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. Please note the blog posts are time sensitive and subject to changes in legislation or law.

Monday, May 14, 2018

Terminal Income Tax Return Planning – Capital Gains and Losses

Today, I am going to discuss tax planning in respect of capital gains and losses on the final tax return (“terminal return”) of a deceased person. While a slightly morbid topic, many of you likely have been named as an executor in your parents, siblings or friends wills and today's discussion will provide you some basic understanding of one of the more important issues when filing a terminal return.

General Rules


When a person passes away, they are deemed under the Income Tax Act (“Act”), to have disposed of their capital property immediately prior to their death. In English, this means you are taxed as if you sold all your capital property the moment before you died and thus, your estate must recognize any capital gains or losses caused by this phantom disposition. For example, say a person had 100 shares of ABC Co. which they bought at $10 in 2010 and at their date of death, the stock was trading at $18. They would have a deemed capital gain of $800 ($18-10 x 100 shares) even though they never had sold the stock before they passed away.

The most typical examples of capital property are stocks, cottages and rental properties (I have assumed the real estate is capital property and not inventory, which it could be if your business is real estate development).

There is one main exception to the deemed disposition rule. Where you are married or live common law and have left your property to your spouse, there is an automatic spousal rollover such that these assets can be transferred to your surviving spouse with no immediate tax consequences and the deemed disposition can be deferred until the death of the surviving spouse.

The rest of this discussion involves planning where the deceased person has a spouse. If this is not the case in your particular circumstance, you can stop reading unless you want some general knowledge or will be an executor in the future.

Electing Out of The Automatic Spousal Rollover


The Act contains an interesting provision that allows a person’s legal representative to elect out of the automatic spousal rollover noted above. The election which is done on a property-by-property (or share by share) basis is typically undertaken for the following two reasons.

1. To trigger capital gains

2. To trigger capital losses

Triggering Capital Gains


You may wish to trigger a capital gain for the reasons I list below:

1. The deceased person is in a low-income tax bracket and by triggering capital gains, you utilize their marginal tax rates.

2. The deceased person was a small business owner and their shares are eligible for the Qualifying Small Business Corporation tax exemption of $848,252.

3. The deceased person had capital losses or non-capital losses that would be “lost” if you do not trigger additional income (be careful with this one, as per #2 below, the capital losses can be deducted against income in the year of death in certain circumstances, so don't waste them).

4. The deceased person has donation or medical credits that will not be utilized without additional income being generated.

It is important to note, not only is the election beneficial for the reasons listed above, but there is a significant additional benefit. Where you elect to trigger a capital gain, the cost base of the capital property to the surviving spouse is increased to the fair market value of the property elected on. So, for example, if an executor elected out of the automatic spousal rollover on the 100 shares of ABC Co. the adjusted cost base of the shares to the surviving spouse would now be $1,800 (100 shares x $18 market value at death) instead of $1,000

Triggering Capital Losses


Although slightly counter intuitive, a legal representative may wish to trigger a capital loss. There are two reasons for this:

1. Any net capital loss triggered can be carried back against capital gains reported in the prior 3 years.

2. The representative can also choose to apply the capital losses against any other income on the terminal return and the preceding year. This means the capital loss can be applied against not only capital gains, but regular income if the capital losses are greater than any capital gains on the terminal return and prior years return. The one constraint is that if the deceased had claimed their capital gains exemption in prior years, the loss carryback is reduced by the prior capital gains exemption claim and may wipe out the benefit of option #2.

Tax planning for a terminal tax return is very complicated and I have simplified the above for purposes of discussion. If you are an executor for a will, I strongly urge you to seek professional advice to guide and assist you through the various tax implications and options.

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. Please note the blog post is time sensitive and subject to changes in legislation or law.

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