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Death and Taxes are Unavoidable: Tax implications during the year of death

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Death and taxes. The 2 certainties of life! What are some of the tax implications when someone dies? Read on to find out.

Deemed Disposition of Capital Assets

In the year of death, the taxpayer is deemed to have disposed of his/her capital assets (depreciable and non-depreciable) at the fair market value (FMV) as of the date of death [ITA 70(5)a)]. Therefore, a taxable capital gain can ensue in the taxpayer’s final return, depending on the beneficiary (other than spouse). For the beneficiary other than the spouse, the adjusted cost base (ACB) of the property transferred (other than the spouse) is the FMV of the deemed disposition [ITA 70(5)b)].

Transfers to a Spouse or to a Spousal Trust

In the case where the capital assets are transferred to the spouse or to spousal trust after death, the deceased taxpayer is deemed to have disposed of the assets at ACB [ITA 70(6)d)(i) & 70(6)d(ii)]. The legal representative of the deceased can elect to have the regular deemed disposition rules apply (sale at FMV) and not transfer the assets at ACB [ITA 70(6.2)].

Capital Losses

Capital losses that are left over after having reduced capital gains to zero can be used against all other income in the year of death, or the prior year [ITA 111(2)]. To determine the amount that can be used against all other income, you must first use these losses to reduce capital gains. Once this is done, the leftover will in turn be reduced by the historical Capital Gains Deduction [ITA 110.6] claimed in prior years. Any capital loss left over from this reduction can be applied against all other income in the year of death or prior year. This table sums up the technical calculation:


Capital losses deductible against other income [ITA 111(2)]
  • Deduction against taxable capital gains (first step)

Amount from ITA 3(b) used against capital gains

XX

  • Deduction against other income (second step)

 

i)

Total capital losses available

XX

Less the total of:

ii)

Capital losses used against capital gains (result from A above)

(XX)

iii)

Cumulative Capital Gains Deductions claimed in prior years [ITA 110.6]

(XX)

Amount deductible against other income [ITA 111(2)]

XXX

Reserves

The deceased person cannot deduct a reserve in the year of his death [ITA 72(1)]. However, if the right to receive the amount owing from the reserve has been transferred to the spouse or a spousal trust, the legal representative of the deceased and the spouse can elect jointly to deduct a provision in the deceased's income tax return [ITA 72(2)].

Registered Retirement Savings Plans Transfers (RRSP)

Death of the Annuitant Before Maturity

At the time of death, the FMV of the RRSP account is deemed to have been received by the deceased individual as a benefit [ITA 56(1)h) & 146(8.8)].

This rule is different if the account is transferred to a spouse/common-law partner. In that case, the premium is not taxed in the deceased’s final return, but rather in the spouse’s file as a refund of premiums [ITA 146(1)]. The spouse can transfer a portion or all of the premiums to their own RRSP [ITA 60l)(i)] or RRIF account [ITA 60l)(v)(A), 60l)(iii)].

For financially dependant children or grandchildren, they may defer the taxation of these funds over a number of years by purchasing an annuity whose maturity does not exceed 18 years less their current age at the time of the acquisition of the annuity, provided that the annuity is acquired within one year or sixty days after the end of the year, and the child is the annuitant under the annuity [ITA 60l), 60l)(ii)(B)]. A financially dependant child or grandchild with an infirmity is defined as a child or grandchild whose income for the year is not above the basic personal amount [ITA 146(1.1)]. The same rules apply for financially dependant children or grandchildren with a disability, the only difference being that the income floor is increased by the disability tax credit amount [ITA 146(1.1)].

Death of the Annuitant After Maturity (Matured RRSP)

Just like the case of the annuitant passing away before the maturity of the RRSP, the FMV of the RRSP account is deemed to have been received by the deceased individual as a benefit [ITA 56(1)h) & 146(8.8)]. If the spouse is the beneficiary in the RRSP contract, the FMV of the RRSP account is deemed to have been received by the spouse and not the deceased [ITA 146(8.8)b)]. The surviving spouse or common-law partner may transfer some or all of the funds received from the registered retirement savings plan from the deceased to his or her own registered retirement savings plan [ITA 60l)(i)] or a registered retirement income fund. If no beneficiary was named in the account, but the deceased allocated the account to his/her spouse in the will, the surviving spouse can elect jointly, with the legal representative, to be the successor annuitant of the plan [ITA 146(8.91)]. To make this election, the legal representative and the spouse or common-law partner need only to write a letter explaining their intention [RC4177]. A copy of the letter must be provided to the payer of the annuity and another copy attached to the spouse's or common-law partner's income tax and benefit return.

Registered Retirement Income Fund (RRIF)

The deemed disposition and transfer rules to spouses or financially dependant children or grandchildren are essentially the same as the RRSP section above. [ITA 146.3(6), 146.3(6.3), 146.3(6.4)]. The amount that can be transferred by the spouse or common-law partner to their own RRSP/RRIF is reduced by the minimum amount [ITA 146.3(1)] required to be withdrawn from the deceased annuitant account [TI 2000-0060715].

Death Benefit

The death benefit is the total of all amounts received by a taxpayer in a taxation year on or after the death of an employee in recognition of the employee’s service in an office or employment [ITA 248(1)]. A deduction of up to $10,000 can be claimed by the beneficiaries of the estate, the formula for each type of beneficiary is as follows:

Spouse or Common-Law Partner
Lesser of:

  • the total of all amounts so received by the taxpayer in the year, and
  • the amount, if any, by which $10,000 exceeds the total of all amounts received by the taxpayer in preceding taxation years on or after the death of the employee in recognition of the employee’s service in an office or employment.

Other Beneficiaries
Lesser of:

  • the total of all amounts so received by the taxpayer in the year, and
  • $ 10,000 less the amounts received by the spouse or common-law partner in the year or during the years multiplied by: the amounts received by the taxpayer / the total amounts received by
    taxpayers other than the spouse or common-law partner.

Compliance: Production of Tax Returns

Final Return

All income gained up until the date of the death is included on the final return, except for income included in a distinct return. Other amounts to be included in the final return are interests, rents, royalties, annuities, income from an office or employment, annual performance bonuses and any amounts payable periodically that has not been paid before the death of the taxpayer but was payable to him/her on that date [ITA 70(1)]. The deadline for this return depends on the date of death: If the date is after October, the deadline is the latter of 6 months after death and the regular deadline [ITA 150(1)b)]. If the death occurred before November, the regular April 30th deadline applies [ITA 150(1)b)].
Return for Rights or Things [ITA 70(2)]
A return for rights or things can be produced on top of the final return for certain amounts not received before death. Some of the amounts that can be included on this optional return are [IT212R3]:

  • unpaid salaries, commissions, and vacation pay owed
  • declared dividends but unpaid
  • uncashed matured bond coupons

Some of these amounts can be declared in the final return, but declaring them in a return for rights or things can be advantageous because you can “double-up” on the credits available in the final return [ITA 70(2)c)].

 

 

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