the event of death of one or both spouses. This also addresses the Singhs' concern about the potential burden of capital gains taxes at the death of the second spouse as an inter vivos trust will provide structured and tax-efficient means of passing on the property to the next generation while maintaining the relationships within the family. 3. Are there other options to consider (suggestion: answer this after reviewing both parts of this assignment)? There are alternative strategies the Singhs could consider addressing their concerns about capital gains and the transition of the rental property to their children:

a) Joint Ownership: They could explore jointly owning their property with their children. However, this could expose the property to the children’s potential creditors or legal issues, impacting the Singhs' original intention for this property. b) Will Planning: Establishing a clear and comprehensive will can dictate how the rental property is distributed after the Singhs' passing. However, this might not offer the immediate benefits and protections that a trust can provide during their lifetime. c) Life Insurance: The Singhs could consider investing in life insurance policies to cover potential tax liabilities upon their passing, ensuring that the children receive the full value of their property without having to sell it to cover taxes. d) Estate Freeze: This involves locking in the current value of the property for the Singhs and allowing any future appreciation to belong to the children. It involves complex tax planning and legal considerations. Each option has its advantages and drawbacks, and the Singhs should weigh them against their specific family dynamics and financial goals. Consulting with legal and financial advisors would be crucial to making an informed decision aligned with their objectives. 4. By proceeding with the transfer to an inter-vivos trust, what would be the taxable capital gain based on the ACB and FMV figures provided. Please keep in mind that the Singhs intend to use their matrimonial home as their principal residence, therefore for the purpose of this

example assume there is no option to have the Rental Property benefit from the principal residence exemption. (4 marks – for full marks show your work) Mr. and Mrs. Singh own (and live) in their principal residence in North York and own the rental property in Toronto. As it currently stands, by holding both properties, there are no capital gains – this would only be triggered upon sale of the rental or if both Mr. and Mrs. Singh were to pass away, prior to the sale/transfer of the property. However, in this situation, they are proceeding with transferring the rental to an inter-vivos trust. This decision (transferring of a property into inter-vivos), results in the trust effectively owning the rental property, while control and management are retained by the Singhs. However, there is a deemed disposition on the property, where the FMV (current value of the property) is determined and the ACB (purchase cost for the Singhs) is subtracted from this current value. The result is capital gain, however, only 50% of the capital gain is taxable. In our example, the FMV is $1,600,000, while the ACB is $500,000, which results in a capital gain of $1,100,000. The taxable capital gain would therefore be $550,000. Rental Property FMV of property $1,600,000 ACB of property $500,000 Capital Gain $1,100,000 Taxable Capital Gain (50%) $550,000 Bonus Question: If the sale of the Rental Property took place in tax year 1994 at the same FMV and ACB as indicated above, and the Singhs had never encountered Capital Gains prior, what, if any, would be the difference compared to question 4, in taxable capital gains on the disposition of the Rental

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