Death and Taxes

In end-of-life planning, there are two main taxes to consider; probate tax and personal income tax.

Probate, the subject of a previous article, is a court certification process which requires a list of your assets and their estimated value. The probate tax on estates with a value greater than $50,000 is currently 1.4% of this total value.

Personal income tax is paid on your final tax return, which your executor files on your behalf. With our graduated tax system, a modest income may be subject to a 20% tax rate, while substantial income may be subject to a tax rate as high as 53.5%.

In order to reduce the overall tax burden of your estate, it is prudent to consider what will be on the tax return filed after your death. This return will include capital gains; income received up to the date of death; death benefits and payouts; balances in RRSP and RRIF accounts; reserves; and balances in Home Buyers and Lifelong Learning Plans. The standard deductions would still apply, and additional deductions are available for unused capital losses, pension splitting to the date of death, donations, and medical expenses, which can be accumulated for a 24-month period on the final return.

A capital gain is the profit from the sale of property or an investment. On the date of your death, all assets not transferred to your spouse are deemed to be disposed of at fair market value. This includes investments, shareholdings, personal property of value, as well as assets held in joint tenancy or with a named beneficiary.  50% of the capital gain is taxable income.

For example, if you own a summer cottage that cost $200,000, and at the date of your death has a fair market value of $380,000, the capital gain is $180,000. $90,000 of this is taxable. In this example, receipts detailing improvements (not maintenance) that have been done to the property could be added to the original purchase price to increase the adjusted cost base. It is important to keep these receipts in a place where your executor will find them.

Your principal residence may be eligible for a principal residence exemption for some or all the years of ownership, offsetting the capital gain on that property. It is important to record the periods of time when a residence is a principal residence, and when it is not.

To reduce the amount of income on death there are many tax planning opportunities to consider, including giving gifts before you die and recognizing the income in a year other than the year of death; contributing to RESPs for grandchildren; leaving money to registered charities in the will (if substantial, there may be better ways to donate); negotiating with an employer for a death benefit.

Another strategy is to spread out your income over more years, so that all of the income is in a lower tax bracket. Consider withdrawing RRSP/RRIFs in a tax efficient manner, and redeeming assets in a planned manner. Also consider the use of trusts and insurance products.

A financial planner can help you create a plan that reduces your overall tax burden, and ensures that more of what you leave behind will go to the organizations and people you believe will make the world a better place.

Written by Margaret Verschuur