Estates clerks and lawyers “speak” their own language.  We use acronyms or initialisms[1] such as CAET, EIR, RCP, ARI, AET, GRE, POA and COLA.  We use abbreviations like Benys and T’ees, and we draw triangles.  The idea for this blog was born when reflecting on having to interpret a lawyer’s handwritten notes for an assistant last week and on answering a “silly” question for a corporate colleague earlier this week.  Not silly at all, we just forget that some of these items may seem like a foreign language to others.  My blog today will focus on COLA.  Read to the bottom for the meaning of the other abbreviations to see if you “speak Estates”.

Inflation and COLA

Inflation is top of mind for most Canadians these days.  In this article, David-Alexandre Brassard, CPA Canada’s chief economist, advises “This year we saw a significant increase in the Bank of Canada’s key rate—it now stands at 3.75 per cent compared to 0.25 per cent at the beginning of 2022. It’s been nearly 15 years since rates have been that high and while it’s unlikely that we will see any more major hikes, they will likely remain high in 2023. Interest rates take time to have an impact and we can expect a longer adjustment period to return to an acceptable level of inflation. Just as it takes time for rate increases to have an impact, so too is a period of adjustment needed before we return to an acceptable level of inflation.”

A cost of living adjustment or “COLA” is a way for a testator to deal with inflation when preparing his or her will.  There may be a fixed or minimum dollar amount in the will that the testator wants to pay on an annual basis to a beneficiary from the income or capital of the trust.  Similarly, the testator may want to pay a fixed amount to the executor or trustee as compensation for the period of their administration of the estate or trust.  While the dollar amount in each case is appropriate at the date of executing the will, it may erode over time due to inflation if (i) there is a long period of time between the date of the will and the date of the testator’s death; and/or (ii) the terms of the trust are such that the trust continues for a long period of time.

To deal with inflation, the testator may wish to include the fixed or minimum dollar amount in the will, subject to a COLA provision.  The provisions should set out a formula for how to calculate the COLA.  They should also include the starting period for the COLA calculation, how often the adjustment is made and whether there is a cap in any year on yearly increases of more than a particular percentage.

Typical terms used in the COLA formula include Index, Base Index and Current Index and refer to the Consumer Price Index for Canada published by Statistics Canada.  I prepared a COLA calculation for executor’s compensation recently and here is the link that I used to search for the Index information needed for the formula in that particular will.  The Bank of Canada also has an inflation calculator that is interesting.

Meanings

How many did you get right?

CAET = Certificate of Appointment of Estate Trustee; EIR = Estate Information Return; RCP = Rules of Civil Procedure; ARI = Acknowledgment, Release and Indemnity; AET = Alter Ego Trust; GRE = Graduated Rate Estate; POA = Power of Attorney.

Benys = beneficiaries; T’ees = trustees; triangles = trusts.  You may ask, why a triangle – because a trust involves three parties to create – the settlor or testator, the trustees and the beneficiaries.

Thanks for reading.

[1] Writing this blog is always a learning experience.  I did not know the term “initialisms”.  This link advises that it is “an abbreviation formed from initial letters.  Some people feel strongly that acronym should only be used for terms like NATO, which is pronounced as a single word, and that initialism should be used if the individual letters are all pronounced distinctly, as with FBI. Our research shows that acronym is commonly used to refer to both types of abbreviations.”