| Basic Estate Tax Information |
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Learn the basics related to estate taxation in this short article.
This part in no way purports to comprehensively cover the taxation issues which arise on the death of a taxpayer. However, the following are a few basic issues of which you should be aware. A. Deemed Disposition at Death Canada, unlike nearly all other jurisdictions in the Western world, does not have any federal or provincial estate taxes (however: see our article on probate fees). What Canada does have is a "deemed realization" of capital gains and losses which is deemed to have occurred immediately prior to the property owner's death. What this means is that the property owner's estate will be deemed to have sold for fair market value all of its property thus triggering tax liability for any capital gains which have accumulated up to that point. In addition, of course, tax will also have to be paid on any income realized during the final year of the deceased's life. This system of deemed capital gains can cause cash flow problems for the estate if the deceased intended to transfer property in its original form to the beneficiaries. For example, if the deceased owned real estate and company shares which he/she wished to transfer as is to certain beneficiaries, the estate would have to pay the full capital gains tax on any accumulated gains throughout the deceased's lifetime before it could transfer the assets. This could cause problems if the estate does not have enough liquid assets to fulfill the tax liability. This is a very common problem for recreational property which often may have experienced very large capital gains during the property owner's life. Note, of course, that all relevant capital gains exemptions will still apply. This includes the principal residence exemption (no capital gains tax on your principal residence property) and some lifetime capital gains exemptions (if they have not previously been used). In addition, relief from capital gains liability is provided for spouses. This relief is discussed below. B. Spousal Rollovers Transfers to the deceased's spouse are subject to an exemption from the above rule in that such transfers are permitted to be made to the spouse without tax liability being triggered. The spouse simply inherits the cost base of the property and the accompanying capital gains liability which will be payable upon his/her death. This transfer is usually referred to as a "rollover" since the property is "rolled over" to the spouse maintaining the same cost base and capital gains liability which it had in the hands of the original owner. These roll-over provisions are also available for qualifying "spousal trusts" - i.e. trusts set up for the sole benefit of the spouse during his/her lifetime. There are a number of important technical rules which apply to these trusts in order for them to maintain their rollover eligibility. It is very important to consult a lawyer when setting up such trusts in order to maintain optimum tax exemption status. You should note that there are no rollover provisions for children. Full capital gains tax will be triggered on transfers to children. This can cause problems in certain situations such as the transfer of a family cottage to children. Full capital gains would be triggered on such a transfer. Make sure you contact a lawyer and/or accountant for detailed and personalized tax advice on these issues - this area is fraught with technical rules and it is easy to fall "off-side" if you don't know exactly what you are doing! Please contact us if you need additional information. |
