A properly drafted will must be crystal clear as to the objectives of the testator. The courts are busy interpreting provisions of wills when the beneficiaries cannot agree on their legal meaning. The process of hiring lawyers to opine on the legal meaning of a provision, or hiring lawyers to object to the interpretation of a provision, can be expensive and time consuming, and can permanently damage family relationships. A recent case before Ontario’s Superior Court of Justice highlights the need to ensure clarity of the written words in a will. The facts of the case are as follows:
- The testator was Mr. Andrew Steward Cromarty.
- At the time of his death, Mr. Cromarty owned three farms (A, B and C).
- Farm B was bequeathed to Mr. Cromarty’s niece.
- Farm C was bequeathed to two of Mr. Cromarty’s friends, a married couple.
- Farm A fell to the residue of the estate, and the residue was left to Mr. Cromarty’s nephew.
- Mr. Cromarty was entitled to the qualified farm capital gains exemption.
The following are three provisions of Mr. Cromarty’s will dealing with the distribution of his property and the handling of taxes and debt. While Mr. Cromarty may have had specific intentions, the words used to articulate his intentions unfortunately resulted in conflicting interpretations.
The bequest to the niece said, in part:
“Capital gains tax with respect to this property that is the subject of this trust shall be determined as at the date of my death and the amount thereof paid from the residue of my estate. Thereafter any such tax payable with respect to the property shall be charged to or paid
by the beneficiary receiving the said property.”
The bequest to the friends noted as follows:
“Capital gains tax and probate fees, if any, that are attributable to this property, shall be charged to or paid by the beneficiaries of the said property.”
The will included a general provision in respect of taxes:
“It is my express intention that all taxes, including capital gains tax, and probate fees, if any, shall be determined as of the date of my death and shall be paid from the residue of my estate, unless provided otherwise in this my will.”
Some of the numerical information was as follows:
|Capital gain on Farm A||$556,431|
|Capital gain on Farm B||$459,633|
|Capital gain on Farm C||$475,000|
|Capital gains exemption||$750,000|
|Other Income subject to tax||$50,850|
|Tax liability on terminal return||$194,045|
|Tax attributed to farm properties||$173,806|
The differing interpretations of the wording of the provisions resulted in disagreement among the beneficiaries and necessitated involvement of the court.
Mr. Cromarty’s nephew took the position that the residue of the estate should bear the least amount of tax and the friends the most amount of tax, and wished to apply the entire capital gains exemption to farms A and B. The nephew’s position calculated the tax owing by the friends as the difference in the estate’s income tax liability with and without Farm C. This approach resulted in the friends owing $111,068 in taxes in respect of Farm C.
The friends, on the other hand, took the position that the estate’s tax should be allocated across the three farm properties based on the ratio of capital gains reported. This approach would allocate the total of $173,807 across the three properties in the ratio of 37%, 31% and 32% respectively. The result was $55,357 of taxes due from the friends as per the will.
The judge presiding over the case reasoned that capital gains and taxable capital gains were taxed in the aggregate, and that the deduction for the capital gains exemption was not taken against an individual property but against the aggregate taxable capital gain reported. The judge decided that the income tax liability attributed to the three farm properties was to be allocated in ratio to the capital gains reported.
The importance of drafting a clear and understandable will cannot be overstated. When the financial interests of beneficiaries can change based on interpretation, disagreements will likely result. For this reason, a careful review should be part of every individual’s
process in creating a will.
E.O. & E.
This commentary is published by the Institute in consultation with an editorial board comprised of recognized authorities in the fields of law, life insurance and estate administration.
The Institute is the professional organization that administers and promotes the CLU and the CHS designations in Canada.
The articles and comments are not intended to provide legal, accounting or other device in individual circumstances. Seek professional assistance before acting upon information included in this publication.
Advocis*, the Institute for advanced financial education.
(The Institue”), CLU, CHS, FHF.C and APA are trademarks of the financial advisors Association of Canada (TFAAC).
The institute is a wholly-owned subsidiary of Advocis. Copywrite TFAAC. All rights reserved. Unauthorized reproduction of any images or content without permission is prohibited.
Copywrite ISSN 0382-7038
Contributors to this edition:
James W. Kraft, cpa, ca, mtax, tep, cfp, clu, ch.f.c.
Deborah Kraft, mtax, tep, cfp, clu, ch.f.c.