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 BDO. This blog is meant for everyone, but in particular for high net worth individuals and owners of private corporations. My posts are blunt, opinionated and even have a twist of humour/sarcasm. You've been warned. Please note the blog posts are time sensitive and subject to changes in legislation or law.

Monday, October 28, 2019

What To Do When Your Spouse Dies Before You – Part 2, Taxes

Two weeks ago we discussed the administrative steps people need to take when their spouse dies.

The truth is, there is more to this topic than the administrative steps we listed in that post. Surviving spouses also need to navigate several high-stakes tax issues, some of which are specific to a surviving spouse. Our blog from two weeks ago tackled the administrative piece – today we dig deep to analyze the steps related to tax.

It should be noted that for income tax purposes, “spouse” includes not only a married couple but also common-law and same-sex couples.

When the surviving spouse avoids tax


On death, a taxpayer is deemed to dispose of all of their assets at their fair market value. This means that tax must be paid on any accrued capital gains to the date of death. For your RRSP, the value at the time of death is included as income on the deceased's terminal tax return.

However, where the assets are transferred under the terms of the will to their surviving spouse or a qualifying spousal trust, the deemed disposition at fair market value is avoided and the assets transferred to the spouse take place at their adjusted cost base (the same deferral can occur for a RRSP where the spouse is a designated beneficiary of the RRSP or a beneficiary under the will and an election is made). If the assets are not transferred to the surviving spouse or qualifying spousal trust, there is a deemed disposition and tax must be paid on the accrued gains and/or value of the RRSP.

As the deemed disposition rules are complicated, I think an example at this juncture may help clarify how these rules work.

 Let’s consider the case of Tom and Mary. Tom unfortunately died while preparing his 2018 income tax return and transfers all his assets to his wife, Mary, under his will. He owned 1000 shares of Bell Canada stock. He had paid $10 per share for them (a $10,000 cost), but they are now worth $30 per share ($30,000 fair market value).

In this case, the shares roll over to Mary at $10,000. She effectively steps into Tom’s cost base of $10 per share, and there are no current income tax consequences. However, Mary will pay tax on the deferred capital gain on the Bell Canada shares at the earliest of when she actually disposes of the Bell Canada shares or dies. 

Saying no to the rollover


Tax-free transfers sound good on paper, and this one is no different. But sometimes the surviving spouse should consider saying no to the automatic rollover. They can do this by “electing out” – a procedure that is highly specific to a surviving spouse and involves triggering taxable capital gains.

The surviving spouse should consider this path in several scenarios. Common ones are when the deceased spouse had:
  • a very low tax rate - for example, they had low income in the year of death, or they died early in the year and only have a month or two of income
  • unused capital losses carried forward
  • alternative minimum tax carryforward
The election is made on a security-by-security basis (i.e., you can select anywhere from one Bell Canada share to all thousand shares) at the fair market value (or stock price) of Bell Canada at the date of death.

Once the election is made, the surviving spouse inherits the higher tax cost base from the deceased spouse. Put simply, where the election is made, the surviving spouse’s tax cost will be the fair market value of the asset as of the date of death of their spouse.

To explain, let’s return to our Bell Canada example from above. if it was determined that for tax purposes to elect to trigger the entire Bell Canada capital gain $20,000 ($30,000 fair market value less $10,000 cost) because your deceased spouse had capital losses, the surviving spouse would have a cost base of $30,000 going forward on these shares, instead of the $10,000 cost base if no election was made.

In some circumstances it may make sense to elect to trigger a capital loss or losses at death instead of a capital gain. This would be for example to offset capital gains on the terminal return. There are various technicalities to this election, so speak to your advisor.

The election may also be applicable if the deceased spouse owned shares in a qualified small business corporation. It may make to elect to trigger a gain to utilize the capital gains exemption, which is $866,912 in 2019. This is a highly complex mechanism, so again, speak with your advisor. 

Family farms


If your spouse owned part of a family farm you may also wish to speak to a professional who is familiar with farming to determine the best course of action. 

Filing an income tax return


Finally, you will need to file at minimum a terminal income tax return for the deceased from January 1 to the date of death. You may have other filing option such as a rights and things tax return. I will post a blog in the next few weeks with more detail on filing returns at death.

The tax and administration issues are immense when a spouse dies. For the surviving spouse, they represent a huge burden. The above will hopefully assist you in understanding these issues. However, I strongly urge you to obtain professional legal and tax assistance immediately in the event of your spouse’s passing.

The content on this blog has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The blog cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information on this blog or for any decision based on it.

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

BDO Canada LLP, a Canadian limited liability partnership, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms.

Monday, October 14, 2019

What To Do When Your Spouse Dies Before You

I have written before on what happens when someone dies: both on the administrative issues an executor needs to consider and also on the income tax issues upon death. However, I recently realized those posts are essentially directed at what happens when a single person dies, or a widower or widow passes away.

Today I’m filling in the gap with a look at what happens when the first spouse in a married or common law couple passes away. This week I address the administration issues – many of which are the same as for when the surviving spouse dies later on, but I have added several additional items. My post in two weeks will tackle the tax issues – which can be very different from when the surviving spouse dies.

How to tackle the nitty gritty of administration


Here are 25 administrative considerations for the surviving spouse (family, or executor of someone who dies):

1. Determine the deceased’s funeral wishes and if the funeral has been prepaid. If they have not made arrangements, you may unfortunately need to deal with this issue immediately while you are likely still in shock from your spouse’s or parent’s passing.

Key takeaway: Always ensure your funeral arrangements have been communicated while you are healthy.

2. Obtain several copies of the funeral director’s statement of death. Many institutions accept this document in lieu of the death certificate, which is issued by the province and is time consuming to apply for and receive.

3. Open the safety deposit box (“SDB”). You may need to open the SDB if the will is in the SDB or to prepare a list of the contents of the SDB with the representative of the bank.

Key takeaway: Please always ensure someone has a copy of the SDB key or knows where to find the key.

4. Meet with your or your spouse’s lawyer to review the will and understand any legal obligations such as advertising for creditors. In general, most spouses leave all if not the majority of their assets to their spouse. This generally makes things easy for tax, but that is not always the case. In addition, specific assets may often be left to the children or a charity, and those assets need to be dealt with in the near term.

5. Notify any beneficiaries of their entitlements under the will and request their personal information.

6. Meet with your or your spouse’s accountant, to ensure you are clear on the income tax obligations and the income filing requirements. If you or your spouse do not have an accountant, engage one. As noted above, I will address this issue in more detail in two weeks.

7. If the executor is someone other than the surviving spouse, ensure you contact them and advise them of their duties and determine whether they accept the appointment. Hopefully, they are already aware they would be appointed.

Key takeaway: always inform the people who will be your executors and provide them an estate organizer or similar document to provide them a roadmap of your assets. They will need to have a list of all your assets for probate and to ensure a full distribution is undertaken.

8. Your lawyer will advise you whether you will need to obtain a certificate of appointment of estate trustee with a will (probate), a very important step in Ontario and most other provinces.

Key takeaway: If you own shares in a private corporation, in certain provinces you can have a second will that removes these assets from probate. Ensure you discuss this with your lawyer if you do not already have a second will.

9. Collect any life insurance benefits.

10. Meet with your and your spouse’s financial planner, insurance agent or any other relevant advisor.

Key takeaway: Make sure you and your spouse meet all family advisors while both spouses are alive to create at least a basic comfort level.

11. Where the deceased was a controlling shareholder or ran a business, find out if there was a succession plan/disaster plan in place and that it is being followed. If the deceased did not create a plan, take control of the business in the short term and start looking for a manager to take over running the business. Your accountant can likely assist you in this.

Key takeaway: As I’ve written before, many business owners do not have a succession plan. This is the quickest way to lose some or a significant portion of your family’s worth when you die. Ensure you have a plan in place now or take steps to put one in place.

12. Apply for any government benefits the estate is entitled to, such as the CPP death benefit, survivor benefits and possibly child benefits.

13. Notify CPP/QPP and Old Age Security – at Service Canada – of your spouse’s death so they stop making payments.

14. Cancel the deceased’s driver’s licence, health card and other provincial documentation. (See this page for Ontario; each province will have a similar resource online.) Also make sure to cancel the deceased’s Social Insurance Number, passport and Nexus account as applicable.

15. Cancel credit cards in your spouse’s name, email and websites attached to them, and memberships in fitness clubs and organizations.

16. Change the name listed on utility, telephone and other bills.

17. Cancel personal health insurance premiums, cell phones and possible “fall alerts” if the deceased was elderly.

18. Transfer RRSPs, RRIFs and TFSAs.

19. Update your will or power of attorney (POA) if your deceased spouse was the beneficiary of all or some of your assets or your POA.

Key takeaway: It is important to update your will and especially your POA as soon as possible. I have seen many situations where the stress (broken heart) of spouse's passing often creates a medical issue for the surviving spouse, so updating your POA is very important.  

20. If you have real estate holdings in your spouse’s name or in a joint name, review the legal ownership and transfer issues with your real estate lawyer.

21. If your spouse had a vehicle, sell or transfer it and cancel or transfer the applicable auto insurance.

22. If the deceased had a domestic caregiver and the payroll account was in their name, you will need to issue final T4s, and possibly set up a new account in your name.

23. A sometimes-troublesome issue is family members taking items, whether for sentimental value or for other reasons. They must be made to understand that all items must be allocated according to the will or other means, and nothing can be taken.

Key takeaway: This is a very ticklish issue and needs to be handled delicately, but a family member "grabbing" a sentimental item can sometimes cause more dissension than monetary allocations.

24. For any jewellery and art not noted in the will, please note there are tax and probate consequences. See this blog I wrote on “Personal Use Property - Taxable even if the Picasso Walks Out the Door.”

25. Depending upon whether assets were left to beneficiaries other than the spouse, you may have to deal with a passing of accounts - commonly known as an official accounting of the estate’s assets – and possibly request a clearance certificate.

The administration and tax issue burdens are immense upon the death of a spouse. We have now covered the key items that the surviving spouse needs to deal with from an administrative angle. Look out for our next post, which will get you up to date on the taxation issues. For both areas, I strongly urge you to obtain professional legal and tax assistance.

The content on this blog has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The blog cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information on this blog or for any decision based on it.

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

BDO Canada LLP, a Canadian limited liability partnership, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms.