COLUMN

The billion-dollar tax deadline

The rule could unravel some of the country’s biggest empires, as the wealthy sell off their holdings

DIANE FRANCIS December 25 1989
COLUMN

The billion-dollar tax deadline

The rule could unravel some of the country’s biggest empires, as the wealthy sell off their holdings

DIANE FRANCIS December 25 1989

The billion-dollar tax deadline

COLUMN

DIANE FRANCIS

The rule could unravel some of the country’s biggest empires, as the wealthy sell off their holdings

An obscure rule in the Income Tax Act is going to dramatically affect some of Canada’s wealthiest citizens over the next three years. Innocuously known as the “21-year Deemed Disposition Rule,” it could create a huge tax windfall for Ottawa, and it could also single-handedly trigger scores of corporate takeovers and possibly unravel some of the country’s biggest empires, as wealthy and famous Canadian families, or their heirs, sell off some of their vast assets to pay, or avoid paying, awesome tax bills. Says Goodman & Goodman tax lawyer Patricia Robinson: “This [rule] could force the disposition of an enormous amount of property.”

The 21-year Deemed Disposition Rule specifies that on Jan. 1, 1993, taxes will be payable on the capital gains generated by assets, such as stocks and bonds, that were placed in trust before Jan. 1, 1972, the day the first federal capital gains tax became effective in Canada. The capital gains tax was overhauled during the 1971 tax reform, giving owners of the trusts 21 years to pay the capital gains tax on the rich contents of the trusts.

Now, 18 years later, untold hundreds of millions, and probably billions, of dollars’ worth of everything from corporate stock to buildings, land and artifacts are locked away in such trusts. No one knows how much is at stake. But whatever increases in value have occurred in the trusts between Jan. 1, 1972, and Jan. 1, 1993, will be taxable. And the country’s richest families and their lawyers are now scrambling to postpone the day of reckoning. While the rich struggle with the problem, most Canadians will never have to worry about it. In Canada, principal residences, family farms and the first $100,000 of capital gains per individual may be passed to beneficiaries tax free.

Most of those affected by the 21-year rule are not talking about it, except to their lawyers, but the list of families under pressure undoubt-

edly would read like the who’s who of Canadian business: Bronfmans, Westons, Thomsons, Eatons, to name a few. Their beneficiaries may face tax bills so large that they may have to sell part or all of their empires. I suspect that sales in the past of some family-owned corporations were partly done to take advantage of high share prices, which may not exist when the taxes are due.

Unfortunately, while the rest of us struggle under the burden of increasing taxation, experts say that some of the rich are finding ways to postpone payment. One sure way is to move the assets out of the trusts, and into the hands of beneficiaries, ahead of the 1993 deadline. If done, the tax applies only when the assets are sold by the person inheriting them or when the beneficiaries die.

The problem is, however, that some trusts don’t allow distribution, so families must gain court permission, which is an expensive process. “This is an area in which we are working very actively,” says tax expert Wolfe Goodman, of the Toronto law firm Goodman and Carr. “The problem is where trusts were established before June, 1971. In many cases, assets appreciated greatly in value, and on Jan. 2, 1993, there would be a realiza-

tion of a very large capital gain on paper, and no cash with which to make payment. Obviously, this is a very unsatisfactory state of affairs.”

Such impediments may be insurmountable in certain cases. “Some trusts specify that assets are to be kept until children are 35 years old,” says Goodman & Goodman’s Robinson. “Others stipulate that distribution is not to take place until a certain date, say 1996 or 2001. So, in order to distribute the asset early, trustees must make an application to the Supreme Court.”

This may be tricky when beneficiaries include minors or their unborn children. Explains Robinson: “This is when the official guardian [provincial custodians who safeguard the rights of children] gets involved. The court must be convinced that there is a benefit to distributing the assets early for each and every beneficiary and future beneficiary.” In other cases, trustees do not feel that beneficiaries are old enough, or capable enough, of handling direct ownership of the assets before 1993.

While what is starting to surface here has no exact equivalent in either the United States or Europe, the death duties and capital gains taxes that dog the rich in those countries can often produce similar results. One famous U.S. case involves the incredibly wealthy chewinggum magnate, William Wrigley. Both his parents died within months of each other in 1977, and he suddenly owed millions in death duties and capital gains to the U.S. Internal Revenue Service. The family business was not publicly listed on stock exchanges so it was difficult for him to sell off a portion. And rival businessmen who wanted to purchase parts of the Wrigley empire knew his desperate situation but were unwilling to pay more than fire-sale prices. But faced with interest payments and penalties on his huge tax bill, Wrigley ended up selling the Chicago Cubs baseball team and its Wrigley Field ball park in a hurry in order to pay the taxes.

Such “hardships” are a small price to pay for enormous wealth. Any society which allows an open-ended accumulation of wealth without taxation asks for trouble as the rich get richer. While there is no indication here that Canada’s wealthy will avoid the tax forever, my concern is that the 21-year rule should have been circumvented at all. By letting assets be distributed tax free to beneficiaries ahead of 1993, payment has been postponed until beneficiaries die or sell, perhaps decades. Even more worrisome is the possibility that the wealthy will find ways to avoid the tax altogether through the courts or through political pressure.

Even though the 21-year Deemed Disposition Rule is hardly as burning a tax issue as the hated Goods and Services Tax seems to be, it certainly should be monitored. I’m all in favor of a society that encourages the creation of wealth, but I certainly hope that courts, politicians and tax officials remember that taxes, like death, should be as unavoidable for the rich as they are for the rest of us.