I'm looking forward to getting older. Why? Because all of the best one-liners come from people who are over age 70. I recently attended the funeral of an elderly man, and overheard an employee at the funeral home speaking with the widow: "How old was your husband?" the employee asked. "He was 98," she replied. "Two years older than me." "So you're 96," the employee commented. She responded, "Hardly worth going home, is it?"
There's something about age, I think, that sharpens the wit. Unfortunately, age doesn't sharpen a person's estate planning expertise if they weren't experts before. Today, I want to share a story that can teach a lesson to many.
On Sept. 1, the Tax Court of Canada rendered a decision in the case DePedrina v. The Queen -- and the taxpayers lost this battle. In 1978, Mr. DePedrina's (Mr. D's) parents transferred ownership of their five-acre parcel of land in Langley, B.C., to Mr. D and his brother, and their wives. Mr. D and his brother weren't aware of this transfer at the time, but were told by mom and dad that "their inheritance had been taken care of."
Mr. D's parents reserved a life interest in the property so that they could continue to live in the home. Mr. D's father passed away in 1983, and his mother died in 1997. Upon his mother's death, the life interest expired and, soon after, in 1998, Mr. D and the other children sold the property for $1.85-million.
The question? Who should pay tax on the large capital gain that resulted from the sale of the property? Mr. D argued that he and the other children should not be taxed on the capital gain that accrued prior to their mother's death. They argued that they could not exercise ownership rights over the property prior to her death, so they shouldn't face tax on the gains during that time.
If the court had agreed, the capital gain that had accrued up to the date of her death would have been reported on her final tax return. This would have allowed use of her principal residence exemption (PRE), and most or all of the tax on the property would have been avoided.
The court disagreed, however. While the judge was sympathetic, he had to conclude that a legal transfer of ownership had taken place, and so any capital gains from the date Mr. D and the others were put on the title (1978 onward) were taxable in their hands.
There are four key lessons to learn from this story: Parents should always talk to their kids about their estate planning. Mr. D and the others had no idea that they were on the title as owners of the property. They may have been able to do some planning to minimize the ultimate tax hit.
Always get proper tax advice when doing estate planning. The lawyers involved in transferring the title to the children did not appear to understand all the tax implications.
Think twice before putting a child on the title on your home. In most cases, all you'll save are probate fees, but the potential tax (and other) problems you create will far outweigh these fees.
Courts cannot provide relief based on fairness where the law is clear. The judge was sympathetic to Mr. D's plight, but had to rule in accordance with the law.
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