Taxes on Death

Taxes on Death

In the year of death, a final (terminal) tax return must be filed by the Executor of the deceased's estate that includes all income earned by the deceased up to the date of death.

Deemed disposition

The Canadian Income Tax Act treats all capital property owned by the deceased as if it was sold immediately before death at fair market value. A final tax return must be prepared, called a terminal return, by the Executor on income they earned up to the date of death. Any monies owing to CRA are paid out from the estate assets before the distribution to the beneficiaries. Understanding the process is vital for all Canadians.

Surviving spouse

There is a rollover to a surviving eligible spouse subject to certain conditions. Therefore, this property will not be taxed until the surviving spouse's death. This is known to be a tax deferral which is very helpful.

No surviving spouse

With no surviving spouse, common-law partner, or other eligible beneficiaries, all estate assets are deemed to have been sold at fair market value immediately at the time of death. A capital gain will have to be reported at 50% (50% inclusion rate per the current ITA rate) for real estate properties. The same goes for any non-registered investment, where the capital gain will be the difference in the cost at the time of purchase and FMV (fair market value) at the time of death. All registered investments, such as RRSPs and RRIFs, are deemed sold at their full market value upon death. The entire balance of the RRSP or RRIF will need to be reported as income on the final tax return.

Principle Residence

The capital gain on the deceased's principal residence is not taxable due to the principal residence exemption.

When can the estate be distributed?

The Executor is responsible for meeting legal requirements and fulfilling the deceased's wishes. The following are essential:

* Notify the CRA

* File the final return

* Obtain NOA (notice of assessment)

* Pay or secure all amounts owing

* Distribute the assets as per the deceased wishes

The Executor has a huge responsibility; if you plan to be the Executor, you must fully understand your role. You must receive a clearance certificate after you have filed the deceased's final return. This ensures that the account with CRA is clear before distributing the funds to beneficiaries.

Life insurance

The death benefit paid to beneficiaries of a life insurance policy is not taxable. This amount can be used to pay any debts or cover taxes, so the heirs don't have to sell an inherited property.

Here are a few examples:

Example 1:

Joey passes away with $125,000 of individual stock held in a non-registered discount brokerage account. The stock has an adjusted cost base of $100,000, leaving Joey's estate with a capital gain of $25,000. Her Executor must report $12,500 (50% of the 25,000) as income on Joey's final tax return.

Example 2:

Nancy has $80,000 in RRSPs at the time of death. Therefore, the Executor will need to report an income of $80,000 on the final tax return.

Final thoughts on Taxes on Death

Instead, the deceased's estate representative must file a tax return for the estate before disbursing funds to the beneficiaries.

Therefore, planning your estate and fully understanding your obligations regarding taxes on death is essential.

Contact us for a consultation.

The content of this blog is intended to provide a general guide to the subject matter. Professional advice should be sought about your specific circumstances.

By: Kamal Gawri, CPA, CA