How to define an estate

It’s difficult to distinguish an estate from other trusts

The CRA is leaving no stone unturned in its hunt for revenue. The agency has begun automatically assessing penalties on taxpayers who fail to file Form T1135, the Foreign Income Verification Statement, on time. These are levied even if all foreign income was fully declared on personal tax returns.

Form T1135 must be filed annually if the total cost of all your foreign investments, including foreign stocks (but not Canadian mutual funds with foreign holdings) held in non-registered Canadian brokerage accounts, is over $100,000.

The penalty for failing to file this form is $25 per day, to a maximum of $2,500. If you knowingly fail to file, the penalty jumps to $500 for each month the form is not filed, to a 24-month maximum.

The CRA used to waive these penalties for first-time violators, but there have been at least ten reported decisions (including Leclerc, Seabrook, and the seven Asper companies, including Canwest Communications Corporation) in the past two years dealing with failed attempts to get relief from penalties for late T1135 forms.

The most recent case involved the late filing of T1135’s lesser-known cousin, the T1142: Information Return in Respect of Distributions from and Indebtedness to a Non-Resident Trust. This form must be filed any year in which a person “receives a distribution of property […] from a non-resident trust, […] other than an estate that arose on and as a consequence of the death of an individual.”

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That was the question in Hess v The Queen, 2011 TCC 360. Paul Hess received income distributions from a non-resident trust created under the will of his great-uncle. The distributions ranged from $16,000 to $35,000 in each year between 2002 and 2006.

Although Hess had no Canadian income taxes payable those years, CRA nonetheless demanded Hess file income tax returns for 2005 and 2006. In 2008, Hess voluntarily filed the required tax returns along with Form T1142 to report distributions for each of the 2002 to 2006 tax years. CRA considered all five of the T1142s to have been filed late, and imposed a $2,500 penalty for each. Hess appealed to the Tax Court of Canada.

Hess’s case focused on the exception provided for an estate. The trust created upon the death of Hess’s great-uncle was clearly a non-resident trust, but was it also an estate?

Distinguishing between an estate and other forms of testamentary trusts can be difficult. Under a testamentary trust, a trust created upon a client’s death, a trustee holds the deceased’s property on behalf of the beneficiaries. An estate is a type of testamentary trust that endures while the executor (estate trustee) distributes the individual’s property to the heirs (beneficiaries). The estate trustee has one year to wind up the estate, although more time may be allowed for complex estates.

Another complication arises when an individual’s will specifies certain property to be held in trust, but does not name a separate trustee for the property. In such instances, it may be unclear whether that property forms part of the estate or is held in a separate testamentary trust.

Justice Hershfield, who presided in the Hess case, noted the submissions by CRA made “no assumption that the estate had been wound up or that the testamentary trust was a distinct trust administered separate and apart from the estate.” He concluded the trust was an estate and the exception under the Tax Act did apply, eliminating the need for Hess to file Form T1142 and pay any late-filing penalties.

This case shows it’s difficult for the average taxpayer to know when an estate exists. Even Justice Hershfield commented, “Should beneficiaries under a will be presumed to know that even though […] all estates are trusts, not all testamentary trusts are estates? I am of the view that the distinctions are not so readily apparent in these circumstances to persons of similar background and experience as [Hess].”

Jamie Golombek

Tax & Estate

Managing Director, Tax and Estate Planning, CIBC Private Wealth Team Jamie Golombek is Managing Director, Tax and Estate Planning with CIBC in Toronto. As a member of the CIBC Private Wealth team, Jamie works closely with advisors from across CIBC to support their clients and deliver integrated financial planning and strong advisory solutions. He joined the firm in 2008 after 12 years with a global investment company, where he was involved in both internal and external consulting on all areas of taxation and estate planning. Jamie has also worked for Deloitte as a tax specialist in the Toronto office, where he specialized in both personal and corporate tax planning. Jamie is quoted frequently in the national media as an expert on taxation. He writes a weekly column called “Tax Expert,” in the National Post, has appeared as a guest on BNN, CTV News, and The National, and for several years was a regular personal finance guest on The Marilyn Denis Show. He received his B.Com. from McGill University, earned his CPA designation in Ontario and qualified as a US CPA in Illinois. He has also obtained his Certified Financial Planning (CFP) and Chartered Life Underwriting (CLU) designations. In 2023, Jamie was named a CPA Ontario Fellow. The FCPA is the highest distinction that can be bestowed upon a CPA who brings distinction to themselves and to their profession through leadership and achievement in their professional, community or personal lives. Jamie is a past chair of the Investment Funds Institute of Canada’s Tax Working Group. He is also a member of CPA Ontario, the Illinois CPA Society, the Estate Planning Council of Toronto, the Canadian Tax Foundation and the Society of Trust and Estate Practitioners. For nearly two decades, Jamie taught an MBA course in Personal Finance at the Schulich School of Business at York University in Toronto.