Author: afridi-angell

International Estate Administration for Canadian Executors

The administration of an estate can be a complex and intimidating process at the best of times.  If the estate in question has international components to it, the complexity increases and professional guidance will almost certainly be essential.  This article will provide an overview of some of the issues that arise in the context of estate administration with international elements, from the perspective of a Canadian executor or a Canadian beneficiary.

 

There are a number of things that can make an estate administration “international”.  These include:  foreign assets that form part of the estate; the existence of foreign beneficiaries; the non-Canadian domicile[1] of the deceased at the time of death or at the time of making his/her will; a foreign executor; or some combination of the foregoing.  When an estate has one or more of these characteristics, there are certain questions that need to be addressed.  The remainder of this article will be guided by these key questions and answers.

 

What laws apply to the estate?

 

As a starting point, movables in an estate are governed by the laws of domicile at the time of death, and immovables (real property and certain intangible assets) are governed by the laws of the place in which they are located.  The practical application of this concept can be much more complex than it appears at first blush, particularly if there is a will that was executed during an earlier stage of life when the deceased may have been domiciled elsewhere, or if the will only addresses part of the estate assets (partial intestacy), or where outcomes based on the laws of one country must be enforced in another country which may have its own administrative or substantive requirements. The issue of which country’s laws apply is very important, as it determines the scheme of distribution (on intestacy) or how the will will be applied and how it may be challenged (if there is a will). This includes spousal or dependant relief claims and other challenges to a will or intestate distribution. For example, if the deceased was found to be domiciled outside of Canada at the time of death, the Canadian (provincial) laws that give preferential rights to spouses and dependents would not apply.  The issue of domicile and determining whose laws apply is therefore central and must be considered as a first step.  Note that a Canadian court may still agree to take jurisdiction and issue a grant of probate for the estate even if the deceased was not domiciled in Canada, but whether this would be appropriate is a case by case decision based largely on where the deceased’s assets are located (more on issues of probate and asset location below).  The issue of which laws apply to which aspects of an international estate can be difficult and do not always have perfect solutions, particularly when the laws of multiple countries need to work together. The cooperative efforts of professional legal advisors in all relevant countries is usually a necessity in order to agree on how to achieve the best practical outcomes.

 

Where should you apply for probate?

 

Where to apply for the “original grant” of probate will be driven largely by which assets in the estate require probate in order to enable the executor to deal with them, and where those assets are located.  Assets that require probate are usually assets that are subject to a third party’s control or consent, like bank accounts (the bank), land (land registry), public company shares (the company or the relevant exchange).  As such, once an inventory of assets and their locations has been taken, inquiries should be made with the foreign third parties and authorities in order to confirm their particular requirements.  Those requirements will be one of the following:  a certified copy of the will; a fully attested copy of the will (possibly translated)[2]; a grant of probate in the jurisdiction of domicile; or, the original grant of probate submitted to the local courts to obtain a local court endorsement to enable local parties to rely on it; a local ancillary grant of probate (i.e., a fresh probate application in the local courts).  Which of these documents will be required in each instance will need to be confirmed with each relevant asset registry or authority.  Note that assets that do not require probate in Canada may require it in other jurisdictions.  If there is foreign real property to deal with, local probate will almost certainly be required (either re-sealing an original grant or issuing an ancillary grant locally).  Probate fees may therefore apply in more than one jurisdiction as well.

 

In most cases, obtaining the original grant of probate in the place of the deceased’s domicile at the time of death is advisable as that is normally where the majority of matters requiring administration emanate from.

 

In general, even if probate is not strictly required, it is often advisable for an executor to obtain a grant of probate anyway as it offers protection against claims against the executor.  In the context of an international estate administration this should be a material consideration for any executor.

 

Are there special tax issues with an international estate?

 

From the perspective of a Canadian executor that needs to distribute assets to foreign heirs, there are some additional tax compliance requirements.  Most importantly there is an obligation on the executor to withhold what is known as Part XIII withholding tax (referring to Part XIII of the Income Tax Act) of 25 percent, or less if reduced by a tax treaty between Canada and the other country.  If the distribution of assets consists of Canadian real property or amounts derived from it, the executor may also need to obtain a special clearance certificate from the CRA before making the distribution (a section 116 clearance certificate). Note  this  is  different  from  the  clearance  certificate  that  the  executor should obtain from the CRA to protect him/herself from liability for tax in respect of estate distributions in any event, even domestically[3].

 

For assets located in other jurisdictions, local advice will be required as to whether any tax liabilities or filing obligations are applicable in respect of such assets, such as estate tax (as in the United States) or transfer taxes or stamp duties or similar.

 

For a Canadian beneficiary that receives distributions from a foreign estate, there are generally no tax consequences of the receipt itself.  However, an information return may still need to be filed with the CRA[4].  If the distribution results in the Canadian owning foreign assets worth CAD 100,000 or more, this will give rise to an additional filing requirement with the CRA[5].  Note that if a Canadian resident owns (or acquires by inheritance) any foreign asset that generates income, that income will be taxable in Canada and will need to be declared going forward.

 

It is worth pointing out an opportunity for tax planning when a foreign benefactor wishes to leave an inheritance for a Canadian resident.  If the foreign benefactor is not a Canadian resident, and has not been a Canadian resident for the past 18 months prior to death[6], then they will be able to establish a trust in their will in a foreign jurisdiction (i.e., a low/no tax jurisdiction) using the inheritance.  The Canadian beneficiary(ies) can receive distributions from the trust tax free, forever.  The benefit of this structure is with respect to the income generated by the trust settlement, not the trust capital itself (which would not have been taxed in Canada in any event when transferred to the heirs).  The income generated by the trust can be accumulated, capitalized, and paid out to Canadian beneficiaries as capital on an ongoing basis, attracting no tax.

 

What should you do to plan your international estate in advance?

 

Having a well-planned estate will make its administration much easier on your executors, and will help to ensure your wishes are in fact carried out in the way you intended and not thwarted by unforeseen legal or administrative obstacles.  Some key elements of good planning that you may wish to consider are:

 

1. Keep your will(s) up to date as your assets grow or change in type, value or location, or your family (or other beneficiary) circumstances change, or as your country of residence changes.  An out of date will can result in unnecessary and entirely avoidable difficulties and a distribution of your estate in a manner you did not intend.

 

2. Have multiple wills where appropriate on a country by country basis, or sometimes by asset type, so they can be probated and administered locally, or so that probate can be avoided for some assets.  This can help to avoid the international attestation requirements, translation requirements, and international recognition or enforcement issues that can arise and which can be very time consuming.  If multiple wills are used, be sure they are drafted in express contemplation of one another and do not operate to invalidate the other(s).  Consider preparing an explanatory note to your executor regarding how the multiple wills are intended to operate, and what formalities are expected to be required to implement them so your executor does not need to struggle to work out your intentions.

 

3. Confirm whether you are subject to any forced heirship regime, as is the case for some EU nationals  (e.g. Germany, France),  and  Middle  Eastern  nationals  (e.g. Saudi Arabia, the UAE), and plan your estate with an awareness of which assets, if any, will be subject to the forced heirship regime.  You can plan your will(s) accordingly so as to avoid a conflict between your wishes and what is required by law, or, you may be able to plan to effectively exclude some or all of your assets from the regime.

 

4. Keep a document that will be easily located by your heirs upon your death which sets out what documents you have prepared (i.e. your wills and any instructional memos) and where they can be located, and the best lawyers or other professionals who were involved in their preparation or other estate planning.

 

5. Consider establishing a trust during your lifetime which can hold some of your assets in order to avoid the probate and estate administration issues that would otherwise arise.  Since ownership of the assets will have passed to the trust already, the only administration that is necessary is to provide the trustees with proof of death, whereupon the trustees will deal with the trust assets in whatever manner is provided in the trust deed.  This provides ease of administration, avoidance of probate (and probate fees), and immediate access to assets for your heirs (or limited or delayed or conditional access, according to what you had provided in the trust deed).  The use of trusts can dramatically ease the burden on your estate administrators.

 

International estate administration can be daunting.  The support of professionals who are experienced in dealing with international issues and who are part of a strong network of professionals in other jurisdictions is essential.  If you require assistance or have any questions about domestic or international estate administration issues, please do not hesitate to reach out to us. ■

 

 

[1] The term “domicile” is not always the same as “residence”, although they usually are the same.  Domicile requires a higher level of permanence, where one has their permanent home.  For many people the answer is obvious, but for recent immigrants or emigrants of Canada, or for people with significant residential ties in multiple countries, the determination of domicile can require further analysis.

[2] The attestation process typically consists of notarization in the place of origin, attestation by the Ministry of Foreign Affairs or equivalent, then finally attestation (or legalization) by the consulate or embassy of the country in which the document will be used.  This can be an onerous process for those unaccustomed to it.  Consideration should be given to the translation requirements in the local jurisdiction, which may include the necessity to use only licensed translators in that jurisdiction.  It is usually more efficient to have the translation done in the foreign jurisdiction.

[3] Such clearance certificates are required under section 159(2) of the Income Tax Act, as opposed to the section 116 clearance certificates for distributions of taxable Canadian property (mainly real property) to foreign beneficiaries.

[4] Form T1142 (Information Return in Respect of Distributions from and Indebtedness to a Non-Resident Trust).

[5] Form T1135 (Foreign Income Verification Statement).

[6] Note the same tax-efficient offshore trust structure can be used during the life of the benefactor too, but they must have been non-resident for at least 5 years rather than 18 months.

Amendments to management liability under the Bankruptcy Law

This inBrief examines the latest amendments to the Bankruptcy Law (Federal Decree Law No. 9 of 2016, as amended) introduced under Federal Decree Law No. 35 of 2021 (the New Law) and their impact on the personal liability of the board of directors and managers of bankrupt companies. The New Law came into effect on 1 November 2021.

 

In contrast with earlier amendments to the Bankruptcy Law (such as Federal Decree Laws No. 23 of 2019 and No. 21 of 2020), which were focused on assisting companies in financial distress through difficult times (such as the COVID-19 pandemic) the New Law is focused on amending and clarifying the scope of the personal liability of directors and managers of companies in bankruptcy, specifically under Articles 144 and 201 of the Bankruptcy Law.

 

The key amendments under the New Law are discussed below.

 

Amendments to Article 144

 

Under the old Article 144 of the Bankruptcy Law, if the value of the assets of a company in bankruptcy were insufficient to settle at least 20 per cent of its liabilities, the court could order some or all of its board members and managers to pay some or all of the company’s debts, provided that they were found liable for the losses of the company under the Commercial Companies Law (Federal Decree Law No. 2 of 2015, as amended). Article 1 of the New Law introduces the following changes to Article 144 of the Bankruptcy Law:

 

(a) The requirement to establish liability for losses under the Commercial Companies Law is replaced with the requirement to establish that the directors and managers have committed any of the acts under Articles 147(a) through (c) of the Bankruptcy Law. Under Article 147 of the Bankruptcy Law, the directors or managers of a company in bankruptcy may be liable to pay the company’s debts if they have; (i) used commercial methods of ill-considered risks, such as disposing of the goods at prices lower than their market value, in order to obtain assets, with a view to avoid bankruptcy procedures or delay the commencement thereof; (ii) entered into transactions with a third party to dispose of the assets at no charge or for an inadequate charge and without any certain benefit or a benefit that is commensurate with the debtor’s assets and/or; (iii) fulfilled a particular creditor’s debts with the intent to cause damage to other creditors, during the period of cessation of payment or during insolvency; in each case during the period of two years following the initiation of bankruptcy proceedings.

 

In addition to severing the cross-liability link between the Commercial Companies Law and the Bankruptcy Law, this amendment to Article 144 of the Bankruptcy Law also limited the scope of the liability from all past and future acts (as under Article 162 of the Commercial Companies Law) to just current and future acts under Article 147 of the Bankruptcy Law (i.e., limited to actions of the directors and managers following the initiation of bankruptcy proceedings). This will be a welcome development for directors and managers, as now any breach of the broader liability provisions under the Commercial Companies Law will not expose them to the risk of having to pay the bankrupt company’s debts under Article 144 of the Bankruptcy Law.

 

(b) New Article 144(2) of the Bankruptcy Law provides the directors and managers of a bankrupt company with a right to appeal any judgement of liability issued under Article 144 of the Bankruptcy Law. An appeal will not result in the (i) stay of execution of the judgement; or (ii) a stay of the bankruptcy proceedings or compromise its validity.

 

The substitution of the broader scope of liability under the Commercial Companies Law for the narrower scope under Article 147 of the Bankruptcy Law, the defence under Article 147(2) (i.e., a person cannot be judged to have breached Article 147(1) if such person has taken all possible precautionary measures to reduce the potential losses that may affect the assets of the debtor company or its creditors), the exemption under Article 147(3) (i.e.,  directors and managers shall not be liable for any of the acts under Article 147(1) if they can establish that they did not participate in such acts or provided their reservations to such acts (e.g., by lodging their objection at the relevant directors’ meeting(s)) and the right to appeal any court judgement under Article 144 of the Bankruptcy Law all combine to reduce the risk exposure for directors and managers of bankrupt companies. However, it should be noted that any wrongful acts (leading to losses for the bankruptcy company), committed outside of the period under Article 147 of the Bankruptcy Law may still attract liability under other legal provisions.

 

Amendments to Article 201

 

Article 1 of the New Law also introduces some minor amendments to the old Article 201 of the Bankruptcy Law, principally to Articles 201(1) and (2), which, when read together with the updated start of Article 201 of the Bankruptcy Law, now provides that the directors and/or managers of a bankrupt company shall be punished by imprisonment for a period not exceeding two years and/or a fine not exceeding AED 100,000 if they deliberately:

 

  • fail to maintain commercial books that are sufficient to reveal the company’s financial position or did not conduct inventory-taking as imposed by under the law, with the intent of harming the company or its creditors (Article 201(1)); or

 

  • refrain from providing the data required by the trustee appointed according to the provisions of Title 4 of the Bankruptcy Law or the court, or intentionally provides incorrect date (Article 201(2)).

 

The key amendments to Article 201 of the Bankruptcy Law are the inclusion of the AED 100,000 fine and the requirement to demonstrate an intention to deliberately perform the acts under Article 201(1) and (2), on the part of the directors and/or managers.

 

Conclusion

 

Although the New Law may have dislodged the Court’s ability to use a director’s or manager’s liability under the Commercial Companies Law as a segue to possible liability for the bankrupt company’s debts under Article 144 of the Bankruptcy Law, it does not eliminate the risk of liability for directors or managers who have acted in a dishonest or fraudulent manner.

 

It should be remembered that the Bankruptcy Law and its application in practice is still in its infancy. In our experience the courts have used their wide discretion in interpreting and applying the Bankruptcy Law and have displayed an indication to examine the role played by the management of a bankrupt company and impose penalties. In light of the above, it would be prudent for management of companies considering initiating, or which have already initiated, bankruptcy proceedings to seek legal guidance and plan a clear strategy to address all potential liability. ■

 

 

New UAE Labor Law – Initial Thoughts

The long-awaited Labor Law has been published in the Federal Official Gazette and is scheduled to take effect on 2 February 2022. The new Law, Federal Decree-Law No. 33 of 2021, replaces the previous 1980 statute in its entirety. The new statute does not constitute a fundamentally different approach to labor relations in the UAE, but it does introduce important reforms.

 

I will discuss a few of these in this note and save a lengthier discussion for a future inBrief. I will focus here on the areas of employment law where disputes are encountered with the greatest frequency.

 

Termination with notice

The 1980 Labor Law accorded differential treatment to contracts of specified term (with a commencement date and an expiration date) and contracts of unspecified term (with only a commencement date). The new Labor Law states that an employment contract must be for a specified term of no longer than three years. Previously, such a contract could not be properly terminated by notice. Termination by notice was available only for unspecified term contracts. No longer. The new Labor Law provides that an employment contract may be terminated by either party for a “legitimate reason” with notice. As before, there is considerable scope for the courts to determine as an issue of fact whether a “legitimate reason” for termination exists in a particular case. Notice of termination must be given in writing. It is not a requirement that the contract set out a notice period, but it is a requirement that the parties follow the notice period set out in the contract, provided that it be no less than 30 days and no more than 90 days.

 

This 90-day cap on the notice period is a new feature. The enforceability of provisions for longer notice periods – common in contracts with senior personnel – is now unclear. This and other issues might be addressed in Executive Regulations to be promulgated by the Ministry of Human Resources and Emiratization.

 

End-of-Service Gratuity

Upon termination of services, an employee who has completed one year of service receives end-of-service gratuity. An employee who does not complete three years or five years of service no longer forfeits a portion of the end-of-service gratuity.

 

Previously, the calculation of end-of-service gratuity was based upon the employee’s salary, but excluding allowances and in-kind payments. Bonuses and commissions were not excluded, and disputes arose over whether these elements of compensation should be included in the figure that was used for calculation of the end-of-service gratuity. The new statute makes it clear that the end-of-service gratuity is based upon the employee’s basic salary. Accordingly, no argument would appear to be available any longer that the figure should include bonuses and commissions.

 

In what appears to be a step in the wrong direction, scope for replacement of the end-of-service gratuity with pensions and savings plans is eliminated. Instead, the Cabinet may by Resolution promulgate systems that would replace the end-of-service gratuity.

 

Overtime

The work week continues to be 8 hours per day and 48 hours per week, with Friday as the weekly day of rest. Crossing either threshold triggers a requirement on the part of the employer to pay additional compensation for overtime. Inconsistencies in calculation of overtime have been eliminated. It is no longer the case that an employee receives overtime based on basic salary in some cases and total salary in others. Instead, overtime compensation is always based upon an employee’s basic salary. Similar anomalies in the calculation of the cash value of unused annual leave have also been eliminated, with basic salary also to be used for that calculation.

 

The rules governing calculation of overtime and the overall caps on overtime have been changed somewhat. The categories of employees that are exempt from the rules on overtime will be detailed in Executive Regulations; it appears that the current exemption for managerial staff will continue until the new Executive Regulations are promulgated.

 

Competition

In a liberal labor market such as the UAE, the hiring away of employees is a feature of the landscape. The 1980 Labor Law stated that an employer could include a clause in the employment contract that would restrict the right of the employee to compete against the employer following termination of services. The enforcement of such clauses was always a separate matter, with the authorities often showing reluctance to prohibit a person from earning a living. Of course, the employer’s central concern is not so much that a former employee may work for a competing employer, but instead that the former employee will make unauthorised use of confidential and proprietary information.

 

The new Labor Law does not really grapple with these issues. It continues the previous language on non-compete clauses, but now limits them to two years’ duration. The narrowing of the restriction might make enforcement more palatable. But it would appear that employers will still have to deal with the reluctance of the local courts to award declaratory and injunctive relief as remedies for threatened breaches of contract. ■

Succession Planning for a Family Business

Planning for the succession of a family business is something that is too often delayed or addressed on an ad-hoc basis without a cohesive strategy.  Considering that the business is likely the most valuable asset in a business owner’s estate, and probably the most complex, it is very much worth the time and effort to develop and implement a plan for succession before life circumstances take these decisions out of your hands.  This article will provide an overview of some of the tools available for family business succession planning, with an emphasis on what is known as an estate freeze.  This article does not address the advantages and disadvantages of providing for the succession using a will, and focusses only on lifetime succession plans.

 

This article will assume the business is incorporated.  If it is not, it is possible to transfer an unincorporated business to a newly formed corporation on a tax-deferred basis, so achieving corporate form is not usually a major obstacle.

 

The simplest approach to succession is for the business owner to make a simple gift of some, or all shares in the company to the intended successors during his/her lifetime.  The gift approach keeps the shares out of the transferor’s will and is simple and has virtually no cost associated with execution, but has little other benefit associated with it.  It is the blunt instrument of wealth transfer.  There are drawbacks to this approach, such as the fact that the gift will be treated as disposition at fair market value for tax purposes and tax will be payable on any capital gain that is deemed to have been realized.  Also, the transferor would be giving up the value and control associated with the gifted shares, and there may be no way to backtrack once the gift is made.

 

Gifts can be made of only some of the shares, or new classes of shares can be created and issued to the successors in order to better customize their voting rights, participation in growth and entitlement to dividends. You may not wish to give your successors voting rights, or possibly even dividend entitlements, until you are prepared to exit from a leadership role in the company. In any scenario in which the company will have multiple shareholders, putting in place a shareholders’ agreement is strongly recommended in order to avoid conflict.  A shareholders’ agreement should give clarity on matters of company governance, board participation, exit rights, what happens if the company is to be sold, what happens on death of a shareholder, how dividends will be dealt with, any expected contributions to the company from the shareholders, key issues for which unanimous or super-majority voting may be required, and how disputes will be managed (among many other things).   In the family business context, a good shareholders’ agreement can act almost like a family constitution, and can be critical to both the business and family harmony.

 

One popular succession planning technique is the estate freeze.  An estate freeze is a restructuring of a corporation in which a business owner exchanges his/her shares in the company for preference shares that have a fixed redemption value and certain other specific attributes required by the CRA.  The fixed value is usually equal to the fair market value of the company at the time.  At the same time, common shares are issued to the intended successors.  The growth in the company from that point forward will accrue to the common shares only, not the preference shares, which remain at their fixed redemption value (and may or may not have dividend entitlements, as desired).  As such, the value of the business owner’s interest (the preference shares) is said to have been “frozen” as of the time of the freeze.  The share exchange is designed to occur on a rollover basis so that no taxable event is triggered, as the business owner has not actually extracted any remuneration from the corporation (just exchanged shares for shares).[1]  On death, or upon an earlier disposition of the preference shares, the business owner will realize a taxable capital gain on the value of the preference shares.  The estate freeze has several important advantages, which include:

 

  • The value of the business owner’s interest is frozen, so his/her tax exposure on death or disposition is known and will not increase (so this can be predictably insured against with life insurance, for instance);
  • The future growth in value of the company is transferred to the successors, and this “transfer” occurs without tax because the value of the common shares issued to the successors is close to zero at the time of issue (the present value of future growth potential is not taxed, under current CRA practices);
  • The lifetime capital gains exemption can be effectively multiplied among the successors, assuming the corporation’s shares qualify for the exemption (meaning the corporation meets certain Canadian ownership and Canadian business and asset requirements, qualifying it as a “qualified small business corporation”);
  • Income splitting among the successors is possible if their shares are entitled to dividends (and if certain attribution rules are avoided);
  • The successors are directly and personally invested in the continued success and growth of the business; and/or
  • The business owner gets to enjoy witnessing the successors benefitting during his/her lifetime as opposed to dealing with the succession in a will.

 

An estate freeze is very often structured using a trust to hold the growth shares (common shares) for the benefit of the successor family members, rather than issuing the common shares to the family members directly.  The trust then controls the shares subject to the terms of the trust instrument.  This can be very useful as it allows the trust to act as a conduit through which the family members’ respective interests in the underlying common shares is divided, and the nature of the division can continually change as needed.  For instance, the trust can distribute dividend income among the beneficiaries in a manner that is most tax efficient in view of the different income brackets of the beneficiaries (income splitting, but not during the lifetime of the settlor/freezor as the TOSI (tax on split income) rules would apply) and this can change from year to year, and can withhold benefits during periods when a beneficiary is subject to creditor claims (asset protection).  The use of a trust also allows the settlor/freezor to retain more control over how the shares will ultimately be distributed to beneficiaries, if indeed a distribution is intended at all, and to help protect the shares from potential spousal claims.  It may not be obvious at the time of the freeze which of the beneficiaries is the appropriate successor(s), which ones have an interest in the business, the aptitude for it, etc.  A trust allows for deferral of such decisions without deferring the economic transfer and crystallization of the tax benefits.  Essentially, the trust facilitates continued flexibility in decision making in ways that direct gifting or direct ownership does not.  As of the date of writing, the lifetime capital gains exemption can still be multiplied among the beneficiaries even when the growth shares are held through a trust.   A shareholders’ agreement should be put in place between the settlor/freezor and the trust.

 

There are many permutations on the estate freeze to accommodate a wide range of goals and circumstances.  For instance, as part of the share exchange that occurs, a settlor/freezor may also choose to take back low value, super-voting shares along with the fixed value preference shares, so that he/she maintains voting control during his/her lifetime.  These shares can be made to cease to carry such voting rights upon the settlor’s/freezor’s death so that control passes automatically to the family (or as provided in the shareholders’ agreement).  Another permutation is that the freeze can be structured in such a manner that only some of the future growth is transferred to successors (say, up to the amount of the lifetime capital gains exemption for each beneficiary, and no more), and the settlor/freezor retains the rest.  Or, the settlor/freezor can retain the ability to receive dividends or to take back some of the growth shares in what amounts to a partial unwinding of the freeze (aptly known as a “thaw”), if circumstances change.  This can be achieved by making the settlor/freezor a discretionary beneficiary of the trust.  It is also possible to execute a second freeze on an already frozen company, known as a refreeze, which may be advisable if the value of the company declines after the first freeze, or if the recipients of the growth shares themselves wish to freeze the value of those in favour yet further recipients (the next generation, for instance).  There are several other named permutations which are need not be addressed here, the point having been made that the estate freeze is an adaptable structure.

 

When structuring an estate freeze, particularly when using a trust, it is important to be very careful to structure it in a manner that adheres to the CRA’s guidance on acceptable estate freezes, and does not trigger any of the so-called attribution rules in the Income Tax Act, and it is therefore important to execute a freeze only with the guidance of professionals who focus on trusts and have experience with estate freezes.  The potential for inadvertent error is high, and the consequences of an error could be disastrous from a tax perspective (i.e., inadvertent attribution of all income and capital gains on trust property – being the common shares – back to the settlor/freezor, or the inadvertent application of the TOSI rules, or the inadvertent application of the corporate attribution rule).  When executed correctly, the structure is safe and is not controversial from a CRA perspective; hence its popularity.

 

An estate freeze should be viewed as a flexible, customizable way of transferring ownership, control and economic benefits (as much or as little of each as is desired over time) in a family business to the next generation, in a tax efficient manner and with the added benefit of the continued flexibility offered by the use of a trust.

 

There are further permutations on the estate freeze that can benefit from the use of foreign trust and/or corporate structures established in low/no tax jurisdictions.  For instance, foreign trusts can avoid being subject to the mandatory deemed disposition of all assets that applies to Canadian trusts every 21 years, and can therefore be made to last much longer than a Canadian trust, creating a much longer legacy.  If the trust/corporation is established in a jurisdiction with which Canada has a tax treaty, there are potential additional benefits with respect to capital gains realized by the trust/corporation (e.g., Barbados and the United Arab Emirates).  As always, planning with offshore trusts requires the assistance of professionals experienced in the area, as it is complex, but the advantages can be worth the additional planning in the right circumstances.  It is worth noting that the media’s unfortunate portrayal of “offshore” structures as illegal or immoral is misleading.  Such vehicles have always been, and they remain as of the date of the writing, entirely legitimate planning vehicles under Canadian law when used correctly.

 

The above presents a selective review of potential succession planning techniques relevant to a private or family business.  Within each option, there is large scope for customization according to individual needs and goals and family composition.  The terms of any shareholders’ agreement or trust instrument, or the rights attaching to any class of shares, can all be tailored to suit your specific circumstances.  While there are tried and true structures that provide good basic starting points, succession planning for a business is not a cookie cutter process and always benefits from bespoke professional guidance.

 

If you have any questions or wish to discuss any issues around family business succession, please do not hesitate to contact us. ■

 

 

[1] If a business owner does wish to extract cash from the company, a tax liability will be incurred on the payment of such amount.  It is often possible to extract such amount in the form of a capital gain.

 

The dishonour of a cheque for insufficient funds will no longer be a crime in the UAE after 2 January 2022

Drawing a cheque which is dishonoured due to insufficient funds will not be a criminal offence after 2 January 2022, when Federal Decree No. 14/2020 (the Decree) comes into effect. Here is a quick primer on the changes that the Decree will introduce.

 

– The highlight of the Decree is the decriminalisation of the act of drawing a cheque which is dishonoured due to insufficient funds. The Decree repeals Articles 401, 402 and 403 of the UAE Penal Code which criminalised the acts of drawing (or endorsing), in bad faith, a cheque without a sufficient balance in the account to honour the cheque, writing a cheque in a manner that makes it unpayable, and ordering a drawee (i.e., a bank) not to make payment.

 

– It is important to note that the Decree does not decriminalise all cheque related offences. For example:

 

 

  • Deliberately writing a cheque in a manner rendering it unpayable (e.g., deliberately placing a wrong signature), closing an account or withdrawing all funds before a cheque is presented, and ordering a bank not to make payment of a cheque (except in the limited circumstances of loss of a cheque, bankruptcy, or the cheque being rendered stale) are punishable with a fine of not less than 10 per cent of the cheque’s value, subject to a minimum of AED 5,000, and a maximum of double the value of the cheque and/or imprisonment for no less than six months.

 

  • Endorsing or delivering a bearer cheque with the knowledge that there are insufficient funds is punishable with a fine of not less than 10 per cent of the cheque value, subject to a minimum of AED 1,000, and a maximum of the value of the cheque.

 

  • Forging a cheque, knowingly using a forged or counterfeit cheque, and knowingly accepting funds received by use of a forged or counterfeit cheque are punishable with a fine of between AED 20,000 and AED 100,000 and imprisonment of no less than one year.

 

  • The court may ‘name and shame’ defendants found guilty of committing any of the foregoing crimes by publication of their name, profession and address in two widely-circulated dailies in the UAE.

 

– The court may prohibit a convicted defendant from conducting business for up to three years where the crime(s) were committed in relation to, or in the course of conducting business. Where the crimes have been committed in the name of or for the benefit of a corporate entity, the natural person managing the entity will not be criminally liable unless it is proved that s/he was aware of the crime or that s/he committed the crime for personal benefit or the benefit of third parties.

 

– The Decree facilitates civil remedies by deeming a cheque which is confirmed by the bank as being dishonoured due to insufficient funds to be an ‘executive instrument’. As a result, a party holding a cheque dishonoured due to insufficient funds can, after January 2, initiate proceedings directly before the execution division of the courts to obtain payment, and seize assets of the drawer. The time and cost incurred with ordinary proceedings are bypassed as a result.

 

– The Decree permits partial payment of cheques, which will facilitate some payment being made under a cheque even where there are insufficient funds for the value of the cheque. Where the beneficiary requests partial payment, the bank must comply and thereafter inform the UAE Central Bank.

 

– The following provisions of the Decree are relevant to banks:

 

  • A bank must make partial payment of a cheque where there are insufficient funds for the whole value, unless the bearer declines partial payment.

 

  • A bank must report events of insufficient funds, where a drawer has emptied an account and cheques cannot be honoured, and where partial payment of a cheque has been made, to the UAE Central Bank.

 

  • Banks may be subject to a fine of not less than 10 per cent of the cheque value, subject to a minimum of AED 5,000 and a maximum of double the value of the cheque, where it refuses to make partial payment, or refuses to make payment of a cheque despite sufficient funds, among others.

 

Decriminalising the act of writing a cheque which is dishonoured due to insufficient funds, and restricting criminal sanctions to acts which are essentially fraudulent in nature, is undoubtedly a step in the right direction. The threat or use of criminal action to pursue civil rights has always been problematic, and the change introduced by the Decree will enhance the UAE’s credibility in the financial world. It is also encouraging to see that the Decree has introduced provisions to make civil remedies in relation to cheques a more efficient process, thereby balancing the interests of the drawer and the beneficiary. The implementation of the Decree will no doubt be monitored with great interest. ■

Dubai Court of Cassation clarifies the application of Optional Arbitration Clauses

In a decision issued in July 2021, the Dubai Court of Appeal held that an arbitration clause should be construed narrowly, and emphasized that everything that may be waived or prevents its [i.e., the arbitration clause’s] application must be sought.  This judgment, which rejected a challenge to the jurisdiction of the Dubai Courts based on the existence of a purported arbitration agreement, was discussed in our inBrief dated 12 September 2021. The gist of the judgment of the Court of Appeal was that the dispute resolution clause of the contract in question included language stating that any referral to arbitration will be ‘without prejudice’ to the jurisdiction of the UAE Courts and ‘subject to agreement between the parties’ and, following the principle of narrow construction of arbitration agreements, the Court of Appeal found that there was no evidence that an agreement was reached between the parties to resolve disputes through arbitration.

 

The judgment of the Dubai Court of Appeal was appealed to the Dubai Court of Cassation. The appellant took up the following arguments in appeal, among others:

 

(a) there are multiple references to arbitration in the contract between the parties (in addition to the dispute resolution clause), which was evidence that the parties had agreed to resolve disputes through arbitration; and

 

(b) there is evidence that the parties negotiated the applicable arbitration rules before entering into the contract, which is evidence that the parties had agreed to resolve disputes through arbitration.

 

In October 2021, the Court of Cassation affirmed the judgment of the Court of Appeal and rejected the appeal. In rejecting the argument summarized in (a) above, the Court of Cassation relied

on the principle that arbitration agreements must be narrowly construed, which is now a common reference in judgments addressing the validity of an arbitration agreement. The Court of Cassation went further, and held that where there is an optional arbitration clause and one of the parties commences litigation, the other may not seek to rely on the arbitration agreement to challenge the jurisdiction of the courts. Unfortunately, the Court of Cassation did not elaborate further on this principle in this judgment, and is a missed opportunity for useful guidance on issues surrounding optional arbitration clauses. Would it have made a difference if it was a unilateral optional arbitration clause? What would have been the position if a party commences arbitration, as opposed to litigation, first?

 

In rejecting the argument summarized in (b) above, the Court of Cassation held that as the evidence relied on by the appellant was not produced in the lower courts, it is not admissible before the Court of Cassation, which is a court of law in the UAE.

 

This judgment highlights the need to have a carefully drafted dispute resolution clause, particularly where the parties wish to have disputes resolved through arbitration. ■

POD inBrief – Competition & Anti-Trust Law in the UAE

 

This episode of POD inBrief features Bashir Ahmed,  partner, and Abdus Samad, senior associate, where they discuss competition, anti-trust, and price fixing in the UAE.

 

Listen to “Afridi & Angell’s POD inBrief _ Competition and Anti-Trust in the UAE” on Spreaker.
 
An overview  is mentioned below:    

Overview:  

– Recent regulations to the UAE competition and anti-trust law 

– Exemptions to the law 

– Merger clearance and due-diligence advice 

–  How businesses can organise themselves to be in line of the law 

Planning for Non-Residency: Doing it Right

Where you choose to be resident is obviously driven by more than just the tax consequences, but for many people tax is a major factor in that decision.  Canada, like most other countries, taxes on the basis of residency.  If you are a Canadian “resident” for tax purposes, you pay Canadian income tax on your worldwide income, and you have broad reporting obligations to the Canada Revenue Agency (CRA) on your foreign interests.  There are many ways for a Canadian resident to optimize their tax position both in life and upon death, but none are quite as effective as becoming non-resident. When you are non-resident, you are not subject to Canadian income tax (with some exceptions regarding Canadian source income) and this article aims to provide a general overview of what you should consider when planning for non-residency.[1]

 

First, be sure you really do cease being resident for tax purposes.  Canada’s definition of “residency” relies on assessing your life as a whole and identifying the number and importance of so-called “connecting factors” that you have in Canada.  This is a widely written about issue and will not be discussed in any detail here, other than to remind you to make sure you really do break ties with Canada sufficiently to ensure you are indeed a non-resident.[2]  Next, and a point that seems to be strangely overlooked more often than one might think, is that you also need to clearly obtain and keep residency status somewhere else, otherwise the CRA will not agree that you have sufficiently severed your residential ties to Canada.  Living a mobile lifestyle where you spend a few months here and a few months there without putting down roots anywhere, may not be enough to cut ties in the CRA’s view.

 

You should also be aware that you will trigger a taxable event upon your exit from Canada.  You are deemed to have disposed of many of your capital assets and realised any latent gain (or loss) on them, and you will be taxed on the gain, and this includes assets worldwide (and virtual assets like cryptocurrencies). There are important exclusions to the assets that are deemed disposed of, including Canadian real estate[1], RRSPs (Registered Retirement Savings Plan) and TFSAs (Tax-Free Savings Plan), and life insurance policies, among other things.  Importantly, the CRA expects you to have obtained valuations of your assets at or around the date of your exit to support the values you report, and that there will be a cost to having such valuations carried out, so be sure to plan for this.

 

Once you have successfully become a non-resident of Canada, and become a resident of another country, are you safely outside of the reach of the CRA?  In many important ways the answer is yes, but a non-resident remains taxable on certain income and property.  Summarised here are some important points to bear in mind as a new or prospective non-resident.

 

  • RRSPs: Nothing happens to your RRSP account(s) when you cease to be resident in Canada.  In your year of exit, you can still contribute to the account to the full extent of your eligibility for that year (although it might be low if you leave early in the year).  The funds in your RRSP are sheltered from Canadian tax while they remain in the RRSP, but this may not be the case in your new country of residence, which may view it simply as any other investment account and may tax it accordingly.[2]  You can withdraw some or all of the funds in an RRSP that you had accumulated prior to your exit.  As a non-resident, these withdrawals will be subject to the non-resident withholding tax of 25 per cent, but that is a much lower rate than the graduated rate you would otherwise have been subject to had you withdrawn the funds whilst being a Canadian resident (unless you withdrew the funds during a very low-income year).  Once the funds are out, you are free to use or invest them and you will not be subject to Canadian tax on the proceeds of such investments going forward.  Withdrawal is not always the best option though, as you may wish to simply keep the funds sheltered in the RRSP for a time in the distant future, or to keep as part of your estate and pass on to a spouse on a rollover basis, for example.

 

  • TFSAs: Similar to RRSPs, nothing happens to these upon exit and such accounts remain sheltered from Canadian tax, including upon withdrawal (no non-resident withholding tax either).  Additionally, like RRSPs, note that other countries may simply view these as regular investment accounts and tax them accordingly to their regular rules of taxation.  The same advice therefore applies regarding crystallization of latent gains that may be unrealised, prior to exit.

 

  • Real estate: If you continue to own real estate in Canada as a non-resident, you are probably leasing it out (if it is residential, you should absolutely be leasing it out on arm’s length terms or your non-resident status will be in jeopardy).  Rental income from a Canadian property is Canadian source of income and will be subject to non-resident withholding tax, and may also be subject to preferential treatment under a bilateral tax treaty, if applicable.  Canadian source income, whether from real estate, business, investments or otherwise, will result in the requirement to continue to file returns with the CRA.

 

  • Investments: Dividends you receive from Canadian sources are subject to non-resident withholding tax, which may be reduced by an applicable treaty.  Interest (assuming it is from an arm’s length party), is not subject to Canadian tax when paid to a non-resident (not the case if the source is not an arm’s length party).  These income sources also give rise to Canadian filing requirements, even if no tax is actually payable.

 

  • Foreign trusts: It may occur to you that setting up an offshore trust is attractive now that you are no longer a tax resident of Canada. It may well be that there are excellent opportunities available to you since you will be clear of many of Canada’s aggressive reporting and attribution rules that apply to trusts, but, as with most dealings with trusts, professional advice is critical.  Canada’s deemed residency rules as they relate to foreign trusts can catch many people off guard.  If you establish a trust within 5 years of your departure from Canada, for example, and there are Canadian beneficiaries, that trust will be deemed resident in (i.e., taxable in) Canada even though you established it after you were firmly and clearly non-resident.  There are similar considerations that will apply to the years prior to your return to Canada too, so good planning from the outset will be critical to ensure you do not inadvertently lose out on some of the tax advantages of non-residency.  Things to consider are the timing of the trusts’ establishment, how to structure the initial settlement and future contributions, who will make those contributions, who the beneficiaries will be, whether that will change in the future, and when they will actually receive any funds from the trust and under what conditions (e.g., only if and when they cease to be Canadian resident?), among other things.  These decisions will also affect what information the trustee is obligated to keep on file, and may be obligated to report, so bear that in mind if you have privacy concerns.

 

  • Wills and POAs: Any wills, powers of attorney, and other estate planning you may have done prior to your exit should be re-assessed in light of your new residency situation, which likely came with a shift in at least some of your assets, and likely more of a shift the longer you remain non-resident.  Multiple wills are common among the expatriate community; one (or more) for assets in Canada, and another for assets in your new country of residence, and perhaps more for certain assets elsewhere such as real estate or bank accounts you may own in yet a third country.  A local will in each jurisdiction can dramatically ease the estate administration process; it avoids the need to seek resealing of foreign probate, or equivalent, in each jurisdiction, a cumbersome and often non-transparent process.  Multiple will preparation requires careful drafting to ensure the documents work seamlessly together and do not conflict, and, of course, to ensure they meet the requirements of the jurisdiction in which each is intended to operate.  Similarly, any POAs you may wish to have in place in the event of your incapacity will need to be prepared (or re-prepared) in your new place of residence to ensure they are effective there.

 

Determining how to break residential ties with Canada (and not accidentally re-establishing them), reporting to the CRA in an effective manner on exit, structuring your assets while non-resident in the context of a broader wealth and estate plan, and knowing your continuing Canadian tax or reporting obligations even as a non-resident, are all key areas to consider in order to ensure your non-residency is both compliant and tax efficient.  The issues discussed in this article are only examples intended to provide a general overview of some of the common considerations, but there are often many other factors to consider depending on your specific circumstances, assets, plans, and risk tolerance.

 

If you are considering non-residency status in Canada and want to make sure you get the most out of your years abroad or are otherwise concerned about the tax implications of the move, please contact us and we will be delighted to provide the guidance you need. ■

 

 

[1] As a quick aside, note that Canadian citizenship is not the same as residency; a Canadian citizen can become non-resident forever and still retain citizenship.

 

[2] Consider obtaining a copy of the CRA’s form NR73, which includes a list of questions about your ties to Canada.  If you answer yes to 5 or more questions, you may need to break more ties or seek advice for more guidance.  Refer to the NR73 for your own reference only, but I do not suggest filing one.  Filing your “final tax return” is generally sufficient and the preferred approach.

 

[3] Note that a “principal residence” undergoes a “change of use” rather than a deemed disposition, although the effect is similar in that there is a deemed realization of the latent gain, but the principal residence exemption can still apply to shelter the full amount (assuming the property is otherwise eligible for the principal residence exemption for all the years the property was owned).

 

[4] Consider crystallizing any latent gains within the RRSP account prior to exit, for this reason (i.e., to minimize capital gains that may be realized as a non-resident when they are no longer sheltered).  Unless of course your new place of residence is a very low or no tax jurisdiction.