You’ve heard it before. There are only two certainties in life: death and taxes. Both are unavoidable. But did you know that the biggest tax bill you may ever have to pay is actually on your tax return filed after you die?
Upon death, you are deemed to have sold all capital property immediately before death. This deemed disposition rule could cost you tens, maybe hundreds of thousands of dollars in taxes. Common types of capital property include cottages, stocks, mutual funds, rental properties and business interests, to name a few.
It is up to your executor to file your final tax return after your death. This person must calculate all gains and losses on the property that is deemed sold and then pay the taxes on behalf of the deceased estate.
Let’s assume the deceased person owned a cottage that was purchased many years ago for $5,000. On the date of death the fair market value of the cottage was deemed to be $255,000. The executor is responsible to report the $250,000 capital gain, 50% of which is taxable, on the final return of the deceased. The tax is owing even though the wishes of the deceased were to pass on the family cottage to the children.
Registered investments including RRSPs and Registered Retirement Income Funds will be included, dollar for dollar, in the deceased income on the final tax return. It is not uncommon to see registered accounts worth hundreds of thousands of dollars. Just imagine the tax bill if a $500,000 RRSP was added to the income tax return all at once. The only exception is that registered investments can be transferred tax free to a surviving spouse or common-law partner or a dependent child or grandchild. If no exception exists then every dollar is included in income on the deceased final tax return.
You do have some options to mitigate the taxes your estate will pay upon your death. You can transfer some of your property into joint names with your children. This is called “Joint With Rights of Survivorship.” There are many caveats to consider. For example, the property may be subject to the claims of creditors of the child. The transfer could trigger a deemed disposition and taxes would become payable. The transfer could disinherit other beneficiaries. Consult with your legal and accounting professional before implementing a strategy of joint ownership.
Another option to ease the tax burden at death is through donations to your favourite charity. The limit on donations in the year of death and the year immediately preceding death is 100% of net income. Donations can significantly reduce the taxes owing in the year of death.
We can’t stop death. Eventually it will happen to all of us. With proper advanced planning you can reduce the tax bill to your estate and enhance the value of your estate and the amount you bequeath to your loved ones and favourite charities. Speak to your trusted advisor to learn more about the different strategies available to reduce or eliminate your tax bill at death.
The foregoing is for general information purposes and is the opinion of the writer. This information is not intended to provide personal advice including, without limitation, investment, financial, legal, accounting or tax advice. Please call or write to Rick Sutherland CLU, CFP, FDS, R.F.P., to discuss your particular circumstances or suggest a topic for future articles at 613-798-2421 or E-mail rick@invested-interest.ca. Mutual Funds provided through FundEX Investments Inc.