Practical advice from the road show circuit

In keeping with the back-to-school theme, AIM Trimark kicked off its annual road show for advisors this week. The company expects to deliver a lineup of continuing education presentations to more than 5,000 advisors across the country before the end of the month — including ways to for advisors to articulate what their services are worth, ways to transition to a fee-based practice, product reviews, and Jamie Golombek’s always-popular tax and legislative updates.

Golombek reviewed two tax-avoidance court cases recently heard by the Supreme Court of Canada and two Ontario Court of Appeal cases scheduled to be heard by the Supreme Court later this year that could affect clients holding joint accounts with their children, and suggested ways to discuss both issues with clients. He also reviewed asset-allocation strategies for corporate accounts, ways to discuss return-of-capital concepts with clients, and strategies to incorporate charitable giving into tax-planning discussions.

Contacting clients who have joint accounts with their children to advise them of the potential risks, and contacting clients who’ve used relatively common tax-planning strategies, in order to advise them of the latest General Anti-Avoidance Rule (GAAR) developments, were the first two practice recommendations made during Golombek’s review of recent court cases affecting clients.

The GAAR recommendations relate to two recent Tax Court cases. In the first, Overs v. the Queen, the court decided that an arrangement to avoid tax on a shareholder loan was not an avoidance transaction because it followed the rules specifically outlined in the Income Tax Act.

According to the act, shareholder loans must be repaid by the end of the corporation’s second tax year following the loan or they will be included in the borrower’s income. In this case, Lillian Overs borrowed money from the bank to purchase $2.3-million worth of company shares, a 7% interest in the company, from her husband, Michael Overs. Her husband used the proceeds from the sale to repay a $2.3 million loan borrowed two years earlier from his holding company. Lillian then used attribution rules to permit her husband to deduct the interest from the original bank loan used to buy her company shares. Overs won and the CRA did not appeal.

In a similar situation, John Singleton borrowed $300,000 from the bank to invest in his law firm, hoping that interest on the loan would be deductible since it was used for generating business income. Singleton then withdrew $300,000 from his law practice to purchase a home. In Singleton v. Canada, the court decided a direct link could be drawn between the borrowed money and an eligible use, so that Singleton was entitled to deduct the relevant interest payments from his income.

Since the court handed down the Singleton decision, Golombek says “Singleton-type” planning advice has been used and dispensed much more frequently by law firms, accountants and planners. In the Singleton case, however, GAAR wasn’t an issue that was brought up or argued.

The possible deal breaker is found in another recent case, Lipson v. the Queen. In this situation, the client tried to use Singleton-type planning in an “Overs-type” case. The court found that provisions of the act were misused and abused, saying “interest deduction provision and attribution rules were used to achieve a purpose for which they were never intended.” The case has been appealed and will likely be heard by the Federal Court of Appeal next year.

“Contact your clients who’ve used Singleton planning and advise them of the latest developments,” says Golombek. “There haven’t been any reassessments that we’re aware of yet, but it is something they should be aware of so they don’t read it in the papers. Let them know that this issue is out there.”

In other recent legal developments, an opportunity also exists to touch base with clients holding joint accounts with their children for practical or estate planning purposes. Last year, the Ontario Court of Appeal decided on two very different outcomes for Pecore v. Pecore and Saylor v. Brooks.

In the Pecore case, the father, Edwin Hughes, decided to leave his entire estate to his daughter, Paula, making her the beneficiary of his life insurance policy and RRSP. Hughes also transferred his investments into a joint a joint account. Following that, Hughes added Paula’s husband, Michael, to his will. Following Hughes’ death, Paula and Michael divorced and Michael sued for a share of the investment account, saying the account was part of the estate to which he was entitled.

In Saylor’s case, Michael Madsen transferred all of his bank accounts into a joint account with his daughter and estate executor, Patricia Brooks. On his death, assets in the joint accounts were transferred directly to Brooks. Her siblings, William Madsen and Mary Saylor, sued their sister, the estate trustee, saying their father never intended the transfer to be a gift to Brooks alone.

For more on both stories, click here to read Golombek’s analysis of the Pecore v. Pecore case, and here to read more about Saylor v. Brooks.

Despite that both dealt with a very similar set of facts on the surface, the courts came to opposite conclusions in the two cases, basing these on an examination of the client’s intent in each situation. Both cases will be heard by the Supreme Court at the end of the year.

“These are not tax issues, they’re civil cases where courts are examining intent,” says Golombek. “Clients that have joint accounts need to read these articles. Tell them to be careful. Contact clients who have joint accounts with children and advise them of the potential risks.”

Filed by Kate McCaffery, Advisor.ca, kate.mccaffery@advisor.rogers.com