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.
As I read the obituaries in the Times Colonist this morning, there was another of my clients. It got me to thinking of “Death and Taxes”. For many people their Date of Death tax return is the most complex one that their family will ever have to do. In this month’s issue of the Beacon I’m going to review what happens, from a tax point of view, when somebody passes away.
What happens when a person dies?
Many things expire with the deceased. Two examples are Powers of Attorney, and Consent on File with the Canada Revenue Agency (CRA). To re-establish consent with the CRA the Executor/trix/Adminstrator needs to send a copy of the death certificate and the will (and any codicils), or, if the deceased left no will, the grant of administration from the court and the death certificate.
When is the final tax return due?
If the person passes away before October 31 the tax return is due, like any other non-self-employed’s, on the following April 30. If the person died in November or December, the tax return, and any amount owing, is due six months after the date of death.
What information is needed to file the Date of Death tax return?
This depends on what the deceased’s sources of income were. If a person has only their Old Age Security, Canada Pension Plan and a workplace pension the final tax return will be relatively simple. On the other hand, if they also had investments, Registered Retirement Savings Plans (RRSP), Registered Retirement Income Funds (RIF), rental or vacation property, the final return will be quite complex.
For a simple tax return
Information slips may be obtained from the CRA
Medical expenses, if not previously claimed, may be claimed for the two years prior to the date of death
The CPP death benefit can not be claimed on the Date of Death tax return; it may be claimed either by the beneficiary(ies) or on a Trust Return.
For an Investor’s return
When a person dies, their investments, including mutual funds, stocks and bonds, real estate other than their principal residence, are deemed to have been sold on the date of death. To determine the tax impact of this requires an analysis of the holdings, their costs and their value on the date of death. If the property is held jointly with a spouse it may pass tax free to that spouse.
Canada does NOT have an inheritance tax, but the gains are taxable in the estate. If the deceased had dealt with a broker, a Statement of Realized Gains and Losses may be requested. This outlines the increase/decrease in the mutual funds, stocks and bonds. For real estate, the most recent assessment or a valuation done by an appraiser or realtor familiar with the market may be used to fix the value.
For the Date of Death return, the Capital Gains/Losses are included. Capital gains are taxed at half the regular rate; losses may be carried back up to three years, OR applied against other income in the year of death, or the year before. An example: the deceased bought 25,000 shares of Royal Bank in the 1980s @ $40/share. RBC recently traded @ $104/share. The cost would be $1,000,000.00; the value would be $2,600,000.00. The total capital gain would be $1,600,000; the TAXABLE capital gain would be $800,000. In British Columbia, with the top combined Canada/BC Marginal Tax Rate being 49.8%, the tax payable on these shares would be $398,400.
RRSPs and RIFs
Taxation of RRSPs and RIFs is a different matter. If there is no surviving spouse, or disabled child or grandchild named as the beneficiary, the WHOLE amount of the RRSP or RIF is taken into income and taxed on the date of death. $500,000 in a RIF or RRSP could attract tax of up to $249,000. The reason for the higher inclusion rate for RIFs and RRSPs is because the deceased received a deduction in tax payable when the contributions were made; so, coming out the WHOLE amount is taxed. At presentations I make to various audiences I often jokingly suggest to surviving spouses that they might want to marry a 20 something. This will delay the taxation of the RIF or RRSP by a couple of generations 😊.
Optional Tax Returns
In addition to the Date of Death tax return, there are three other optional returns that it may be advantageous to file. The first is a return for Rights and Things. This is for income earned before the date of death, but not paid until after. This return has the full set of non-refundable credits available so the first $11,809 of income would escape taxation. The second is the return for Partner or Proprietor for income from the business’s year end to the partner’s date of death. Again, with full non-refundable tax credits. The third is a Trust Return for the Estate. In this return would go the CPP Death Benefit (if more tax efficient than in the beneficiary(ies)’s hands and any ongoing investment, rental or other income the Estate receives before it is wound up.
A Clearance Certificate is the final stage in the tax dealings of an Estate. The Executor/trix/Administrator applies to the CRA using form TX 19 Asking For A Clearance Certificate. The Clearance Certificate may be asked for after all of the taxes on the deceased’s and Estate’s tax returns have been assessed and paid. When granted, the CRA is saying that the deceased/Estate has no more obligations to the CRA. Complicated Estates and cautions Executors are the usual reasons a Clearance Certificate is sought. It adds another two to six months to the time to administer and distribute the assets to the beneficiaries.
As always dear readers, I look at tax matters through my lens of Helping You To Keep More Of YOUR Money. Next time: some tax planning ideas.