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.

Joint Bank Accounts-Documenting your Intention

In my blog Probate Fee Planning-Income Tax, Estate and Legal issues to consider, I talk about how holding assets in joint tenancy can be problematic post the Supreme Court decision in Pecore v Pecore.

I further discuss that many parents who put funds in joint accounts with a child/children to save on probate taxes (sometimes creating substantial income taxes as result) are often not clear as to their intention in regard to the funds: i.e. is it the parent’s intention that the funds held jointly with one child belong to that child, or do they belong to all their children with an understanding that the child on the account will share with their siblings?

The Pecore decision states that where assets are transferred without consideration (such as to a child to avoid probate), the presumption of a resulting trust will operate in almost all cases save transfers from a parent to a minor child. This means that when a parent transfers assets into a joint account with one child, there must be evidence of the intention to make a gift to that specific child or the joint account is presumed to be held in trust for the parent’s estate and the proceeds are divided pursuant to the parent’s will. In certain cases it may have been the parent’s intention to share the funds with all their children equally; however, in other cases the parent may have wanted a specific allocation to a specific child.

In order to avoid the presumption of a resulting trust post Pecore, lawyers have been yelling from the rooftops that people need to document their intention in regard to joint accounts. Well, the enterprising law firm of Fish & Associates has tried to come to the aid of Canadians with The Joint Asset Planning Kit.

For $45 the firm will sell you a 15 page document that, according to the website, “allows a parent to clearly express his or her intentions regarding joint parent-child accounts. If a parent wants the assets in a joint account to go to the joint owner, then this is spelled out clearly in the document.”

On the Jointasset.com website, Barry Fish states that he took “pains” to ensure that The Joint Asset Planning Kit can't override a will. “We've been very, very careful to ensure that, under no circumstances, do we ever want this document to be construed as a revocation of a prior will or testamentary disposition.”

I want to be clear of two things at this point. Firstly, I have never met Barry Fish or any of his associates (although we were quoted together in this article on estate planning for the black sheep child) and I am not receiving any compensation for discussing their website. Secondly, I can only rely on Mr. Fish’s assertion that this kit will stand up in a court without having any effect on a prior will.

If you have a lawyer, I suggest you consider meeting with them to draft a document stating your intention in regard to any joint bank accounts (this is the case whether you want a joint account to be shared equally by your children or not). If you do not have a lawyer, you may wish to consider purchasing The Joint Asset Planning Kit, but be clear, I am not endorsing such, just noting the kits existence for your consideration.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.