23°c Partly cloudy
18°c Cloudy periods
Winnipeg Free Press - PRINT EDITION
Capital gains, probate fees will affect an inheritance
There are many myths circulating about how taxes apply when a person dies. Much of this misunderstanding may come from people reading too many U.S. publications and thinking that concepts like gift tax and estate tax apply in Canada.
They do not. Canada does not assess a tax on the actual value of an estate. It's a little trickier than that.
As you read the following, remember that none of these taxes have to be paid if the deceased person leaves a living spouse. More on that later.
Under Canadian tax law, a person who dies is deemed to have sold, an instant before death, all property they own alone. Recall that selling certain capital property that has appreciated in value results in half the capital gain being included in taxable income.
For example, if the deceased person had owned a rental property with an adjusted cost base (for tax purposes) of $100,000 and the market value on the day of death was $200,000, the gain would be $100,000, half of which would appear as income on the final tax return.
If this person owned shares of a company with the same cost base and current market value, the capital gain and income-inclusion treatment would be the same.
A principal residence would generally not be included in income, though the executor would have a choice of which residence to declare as "principal" if the person also owned a cottage or other non-rental residential property. (See my blog for lots of detail on these rules.)
For investments such as GICs, Canada Savings Bonds, savings accounts or term deposits on which tax has been paid each year -- or any capital property that has not gained in value -- there is no special tax on death.
That final tax return must also include all regular income earned in the year so far, including employment, net self-employment, pension, net rental and professional income as well as interest and dividends received while alive.
Now comes the big taxable amount for many people -- de-registering all RRSPs, RRIFs and related registered accounts such as LIRAs and LIFs. All are deemed cashed in on the day of death, and the entire amount of the plan becomes taxable income on the final tax return.
Since the RRSP or RRIF value is taxed on top of regular income (and any net capital gains), it is often taxed at a high or top tax rate.
TFSA withdrawals are not taxable, either on death or while alive.
Here's some good news for married people.
Subsection 73 of the Income Tax Act allows for a tax-free rollover of assets between spouses when the deceased person leaves a living spouse or common-law partner. (This can also work for transfers to children or grandchildren in the case of farm property.)
This means a widow or widower can opt to pay no tax on capital gains in the year of the first death and instead defer declaration of those gains until the properties are actually sold or the surviving spouse dies.
A similar option exists for a spouse who receives the RRSP, RRIF, LIRA or LIF assets. These can be rolled into the registered account of the surviving spouse, with no tax payable on the first death.
In all cases, the taxable amounts will have to be claimed when passing these assets on to another generation.
There are several situations in which the surviving spouse might opt out of these rollover provisions.
For example, if the person dies early in the year, if shares were eligible for the $750,000 lifetime capital gains exemption, if the deceased had capital losses carried forward or unused credits from large donations or other sources, it might make more sense to claim some of the income on the final return.
While technically not a tax, Canadians pay probate fees in the province in which the will is probated, based on the value of their estate.
Probate fees can be reduced by techniques such as joint ownership with right of survivorship, by naming individuals as beneficiaries where this is allowed, such as on registered accounts and most life insurance products.
However, there are times -- such as when using testamentary trusts for longer-term tax benefits -- that these short-term techniques should be avoided. Again, good advice is recommended, especially if you have a sizable or complicated estate.
This is where good tax advice pays off.
David Christianson is a fee-for-service financial planner with Wellington West Total Wealth Management Inc., a portfolio manager (restricted).
dchristianson@wellwest.ca
Republished from the Winnipeg Free Press print edition September 14, 2012 B9
More Business
- Back to Top
- Return to Business
More Business
(1 of 50 articles for today)
Dish won't submit revised bid for Sprint; path open for Softbank takeover of wireless carrier
8:13 PM 0ENGLEWOOD, Colo. - Satellite TV operator Dish Network Corp. said Tuesday it would not submit a revised bid for Sprint, ...
Poll
Most Popular Business
- McMunn & Yates absorbs five McDiarmid locations
- Shark Club opens in citiplace
- Daycare-subsidy rules bad for business
- Magellan signs MOU to produce F-35 tails
- Carriers turned off by Canada's wireless law
- Local business incubator gets new name
- NY, Va. 7-Eleven stores raided as US accuses owners and managers of exploiting immigrants
- U.S. hedge fund increases its ownership stake in Tim Hortons to 5.5%
- Mountain Equipment Co-op unveils new logo, name to appeal to urban customers
- St. Vital Centre's energy savings help managers snag BOMA awards
- Sobeys expanding reach in Western Canada with Safeway acquisition
- McMunn & Yates absorbs five McDiarmid locations
- Shark Club opens in citiplace
- Aircraft maintenance engineer taking off
- Two CBC reporters freed after being detained in Turkey
- St. Vital Centre's energy savings help managers snag BOMA awards
- Toronto condo market poses economic risk to Canada
- Daycare-subsidy rules bad for business
- Fund helps entrepreneurs fly
- New owner for lumber stores
- New owner for lumber stores
- Earls Pembina says goodbye after 18 years
- Sobeys expanding reach in Western Canada with Safeway acquisition
- Grove Pub to take over former home of Papa George's
- New rules let customers cancel phone contracts without penalty after two years
- MTS to sell Allstream to Egyptian investment group, focus on Manitoba market
- McMunn & Yates absorbs five McDiarmid locations
- Where is easy street? Survey of city's richest routes may surprise
- Custom-made suits no longer just for the ultra-wealthy
- Eateries brace for Blue blitz
- McMunn & Yates absorbs five McDiarmid locations
- Daycare-subsidy rules bad for business
- Warren Buffett -- Winnipeg-style
- Knights riding in with cash to spend
- Transcona transformation
- Target exceeds sales goal at Canadian stores
- The $2-million question
- Bombardier wins German locomotive rail order potentially worth US$2 billion
- Magellan signs MOU to produce F-35 tails
- CFIA suspends licence of Edmonton's Aliya's Foods Ltd. over inspection rules
- Sobeys expanding reach in Western Canada with Safeway acquisition
- McMunn & Yates absorbs five McDiarmid locations
- Toronto condo market poses economic risk to Canada
- Cutting edge, made-in-Manitoba tech finds buyer -- in Manitoba
- Google unveils Internet beaming balloons launched into stratosphere
- Warren Buffett -- Winnipeg-style
- Fund helps entrepreneurs fly
- St. Vital Centre's energy savings help managers snag BOMA awards
- Daycare-subsidy rules bad for business
- New owner for lumber stores
- New owner for lumber stores
- Snowbirds: It's that time of year again
- Sobeys expanding reach in Western Canada with Safeway acquisition
- Custom-made suits no longer just for the ultra-wealthy
- New rules let customers cancel phone contracts without penalty after two years
- Where is easy street? Survey of city's richest routes may surprise
- Value Partners cracks $1-B mark in assets
- MTS to sell Allstream to Egyptian investment group, focus on Manitoba market
- Manitoba Movers
- Grove Pub to take over former home of Papa George's
Ads by Google
You can comment on most stories on winnipegfreepress.com. You can also agree or disagree with other comments. All you need to do is be a Winnipeg Free Press print or e-edition subscriber to join the conversation and give your feedback.
You can comment on most stories on winnipegfreepress.com. You can also agree or disagree with other comments. All you need to do is be a Winnipeg Free Press print or e-edition subscriber to join the conversation and give your feedback.
Have Your Say
New to commenting? Check out our Frequently Asked Questions.
Have Your Say
Comments are open to Winnipeg Free Press print or e-edition subscribers only. why?
Login SubscribeHave Your Say
Comments are open to Winnipeg Free Press Subscribers only. why?
SubscribeThe Winnipeg Free Press does not necessarily endorse any of the views posted. By submitting your comment, you agree to our Terms and Conditions. These terms were revised effective April 16, 2010.