LEGALLY YOURS NEWSLETTER 
Issue 2 - 2001 

FEDERAL INCORPORATION FEES REDUCED

The fees to incorporate and maintain a federal corporation have been substantially reduced. Yes, you read that correctly: the fees were cut in half effective April 1. For example, the federal incorporation fee has been reduced from $500 to, depending on the method of incorporation, $200 to $250.  

According to a regulatory impact analysis done by the federal Corporations Directorate, the fees from incorporations and annual returns generate over 80% of the Corporation Directorate’s revenues. In its most recent fiscal year, the revenues from fees collected by the Corporations Directorate exceeded the costs of administration by over $4 million.

This surplus situation is contrary to federal government policy, which policy is due in large part to a 1998 decision of the Supreme Court of Canada regarding probate fees. In that case, the Supreme Court of Canada held that it was unconstitutional to impose a tax by regulation, since taxes must be approved by Parliament or the legislature. While fees can be set by regulation, the court held that probate fees were not a fee but a tax because there was no link between the amount of the fee and the cost of the service provided. (Both Ontario and B.C. subsequently introduced probate tax legislation to comply with the decision.)

Under the Corporation Directorate’s new fee schedule, the fees will more closely match the cost of the service provided.

The vast majority of B.C. companies are incorporated under provincial jurisdiction, in part because of previously lower provincial fees. Now that federal fees are lower, we expect that federally incorporated companies will become more popular in B.C. If you are considering incorporating, and want to know more about the pros and cons of each jurisdiction, give us a call.

NEW TRUSTS CREATE NEW ESTATE PLANNING OPPORTUNITIES

If you are over 65, proposed amendments to the Income Tax Act permit you to use two new types of inter vivos trusts to achieve your estate planning goals. (An inter vivos trust is a trust created during your lifetime, as opposed to a testamentary trust, which takes effect upon death.)

A trust is a legal relationship and, for tax purposes, is a separate legal entity. When you transfer property to you no longer legally own it, even though you can continue to control and benefit from it. Inter vivos trusts have always been available as a tool for estate planning. However, because of the tax rules that apply to inter vivos trusts, they have not been widely used.

Those rules provided that a transfer of assets to an inter vivos trust (except a “spousal trust”) was, for tax purposes, a disposition of the assets at their fair market value, which could result in capital gains tax. As a result, inter vivos trusts have normally been created only in the following situations:

• to create an inter vivos “spousal trust”, where the spouse is entitled to all of the income, and is the only person who can receive any capital, of the trust during the spouse’s lifetime;

• to create an inter vivos trust with assets that do not trigger a capital gain (such as cash, unappreciated stocks or a principal residence)

• to create an inter vivos trust to acquire future growth shares of a corporation as part of an estate freeze transaction.

The proposed amendments to the Income Tax Act create two new inter vivos trusts, the Alter Ego (meaning “other self”) Trust and the Joint Spousal Trust. These trusts enjoy the same benefits of other inter vivos trusts, with the added advantage that transferring assets to these trusts will not trigger any liability for income tax.

To create an Alter Ego Trust, you must meet the following conditions:

• you must be over the age of 65

• you must be entitled to receive all of the income of the trust before your death

• no one else can receive the capital of the trust before your death.

The Joint Spousal Trust has the same requirements except that you and your spouse must be entitled to all of the income of the trust, and no one other than you and your spouse can receive any of the capital while either of you are still living.

If you transfer assets to one of these new trusts, you will no longer legally own them (the trust will), so they will not form part of your estate when you die. During your lifetime you can continue to control the assets as the trustee of the trust, or you can name other trustees to manage the assets for you. You can name beneficiaries who will receive the assets after your death. The trust can be changed or even revoked as long as you have the capacity to make those decisions.

The use of these trusts can be advantageous for many reasons:

1) Probate Avoidance

A trust can avoid probate and probate fees. Because the trust owns the assets, they are not part of your estate when you die. Probate, and the payment of probate taxes, applies only to assets that are part of your estate.

2) Asset Protection

The Wills Variation Act allows your spouse or children to apply to the court to vary your Will if they have not been adequately provided for. Because assets in a trust are not part of your estate, the use of a trust can avoid these claims. This could be useful if you wish to treat your children differently, or if you are in a second marriage and wish to provide for your spouse while also preserving the assets for your children from a previous marriage.

For the same reasons, the use of a trust can potentially protect assets from claims by creditors.

3) Centralized Ownership and Management

While you will likely want to control the assets in the trust, you can name other trustees, such as family members or friends, to manage the assets for you. For example, the trust could provide that if you become incapable, your spouse or another trusted family member will act as trustee in your place. As a result, you will not require a power of attorney for the assets in the trust.

4) Privacy

If your Will is probated, it will become a public document, along with the value of all of the assets that formed your estate. Certain people are entitled by law to receive a copy of your Will after your death. A trust is a private document and can be used to keep your affairs confidential.

To avoid probate and protect assets from claims, many people are giving assets away before they die or putting assets into joint tenancy. This can result in many unintended consequences, including taxes. The Alter Ego Trust and Joint Spousal Trust can help you avoid probate and claims against your estate without the problems that can arise by giving away your assets or putting them into joint tenancy.

So should everyone over age 65 create an Alter Ego or Joint Spousal Trust? Definitely not. Although they have many advantages, other factors must also be considered, including:

• the transfer of trust assets to other beneficiaries after your death may not qualify as a testamentary trust, so the ability to save taxes using testamentary trusts for income-splitting may not be available

• for tax purposes, charitable bequests from the trust will not be treated as favourably a charitable bequests under a Will

• transferring real estate into the trust may require payment of provincial Property Transfer Tax

• a trust costs more than a Will, and the preparation and filing of an annual tax return for the trust will be an extra cost.

• it is more difficult to change a trust than a Will

While these new trusts are not for everyone over 65, they have considerable potential as an estate planning tool.  For a personal review of your estate plan, including whether a trust might be right for you, call us to arrange a consultation.

CANADA'S FIRST JUDGEMENT ON INTELLECTUAL PROPERTY AND THE INTERNET

Earlier this year, the Supreme Court of British Columbia delivered Canada’s first trial judgment regarding intellectual property rights in the context of the Internet. The case, BCAA v. Office and Professional Employees’ International Union, arose out of a strike by employees of BCAA. The union set up a series of protest websites similar to the BCAA website to spread its views.

The union’s original protest website copied the metatags and the layout of BCAA’s website, and contained trademarks owned by BCAA. It used the domain name “bcaaonstrike.com”. Later versions of the website contained fewer of BCAA’s trade­marks and metatags.

BCAA sued, claiming that the website’s domain name and metatags, by themselves or in combination with the layout of the website, constituted the tort of passing-off and trade-mark infringement, and that the colours, layout and functionality of the website constituted copyright infringement. Since no Canadian cases had yet dealt with these issues, the court obtained guidance by reviewing several cases from the United States and the United Kingdom.

Passing-Off and Trade-mark Infringement

The court held that the union’s original website did constitute passing-off, as its close similarity to the BCAA website would have caused confusion to the public about the source of the website.

However, the later versions of the website were held not to constitute passing-off. Some of the factors that shaped the court’s decision included the following:

• The union’s domain name included ‘bcaa”, a trademark of BCAA, but because of the addition of the phrase “on strike” it was not identical to BCAA’s trade-mark

• The union was not selling competing services, but was exercising its right to free expression guaranteed by the Charter of Rights and Freedoms

• The subsequent websites included express disclaimers that they were not connected with BCAA

• BCAA did not provide any evidence of any user actually being confused about the source of the website.

Copyright Infringement

The court agreed with BCAA that the unique of BCAA’s website was an “artistic work”, and that the union’s substantial copying of the design by the union for its site constituted copyright infringement.

However, because BCAA could not prove that it has suffered any actual losses as a result of the union's activities (through loss of business, confusion to the public, or damage to reputation), the court awarded only nominal damages of $2,500.

This case has important implications for intellectual property and e-business owners, and is sure to form a cornerstone of future Canadian jurisprudence in this area.