Tax Consequences When a Person Dies in Canada

Estate Taxes in Canada
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Introduction

Tax consequences when a person dies in Canada are often overlooked during the emotionally taxing time following the loss of a loved one. However, understanding these tax implications is crucial for the proper management of the deceased’s estate and for the benefit of its heirs. This article serves as a comprehensive guide to navigating the complex tax landscape that comes into play upon a person’s death in Canada

Deemed Disposition of Assets

Capital Gains and Losses

When a person dies in Canada, there is a deemed disposition of all their assets at fair market value. This leads to the estate becoming liable for income tax on any accrued capital gains, net of capital losses.

Importance of Planning

Planning for this tax burden while the individual is alive is crucial to avoid financial hardship for the estate. Consulting a tax advisor can help you understand the best ways to mitigate this liability.

ax consequences when a person dies in Canada

Spousal Rollover: A Tax-Deferred Strategy

How it Works

The tax implications can be deferred by transferring assets to a surviving spouse or a testamentary spousal trust. This is known as a spousal rollover. The property can “roll” to the surviving spouse or spousal trust without triggering immediate income tax.

Limitations

This deferral lasts until the death of the surviving spouse. It’s essential to understand that this is a temporary measure and requires further planning.

Probate Fees and How to Minimize Them

Probate Fees in Different Provinces

In British Columbia, probate fees are generally 1.4% of the estate’s total value, plus a filing fee. However, these fees can vary by province.

Filing Fees

These fees are in addition to the income tax triggered by the deemed disposition of assets. Filing fees can add up and should be considered in the estate planning process.

Mechanisms to Minimize Probate

Beneficiary Designations

Designating beneficiaries on assets like life insurance policies allows assets to pass outside of the will, thus avoiding probate fees.

Multiple Wills

Some provinces allow the creation of multiple wills to govern different types of assets, offering another way to minimize probate costs.

Gifting Assets

Transferring assets to beneficiaries before death can reduce the estate’s value and, consequently, the probate fees.

Advanced Tax Planning Mechanisms

Use of Trusts

Transferring assets to a trust can effectively remove them from a person’s estate. Trusts like alter-ego trusts or joint spousal trusts can serve as “will substitutes” for those over 65.

Joint Tenancy

Holding assets in joint tenancy may avoid probate as the asset passes automatically to the other individual upon death. However, this comes with its own set of challenges and implications.

Conclusion

Understanding the tax implications when someone passes away in Canada is crucial for effective estate planning. From deemed disposition of assets to spousal rollovers and probate fees, each aspect requires careful consideration and planning. Consult with our estate planning experts today to navigate this complex landscape effectively.

Frequently Asked Questions on Tax Consequences When a Person Dies in Canada

1. What is Deemed Disposition of Assets?

Question: What does “deemed disposition of assets” mean when someone passes away in Canada?

Answer: When an individual passes away in Canada, they are considered to have sold all their assets at their fair market value at the time of death. This is known as “deemed disposition.” The estate then becomes liable for income tax on any capital gains or losses that have accrued.

 

2. How Does Marital Status Affect Taxation?

Question: How does marital status affect the taxation of assets after death?

Answer: If the deceased had a spouse or common-law partner at the time of death, assets can be transferred to the spouse on a tax-deferred basis, effectively postponing the tax liability. This is often referred to as a “spousal rollover.”

 

3. What are Probate Fees?

Question: What are probate fees and how are they calculated?

Answer: Probate is a legal process that validates a deceased person’s will and confirms the executor’s ability to manage the estate. Probate fees vary by province. For example, in British Columbia, the fee is generally 1.4% of the estate’s total value, plus a filing fee.

 

4. Are RRSPs Taxed After Death?

Question: What happens to my Registered Retirement Savings Plan (RRSP) after I pass away?

Answer: Unless you have a surviving spouse or meet certain conditions for a dependent child or grandchild, RRSPs are deemed to be cashed in at their total value the day before you die. The estate is responsible for paying the tax on this deemed income, which can result in a significant tax bill.

 

5. Are Funeral Expenses Tax-Deductible?

Question: Can funeral expenses be deducted from taxes in Canada?

Answer: In Canada, funeral expenses are generally not tax-deductible for the deceased or their estate. These costs are considered personal expenses and do not qualify for a tax deduction on the deceased’s final tax return or any other income tax filings. However, the estate may claim a deduction for amounts paid for medical expenses or other specific circumstances, subject to certain limitations and requirements.

 

6. What Happens to a Tax-Free Savings Account (TFSA) Upon Death?

Question: What happens to my Tax-Free Savings Account (TFSA) when I pass away?

Answer: In Canada, the treatment of a TFSA after death depends on the type of beneficiary designation made by the account holder. If a spouse or common-law partner is named as the “beneficiary,” the TFSA assets can be transferred directly to the surviving spouse’s TFSA without affecting their contribution room or incurring any tax liability.

If someone other than a spouse is named as the beneficiary, or if there is no named beneficiary, the TFSA will be collapsed, and its value at the date of death will be distributed tax-free to the estate or the named beneficiary. However, any income or growth earned in the TFSA after the date of death is taxable to the recipient.

 

7. What Taxes Do Parents Have to Pay When Transferring Property to a Child as a Gift?

Question: If parents in Canada transfer property to their child as a gift, what are the tax implications for the parents?

Answer: When parents transfer a property to their child in Canada, it is considered a “deemed disposition” at the property’s fair market value. This means that capital gains tax could apply, potentially as high as 27% of the property’s appreciation. However, if the property qualifies as the parents’ principal residence, they could claim the principal residence exemption to make the transfer tax-free. It’s important to note that claiming this exemption for the gifted property would negate the ability to claim it for another property owned during the same period.

 

8. Are There Any Tax Consequences for the Child Receiving the Property?

Question: What are the tax implications for a child in Canada who receives property as a gift from their parents?

Answer: In Canada, gifts are not taxable income for the recipient. However, the transfer is deemed to take place at the property’s fair market value, regardless of whether the child pays full, partial, or no value for it. This means that any future capital gains will be calculated based on this fair market value when the child eventually sells the property.

 

9. Can Parents Take Back a Mortgage to Protect the Property?

Question: Can parents register a mortgage at 0% interest when transferring property to protect it, especially in the context of family law?

Answer: Yes, parents can register a mortgage for the full fair market value at 0% interest when transferring the property. This could provide a degree of family law protection for the child in the event of a separation or divorce.

 

10. Does Transferring Property Over Several Years Reduce Taxes?

Question: Is it beneficial to transfer the property to a child over a span of several years to reduce taxes?

Answer: Transferring the property over several years could help to split the capital gain, but it may or may not reduce the total amount of tax owing. This strategy’s effectiveness depends on the parents’ income levels and other factors, such as Old Age Security (OAS) clawbacks. Consulting a tax professional is advisable to determine the best approach.

 

11. Using Multiple Wills to Minimize Probate Fees in Canada

a) What is the Concept of Multiple Wills?

Question: What does it mean to have multiple wills, and how can it help in minimizing probate fees?

Answer: In some Canadian provinces, it’s possible to have multiple wills to govern different types of assets. The primary purpose of this strategy is to minimize probate fees. One will, often called the “Primary Will,” covers assets that require probate for transfer, such as real estate. The other will, known as the “Secondary Will,” covers assets that do not require probate, like shares in a privately-held company. By segregating assets in this manner, you can reduce the value of the estate that is subject to probate fees.

b) What Types of Property Can Be Covered Under Multiple Wills?

Question: What kinds of assets or property can be included in multiple wills to minimize probate fees?

Answer: The types of assets that can be covered under a Secondary Will to minimize probate fees generally include:

  • Shares in Private Companies: Ownership stakes in privately-held corporations are often included in a Secondary Will.
  • Bank Accounts: Some financial institutions may allow the transfer of bank accounts without requiring probate, making them suitable for a Secondary Will.
  • Intellectual Property: Copyrights, patents, and trademarks can often be transferred without probate.
  • Personal Items: Jewelry, artwork, and collectibles can sometimes be included in a Secondary Will, especially if specific arrangements have been made for their transfer.
  • Loans Receivable: Money owed to the deceased by private individuals or entities can also be included.

c) Are There Any Risks Involved?

Question: Are there any risks or downsides to having multiple wills?

Answer: While multiple wills can offer probate fee savings, they also come with complexities. For instance, both wills must be carefully drafted to ensure they do not inadvertently revoke or conflict with each other. Additionally, the laws surrounding multiple wills can vary by province, so it’s crucial to consult with legal professionals familiar with the jurisdiction’s estate laws.

Table of Contents

Disclaimer: The information provided in this article and other blogs on the website is intended for general informational purposes only and should not be construed as professional financial advice. Individual financial situations vary, and it is recommended that you consult with a qualified professional accountant to address your specific financial needs and circumstances. Always seek the guidance of a professional before making any financial decisions.

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Nafees Chaudhry

Nafees Chaudhry is the founder of CNC. Providing accounting, tax, and consulting services to small businesses and individuals for 23+ years.

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