As the saying goes, the only two certainties in life are death and taxes. As with most things in life, death comes with tax implications that should ideally be considered in advance to minimize obligations. If you are an Estate Trustee for a loved one’s estate, what should your priorities be with respect to estate taxes? Below, we will outline the three most important tax considerations when it comes to managing the tax implications of a deceased person’s income and assets.
The Deceased’s Assets
The first consideration deals with the deceased’s assets. For tax purposes, there is a deemed disposition on these assets as of the date of death. What does deemed disposition mean? As we discussed in our previous blog on the tax implications of gifts in Canada, it means that these assets are deemed by the government to have been sold, even if they have not. The value of these deemed sales is the market value of these assets at the time of death. For example, if the deceased owned shares or bonds in a specific publicly-traded company, these investments are considered to have been “sold” at the closing value of these shares on the related stock exchange on the date of death. Any gain or loss on capital assets on these deemed dispositions will be included in the deceased’s income in the year of their passing. As the estate trustee, it will be your responsibility to determine these market values when preparing the estate tax filing. This can be a complex undertaking, and so many estate trustees opt to work with an experienced accountant to prepare and manage an estate’s tax filings.
Tax obligations may be deferred when an asset is held jointly by the deceased and their spouse. For example, if one spouse passes away and both spouses own a cottage property, the ownership of the cottage can be transferred by the right of survivorship to the surviving spouse or to a spousal trust. Taxes will not be levied until the surviving spouse sells the cottage or passes away. Ownership of a personal residence would also be transferred but there are no current or future tax consequences related to capital gains on a personal residence.
These comments remind us of the importance of having an up-to-date will so that taxes on capital properties owned by both spouses are effectively managed and the ownership structure is carefully thought out. Planning ahead means that the beneficiaries of the deceased will pay minimal taxes on the estate and that there will be enough cash available to over probate fees and estate taxes.
Registered Assets (RRSPs and RRIFs)
We have discussed physical assets and accounts, but, what happens with RRSPs and/or RRIFs? It will be necessary to deregister (i.e. collapse) any registered assets such as Registered Retirement Savings Plans (RRSPs) or Registered Retirement Income Funds (RRIFs) at the point of death. The full value of the RRSP or RRIF must also be included on the deceased’s final (terminal) tax return. There are exceptions to this deregistration requirement if the RRSP or RRIF is left to the surviving spouse, a common-law spouse and in some cases to a surviving child or grandchild.
An RRSP or RRIF can be transferred tax-free to a surviving spouse’s own plan. Also, the RRSP or RRIF can be transferred tax-free to a financially dependent child or grandchild who is under age 18, or who is mentally or physically infirm, even if there is a surviving spouse. The registered funds must be used to purchase a term-certain annuity with a term not exceeding the child’s 18th year.
Probating the Estate
The next thing that we need to consider is the term “probate”. Probate is the term for a legal process in which a will is reviewed to determine whether it is valid and authentic. Probate also refers to the general administering of a deceased person’s will or the estate of a deceased person without a will.
As executor of an estate, you will be required to file for probate with the provincial court. Part of this requires submitting the original will to the court as well as an inventory of the deceased’s assets. Upon acceptance of these documents by the court, letters probate (called “Certificate of appointment of estate trustee with a Will” in Ontario) are issued. This document serves to verify that the submitted Will is a valid document and confirms your appointment as executor of the estate.
With your submission to the court, you must also calculate and pay a probate tax. This tax is based on the total value of the assets that flow through the Will. The rate charged varies between provinces with some provinces having a maximum fee. All provinces except for Alberta and Quebec levy potentially significant probate taxes.
As a final point, executors should be aware that any property owned by the deceased in the U.S. will likely be subject to estate taxes in that state. If you are an executor of an estate with U.S. property, consult with an experienced accounting professional to determine the estate’s obligations.
If after reading this information on taxes at death, you are looking for advice on how to minimize taxes when a family member passes, please contact the experienced Chartered Professional Accountants at Edelkoort Smethurst CPAs LLP by calling 905-517-2297 or reaching out online.