Planning ahead … Prepare your Will with Taxes in Mind:
One of the main reasons for drawing up a will is to make sure your assets are distributed according to your wishes after you die. However, you can also take steps to minimize taxes on your estate. Here are some tips from Chartered Accountant Geoff Gravett, a partner with Millard Rouse & Rosebrugh LLP in Brantford.
- Understand what taxes may apply on death– “Estate administration taxes are based on the size of the estate that is required to be probated,” says Gravett. “In Ontario, probate rates are calculated at a rate of $5 per $1,000 for the first $50,000 of assets required to undergo probate and $15 per $1,000 for assets in excess of $50,000 that are required to undergo probate.” Tax may also apply to registered plans, such as Registered Retirement Savings Plans (RRSPs) and Registered Retirement Income Funds (RRIFs). “Registered plans are generally deemed to be included in income at a rate of 100 per cent,” says Gravett. “For example, an RRSP with a value of $100,000 at the date of death would result in $100,000 being taxed as income on the deceased’s final return. However, in certain circumstances, the registered plan may pass to a qualified beneficiary on a tax-free basis. The most common example of this is where a spouse is named as the beneficiary. In this case, the value of the plan wouldn’t be taxed until the death of the surviving spouse.” At the time of death, you are deemed to have disposed of all of your assets at fair market value. “For assets with accrued capital gains, this means that the capital gain becomes taxable at the time of death. These assets could include things like nonregistered investment portfolios, shares in private companies and real property. Any gains on your principal residence are not taxed,” explains Gravett. At the time of death, 50 per cent of the accrued gain on assets subject to these rules would be included in the taxable income on the deceased’s final return. “As with registered assets, a tax-free spousal rollover is available at the time of death. In this case, the accrued gain would not be taxed until the death of the surviving spouse.”
- Determine what taxes would apply to your estate– “Prudent tax planning would involve looking at all of the various taxation impacts that would arise in the event that you die today with your existing will, or without one,” advises Gravett. “You can then examine the various alternatives that will achieve your objectives while reducing taxes.”
- Take steps to defer or minimize taxation of your estate– “Planning techniques can include a wide variety of strategies,” says Gravett. These include, but are certainly not limited to: (a) Transferring the ownership of an asset prior to death (b) Taking advantage of income-splitting opportunities (c) Using the tax-free rollover rules, as applicable (d) Making sure beneficiaries are named on registered plans and life insurance policies (e) Making specific charitable bequests (f) Using a variety of trust structures, including spousal trusts, that are allowed under the Income Tax Act (g) Using secondary wills for assets not requiring probate (h) Estate freezes, using privately owned corporations
- Talk to a professional– “I would always recommend that a lawyer be involved in the actual drafting of your will,” says Gravett. “A Chartered Accountant can add significant value to the process by working with your lawyer to outline the current tax consequences to the estate in the absence of planning. Your CA can then work on a variety of planning strategies to minimize the taxation impact, while making sure your assets are distributed according to your wishes.”
People of all ages find it hard to contemplate their own death and its consequences. As a result, when death occurs, survivors are often left unprepared for the effects of taxes on themselves or on the deceased. Reviewing your personal financial position, planning your estate and discussing your options with your accountant is a positive step toward eliminating unpleasant surprises for your loved ones as they face one of the most distressing events of their lives – your death.
There is no “estate tax” in Canada, but when a person dies there is a deemed disposal of any capital property, so any capital gains would be taxed at this time. This would include assets such as vacation properties and investments. However, if the deceased taxpayer’s property is being distributed to the taxpayer’s spouse or to a “spouse trust”, then under certain circumstances taxable capital gains, allowable capital losses, recaptures of capital cost allowance, and terminal losses may be deferred. The deceased taxpayer’s cost basis for the property would then become the cost basis for the property to the spouse. Thus, any taxable capital gains would be deferred until the property is disposed of by the spouse. The spouse also has an option available to “opt out” of these deferral provisions.
Really, there are two main tax consequences resulting from the death of a taxpayer: the disposition of property and the filing of returns.
Disposition of property
Generally, at the time of death, taxpayers are deemed to dispose of all of their capital property for proceeds equal to fair market value. Any resulting capital gains and recapture are included in the deceased’s terminal return.
If the surviving beneficiary is a spouse or common-law partner, the automatic spousal rollover applies to defer capital gains and recapture. The deceased is deemed to have disposed of the property at cost and the spouse acquires the capital assets at the same ACB and UCC. However, the estate may elect to opt out of the option if there are unused losses.
Returns
The return filed in the year of death is referred to as the terminal return. The terminal return includes any income or loss resulting from the deemed disposition of capital assets, as well as periodic payments such as interest, rent or salary accrued until the date of death. The terminal return allows a taxpayer to claim a full year of personal tax credits.
Non-periodic payments that have not been received at the time of death do not have to be reported on the terminal return. Rather, these “rights and things” can be reported on a separate tax return. This is advantageous because the taxpayer can claim a full year of personal tax credits and will also be charged at a lower marginal rate. Alternatively, the “rights and things” return need not be filed if the income is assigned to a beneficiary.
The terminal return is due the later of the normal filing due date and six months after death. If the taxpayer dies before the return for the prior year has been filed, that return is also due the later of the normal filing due date and six months after death. If the return for the prior year has been filed, there is no issue. The rights and things return must be filed by the later of one year after death and 90 days after the assessment of the terminal return.
Source:The Institute of Chartered Accountants of Ontario
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