Death and taxes
U nlike the U.S., Canada no longer has any form of estate or inheritance tax. Yet despite this, death can trigger a significant income tax bill that, if not properly planned for, can leave an unexpected liability. Here’s what happens to your non-registered and registered assets when you die:
Non-registered assets The general rule for non-registered assets is that a taxpayer is deemed to have disposed of all his or her property, such as stocks, bonds, mutual funds and real estate immediately before death at their fair market value (FMV).
When the FMV exceeds the property’s adjusted cost base (ACB), the result is a capital gain, half of which is taxable to the deceased and must be reported in the deceased’s final tax return. There is an exception for the capital gain arising on the deemed disposition upon death of your principal residence, which is generally exempt.
Perhaps the best way to avoid or at least defer this deemed disposition upon death is to transfer the property to the deceased’s spouse or partner, where applicable. When property is transferred in this way, the transfer can be done without triggering any immediate capital gains and the associated tax liability can be deferred until the death of the second spouse or partner (or until that spouse or partner sells the property).
Another opportunity to eliminate the tax arising from the deemed disposition at death is to consider leaving appreciated marketable securities to a registered charity through your will.
The capital gains tax is completely eliminated when appreciated publicly listed shares, mutual funds or segregated funds are donated in kind to charity.
Registered Plans For many Canadians, however, the largest tax liability their estate will face is the potential tax on the FMV of their RRSP or RRIF upon death. The tax rules require the FMV of the RRSP or RRIF as of the date of death to be included on the deceased’s terminal tax return, with tax payable at the deceased taxpayer’s marginal tax rate for the year of death.
This income inclusion can be deferred if the RRSP or RRIF is left to a surviving spouse or partner, in which case tax will be payable by the survivor at his or her marginal tax rate in the year in which funds are withdrawn from the RRSP or RRIF.
Alternatively, an RRSP or RRIF may be left to a financially dependent child or grandchild and used to purchase a registered annuity that must end by the time they reach age 18.
The benefit of doing this is to spread the tax on the RRSP or RRIF proceeds over several years, allowing the child or grandchild to take advantage of personal tax credits as well as graduated marginal tax rates each year until he or she reaches the age of 18.