My name is Mark Goodfield. Welcome to The Blunt Bean Counter ™, a blog that shares my thoughts on income taxes, finance and the psychology of money. I am a Chartered Professional Accountant and a partner with a National Accounting Firm in Toronto. This blog is meant for everyone, but in particular for high net worth individuals and owners of private corporations. The views and opinions expressed in this blog are written solely in my personal capacity and cannot be attributed to the accounting firm with which I am affiliated. My posts are blunt, opinionated and even have a twist of humor/sarcasm. You've been warned.

Monday, January 19, 2015

The Two Certainties in Life: Death and Taxes

We have all heard the famous quote “In this world nothing can be said to be certain, except death and taxes”. Did you know the person who uttered this profound statement was none other than Benjamin Franklin?

This blog post and the two follow-up posts, will share with you the income tax consequences of Benjamin's second certainty, the always popular subject of dying.

Deemed Disposition


Ignoring the fact that the U.S. Income Tax Code in the 1700's may have been slightly different than today, Franklin's view on death and taxes was that of an American. This distinction is very important. The U.S. tax system taxes you on the value of your estate upon death, while Canada deems you to have disposed of your property at death, at its fair market value, which triggers income tax on any unrealized capital gains (paper gains).

I will explain this “deemed disposition” in greater detail later on, but simply put, if you own shares in say Bell Canada that are worth $40 upon your death, that you purchased for $15, you/your estate are deemed to have a $25 ($40-$15) capital gain per share, if your assets are not left to your spouse.

Probate Fees


Depending upon the province in which you live, you may also be subject to probate fees (Estate Administration tax in Ontario) on the value of your estate at death. However, notwithstanding people plan around probate fees, often to their detriment; these fees/taxes are typically fairly immaterial to an estate in Canada (1.5% versus 40% Estate tax in the U.S. or higher, depending upon the state and size of your estate). Here is a summary of the probate fees for each province. For purposes of this blog, and the two follow-up blog posts I have written, I am just going to focus on the “deemed disposition” upon death and ignore probate fees.

Personal vs Corporate

 

It has been my experience that most people are not clear about how the income tax system works upon their death. In particular, shareholders of private corporations are often surprised when I inform them that any increase in value of the shares of their private corporate shareholdings are subject to income tax upon their death (they often think the yearly corporate tax they pay has covered this liability). This does not even account for the fact that without proper tax planning, there could be double taxation in respect of their corporate shareholdings.

In order to deal with the distinction between the personal and corporate income tax consequences, I have made this topic a three-part blog series. Next week, I will deal with the personal income tax consequences of you dying, and the following week, I will discuss the income tax consequences of dying when you own shares in a private corporation.

Just Die First

 

You can avoid all these messy income tax complexities upon death by just dying first if you are married or in a common-law relationship. This is because if you leave your property to your spouse or common-law spouse, the property passes to them at the adjusted cost base of the property and the capital gain is deferred until the surviving spouse or common-law partner dies, or they sell the property during their lifetime.


Consequently, the deemed disposition rules typically only apply in the following three situations:

(1) Your estate elects out of the automatic transfer to your spouse (this can be done on a property by property basis).

(2) You are the last to die spouse.

(3) You leave your property to your children or other beneficiary, instead of your spouse.

Next week, I will discuss in greater detail, the personal income tax consequences of passing away. 

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation.

9 comments:

  1. It would be very hard to argue against the first one, although the scientists are working on delaying it at least, but as to taxes?? Well, with a devious financial wizard, sorry Mark ( I don't think this applies to you) some people and companies have and do manage to delay, reduce and in some cases, exempt themslves from the tax man. You konw, little brown envelopes and those types of things. Mind you, even Al capone evemtually paid his dues but things have gotten a lot more complicated since then and, after all, rules are made to be broken.
    Richard

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    1. Hey Richard

      There is planning and tax minimization and especially tax deferral based on existing income tax rules. Personally, I don't think there are many tax exempt situations for those willing to play within the legal boundaries.

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  2. First Mark, thanks again for the 3 part African excursion updates. On cold days, warms me up just reading through them.

    I concur with something you had mentioned last year in a post, something I mentioned to my tax prof in my graduating year: personal tax planning is a fallacy (for those who work within the guidelines).

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  3. If my adult child (not a dependent) lives with me and my home is also her primary residence, when I die would she have to pay a capital gains tax? She and I have no other property. Would my home be exempt from a capital gains tax, as it will not be sold. She will simply continue to live in my home as her primary residence.

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    1. Hi Anon

      I assume it is you own the home and it is your principal residence. If so the home is tax free to you and when you pass away there is no tax. If your will provides that your dtr gets the home and she then lives in it as her principal residence, then in general it will tax exempt as her PR

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    2. Hi Mark,
      Thanks very much for your response. It is greatly appreciated.

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  4. As always I appreciate and enjoy your blogs. A quick question regarding this blog entry.
    I understand that if I die my property (Stocks) are passed to my surviving spouse (wife), capital gain is deferred; this seems to be called a "rollover". My wife will receive stocks in my estate via my will, does this just happen under the tax system or will my wife need to do something to ensure that this "rollover" happens. I have searched but I can't see this discussed on the CRA website. Your help appreciated.

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    1. Here is a good explanation taken from Advisor.ca

      Rollovers, exemptions, elections

      A common rollover involves transferring assets to a surviving spouse. The rollover is available for capital property and RRSPs/RRIFs.

      It allows such assets to be transferred to a surviving spouse (via the will, joint ownership with right of survivorship, where applicable, or beneficiary designation) with no immediate tax consequences. Instead, the usual deemed disposition will be deferred until the death of the surviving spouse.

      Note, the rollover can be made to a spouse or a qualifying spousal trust (criteria for establishing a “qualifying spousal trust” are set out in s70(6) of the Income Tax Act). Also note, for income-tax purposes, “spouse” may include legally married, common-law and same-sex couples. Other possible rollovers include family farms to a child or grandchild and RRSPs to a dependent minor child or grandchild.

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