Summary of Taxes at Death and Some Suggestions
Introduction
At the time of a person’s passing, it is not only an emotionally difficult time but also an overwhelmingly busy time for the executors or the heirs. For tax purposes, the deceased taxpayer is deemed to have disposed of all properties owned at their fair market value. A deemed disposition means that the assets are considered sold and the proceeds received, although there is no actual sale.
Capital Properties
Properties left to the spouse or common-law partner are transferred at the tax costs of the properties under Subsection 70(6) of the Income Tax Act (the “Act”). The rollover provision automatically applies unless the deceased’s representative elects out of it under subsection 70(6.2) of the Act. If the taxpayer has losses carried over or other credits, the election may be made on an asset-by-asset basis to utilize the losses or credits that would otherwise not be used.
A deemed disposition can lead to different tax consequences depending on the type of assets and the relationship between the beneficiary and the taxpayer (if you need more information on tax consequences on capital properties, please do not hesitate to contact us). If in the year of death, the total allowable capital loss is higher than the total allowable capital gain, the net difference can be used against income in the following order to lower the tax burden,
Any other income included in the terminal return,
Any other income included in the deceased’s income tax return for the proceeding year (please refer to the deadline section to find out more about the concept of income tax return for the proceeding year of a deceased person).
Sheltered plan
Sheltered plans include unmatured RRSP, RRIF and TFSA. There are different tax consequences of the three different plans if the beneficiary is the deceased’s spouse or common-law partner (If you want to find out more about the tax consequences in the case where the beneficiary is not the spouse or common-law partner, please do not hesitate to contact us). The following discussion only provides a summary of the tax consequences of the three different plans.
TFSA (Tax-Free Savings Account): the spouse or common-law partner will keep the tax-exempt status of the TFSA without impacting his or her contribution room in the year.
RRSP (Registered Retirement Savings Plan): the fair market value of the RRSP is included in the deceased’s income and a corresponding deduction can be claimed if the full amount is a refund of premiums. The amount will then be taxable to the spouse or common-law partner, and a deduction can be claimed if the spouse or common-law partner transfers the funds to his or her RRSP account. His or her contribution limit is not affected.
Registered Retirement Income Funds (RRIF): RRIF payments after death continue to be made to the surviving spouse or common-law partner if he or she is the successor annuitant of the RRIF.
Terminal Return
A terminal return must be filed for the period from January 1 to the date of death in the year of death. The terminal return should include all the capital gains or losses, taxable amounts mentioned above and other incomes such as rental income, interest income and salaries earned in the period before death.
Filing Deadline
The tax filing deadline for the deceased who did not have a business is as follows:
April 30 of the year following the date of death if the date of death is between January 1 to October 31
Six months after the date of death if the date of death is between November 1 to December 31
The tax filing deadline for deceased who had business income or loss is as follows:
June 15 of the following year (any taxes owing must be paid by April 30) if the date of death is between January 1 to December 15)
Six months after the date of death if the date of death is between December 16 to December 31
Payment deadline
The payment deadlines, like the filing deadlines, also depend on the date of death.
April 30 of the following year if the death occurred between January 1 and October 31
Six months after the date of death if the death occurred between November 1 and December 31
“Rights or things” Return
The deceased may own “rights or things” at the time of death, including but not limited to the following items:
Matured but unclipped bond coupons
Dividends declared but not yet received
Employment income (salary, vacation pay, etc.) earned for the period before death but not received
“Rights or things” return filing deadline is the later of:
One year after the date of death
90 days after assessment of the final return (year of death return)
Estate Administration Tax (formerly “Probate Fees”) of Ontario - General Concept
Estate administration tax (the “EAT”) is calculated based on the total value of the deceased’s estate, which includes the value of all assets owned by the deceased at the time of death with some exceptions.
Depending on the ownership structure, the assets can include:
Real estate in Ontario (less encumbrances)
Bank accounts
Investments
Vehicles and vessels
All property of the deceased held in another person’s name
All other property including goods, intangible property, insurance and business interest
When the estate representative applies for a Certificate of Appointment of Estate Trustee (the “Certificate”) with the Ontario Superior Court of Justice, the representative pays a deposit equal to the EAT. The deposit is converted to the EAT when the certificate is issued. If the Certificate is not granted, the deposit will be refunded.
Special Cases
The court issued a Certificate of Appointment of Estate Trustee with a Will Limited to the Assets Referred to in the Will, only assets included in such Will are included.
If the court issued the following, then only assets located in Ontario are to be included:
A Confirmation by Resealing of Appointment of Estate Trustee
A Certificate of Ancillary Appoint of an Estate Trustee with a Will
A Certificate of Appointment of Foreign Estate Trustee’s Nominee as Estate Trustee Without a Will
How to calculate the tax amount?
If a Certificate of Appointment of Estate Trustee is applied before January 1, 2020, the tax rates are as followed:
$5 for each $1,000, of the first $50,000 of the value of the estate (0.5% and maximum of $250) and,
$15 for each $1,000 of the value of the estate exceeding $50,000 (1.5%)
If a Certificate of Appointment of Estate Trustee is applied on or after January 1, 2020, the tax rates are as followed:
No estate administration tax payable if the value of the total estate is $50,000 or less,
$15 for each $1,000 of the value of the estate over $50,000 (1.5%)
Filing Estate Information Return Deadline
The Ministry of Finance must receive an estate information return within 90 days after a Certificate of Appointment of Estate Trustee has been issued.
Difficulties
When handling post-mortem filings, you will face some challenges and pitfalls, which may lead to double, or even triple, taxation as well as longer processing time. It is essential to plan ahead.
Dying Without a Will (Intestacy)
Dying without a proper Will can lead to substantial estate administration tax, especially when the estate’s value is high. The amount of estate administration tax is based on the total value of the assets that flow through the primary Will but generally not the secondary or corporate Will. Without a Will, the amount is based on the total estate value which includes assets in the primary Will as well as assets that could have been placed in the secondary or the corporate Will. In this case, the value of assets for probate purposes can be significant. As mentioned above, the estate administration tax is charged at 1.5% of the estate value over $50,000 (if the Certificate is issued after January 1, 2020).
Some Special Circumstances and Complications
When a person dies with a Will, the Will governs how the deceased’s assets should be distributed. In some cases, even though there is a Will in place, it may not be enough, and you should seek professional advice. Here are some examples:
The deceased has funds or properties that are under joint ownership with right of survivorship.
The deceased got married or divorced or remarried after he or she wrote a Will (in this case, this particular Will may be completely or partially invalid).
One of the beneficiaries is no longer alive.
The deceased owned private corporate shares.
If a person dies without a valid Will, the assets and properties are distributed based on specific local laws. In this case, the deceased’s assets can be distributed unfairly and may lead to unexpected higher tax burdens. Hence, it is essential to have a valid Will.
Properties Discovered After Death
A person may have lost track of the total assets and properties owned before death. Upon death, all assets are deemed to be disposed of. As mentioned in Capital Properties, the rollover provision can be elected out of on an asset-by-asset basis to utilize loss carryovers and other applicable tax credits. However, without a full knowledge of the assets and properties owned at the time of death, it is difficult to plan for the election. It is crucial to eliminate surprises.
Incompetent Tax Filer
The deceased may have been filing the regular tax return with a tax return preparer. Please note that terminal return filing and estate planning require specialized knowledge, which may not be acquired by general tax return preparers. Terminal return may be filed late or incorrectly if the filer is incompetent, leading to penalties and interests. Late filing of a terminal return will lead to 5% penalty on any balance owing, plus 1% of the balance owing for each full month that the return is late (no proration), to a maximum of 12 months.
Suggestions
Here are some general ideas to help you alleviate the burdens of the loved ones and plan ahead:
To hire a Will and Estate lawyer to prepare a proper Will or Wills.
To hire a competent accountant or lawyer with an in-depth knowledge of taxes on death to handle the post-mortem filings and planning. If you are a shareholder of a private company, the right professional advisor can assist in reducing double or triple taxation by way of various planning techniques such as pipeline type restructuring, step-up of certain assets, Subsection 164(6) losses carryback, and so on.
To keep an inventory or listing of all the assets you own. You should specify the costs, locations and any other critical information you think your executors will have a hard time finding.
To keep an update-to-date contact list of people that you believe your executor(s) or heirs should reach out. This list should include, but not limited to, your bankers, investment advisors, accountants, lawyers, and so on.
To monitor your tax attributes closely, such as capital losses carryforward, unused donation credits, and other unused or carryover amounts.
If you have any questions or comments about this blog post, please feel free to contact us.
Disclosure
This article provides general comments on various tax implications, concerns and suggestions related to taxes arising on death. The material is based on current laws and regulations as of the writing date of this article, November 9, 2019.
All comments are for education purposes only, and the following information is not intended to provide legal or tax advice. The article may outline strategies or suggestions, not all of which will apply to your particular facts and circumstances. To ensure that your facts and circumstances have been properly considered and that action is taken based on the latest information available, you should obtain professional advice from a qualified legal and tax advisor before acting on any of the information in this article. The publisher of this article has no responsibility to any person. Under no circumstances, including, but not limited to negligence, shall we be liable for any direct, indirect, special, consequential or other damages that result from the use of, or the inability to use, the information contained in this handout. To the fullest extent permitted by applicable law, we disclaim all warranties, express or implied, including, but not limited to, implied warranties of merchantability and fitness for a particular purpose, concerning any materials provided or obtained from or via us.