By Fin MacDonald, Fin Tax Service
Fin MacDonald has over 20 years experience providing retirement and income tax planning advice. Readers are however cautioned that responsibility falls on the taxpayer to ensure that all information is adequate and correct.
On September 11, B.C. Finance Minister Carole James delivered a ‘Budget Update’. Much of what was in this update had already been announced: increases in Income Assistance and Disability Benefits of $100 per month, elimination of bridge tolls in Vancouver area, and, reduction in Medical Service Plan premiums. Other measures had been hinted at: increase in top marginal tax rate for taxable incomes over $150,000 from 14.7 percent to 16.8 percent; elimination of Provincial Sales Tax on BC Hydro (for businesses only) over two years, and an increase in the corporate tax rate from 11 percent to 12 percent.
One surprise was the reduction in the small business tax rate from 2.5 percent to 2 percent. This may be offset by the decrease in the dividend tax credit for ineligible dividends. With the ongoing discussion of Federal Finance Minister Bill Morneau’s discussion paper on reforming the taxation of Canadian Controlled Private Corporations (CCPC), one might ask why this was done at this time.
Two measures that were missing were the move towards $10-per-day day care and the $400 renters’ tax credit, both of which were in the NDP’s campaign platform. When asked, in the budget lockup, why these were not included, Carole James responded that neither measure had the support of the Green Party, which is propping up the NDP minority Government. In television interviews, aired on September 12, Green Party leader Andrew Weaver took credit for the non-inclusion of these two measures. (As I write this on September 14, 2017, the Greens appear to be suggesting that they would not bring down the Government if it brought forward these measures.)
Life End Tax Planning
Death and Taxes are two things that go together. When a person passes away, they are deemed to have disposed of all of their assets. If there is a surviving spouse, most of these assets may be ‘rolled over’, without tax, to that spouse. In some cases, it may make sense for the estate of the deceased to declare the capital gains, for example, if the person dies early in the year and has little other income.
Some assets, such as a principal residence and most life insurance policies, are not taxable upon death. However, the deemed disposition of the principal residence (if it is not being rolled over to a spouse) must now be reported on the tax return, even though it will not create any tax liability. Other assets, such as cottages, rental property, mutual funds, stocks, bonds, GICs, are subject to capital gains taxes. Capital gains are charged on the increase in value of the asset. An example: a client bought 10,000 shares of a Canadian bank in the 1960s, for $6.25 per share. If he was to pass away today, with the shares worth $72.00 each, he would have a total capital gain of $657,500. Since only half of total capital gains are taxable, the taxable amount would be $328,750. If the person was already in the top tax bracket, this would increase the taxes payable by about $160,000.
If some of the assets have a capital loss, half of the loss is deductible against taxable capital gains. If there are no capital gains to use the loss against, the loss may be carried back up to three years to be used against capital gains. If there are no capital gains, the loss may be applied against other income in the year of death, and the year proceeding.
RRSPs and RIFs
Registered Retirement Savings Plans (RRSP) and Retirement Income Funds (RIF) may pass, without tax to a surviving spouse, or to a child or grandchild who qualifies for the Disability Tax Credit. If the registered holder of the plan does not have a spouse or an eligible disabled descendant, the whole amount of the RRSP or RIF is taken into their income on the date of death. My sister in law recently asked me how she could save taxes on her RRSP. I replied, jokingly, that, after her husband (my brother) dies, she should marry a young person. The RRSP/RIF would pass, on her death, to the new spouse, who would not have to pay tax on it!
If a large amount remains in a person’s RIF, and there is no eligible survivor, one may wish to take out each year more than the minimum. Depending upon the holder’s other income, lowering the amount in the RIF may make sense. Choosing to make extra charitable donations or other uses of the money can reduce the amount left in the estate to be taxed. A client of mine who is in hospital, and soon to be hospice, is withdrawing half of the remainder of her RIF this year. This will substantially lower the taxes her estate will have to pay.
Tax Free Savings Accounts (TFSA)
As the relative new kid on the block in the tax world, TFSAs have many advantages that are not always understood. In the case of the death of a TFSA holder, the rules depend upon whom the account is left to. If the TFSA passes to a “Successor Holder”, such as the surviving spouse, the tax implications are minimal. As long as the TFSA holder did not have excess contributions in the account, the TFSA and any income after death may pass tax-free to the Successor Holder. The Successor Holder does not need to have contribution room in her/his account. The Successor Holder may then consolidate the two accounts into one without any taxes being payable.
If the TFSA passes to a “Designated Beneficiary”, such as a child, the rules are stricter. The amount in the TFSA may be withdrawn by the Designated Beneficiary, with no tax being payable. Alternately, the Designated Beneficiary may transfer to her/his TFSA, from the deceased’s account, up to the amount of contribution room he/she has in her/his TFSA. An example: the deceased had $65,000 in their TFSA. The Designated Beneficiary has $15,500 in contribution room. They may transfer $15,500 into their TFSA; the balance of $49,500 will be paid out to them. (If you have lived in Canada since the TFSA rollout in 2007, and have never made a contribution, you have $52,500 in contribution room. If you have made contributions, the amount you now have in your TFSA may be much higher than $52,500, depending upon how your investments have done.)
For many people, their final tax return is the most complicated. If the deceased has few investments, assistance is not usually required. If the deceased is the family member who looked after financial affairs, assistance can be very helpful.
As always. Through my lens of Helping You to Keep More of YOUR Money. Next month, Year End Tax Planning.