Week 3 Death & Taxes

Week Three: Unit 13 Death & Taxes FANSHAWE

Objectives

• Identify income tax consequences upon death of a Canadian resident taxpayer.

• Understand deemed disposition at death.

• Calculate tax consequences in various scenarios including:

  • RRSP income inclusion

  • Capital gains

  • Recapture/terminal loss

• Understand Principal Residence Exemption at Death and Spousal Rollovers.

• Evaluate optional tax returns.

• Understand the Terminal Tax return filed for a taxpayer’s year of death.

• Discuss benefits of a will for post-mortem tax planning.

• Differentiate between terminal and estate returns.

• Describe disposal methods for property.

Overview of Taxation at Death

• Deemed Disposition: At death, all capital property is deemed disposed.

• Pre-Mortem and Post-Mortem Tax Planning:

  • Consider income inclusions and deductions at death.

  • Identify which tax return to complete.

  • Assess implications of gains and losses.

Taxation of Property at Death

Deemed Disposition

• Deemed proceeds = Fair Market Value (FMV) immediately before death, not upon death.

• Affects calculations of:

  • Capital gains and losses.

  • Recapture of Capital Cost Allowance (CCA).

  • Terminal losses.

• Acquisition upon death: Adjusted Cost Base (ACB) = deemed FMV at death.

Capital Gains and Losses

• Deemed Capital Gain: FMV at death - ACB.

• Deemed Taxable Capital Gain: 50% of deemed capital gain.

• Net Capital Gain = Deemed/actual taxable capital gains - deemed/actual taxable capital losses.

• Taxes owed can be paid in 10 equal annual payments with interest charged.

Principal Residence, RRSPs, and Other Assets

• Principal Residence Exemption:

  • Tax-free upon eventual sale.

• RRSP Income:

  • Included in income at death.

• Non-Registered Assets:

  • FMV minus ACB.

• Other Real Estate and Personal Items:

  • Valuation at FMV for estate assessment.

• Life Insurance:

  • Exempt from taxes for beneficiaries.

Depreciable Capital Property

• Can trigger:

  • Recapture of CCA if FMV exceeds Undepreciated Capital Cost (UCC).

  • Terminal loss if UCC exceeds FMV.

• Recapture Calculation:

  • Lesser of (FMV or ACB) – UCC.

  • 100% subject to tax.

Terminal Loss

• Occurs when UCC exceeds FMV.

• Reduces taxable income.

Spousal Rollovers

• Rules for deemed disposition don’t apply for property transferred to:

  • Spouse

  • Qualifying spousal trust.

• Conditions include:

  • Spouse receiving all income while alive.

  • No other recipient of income or capital during spousal lifetime.

• Must comply with residency requirements.

• Deemed disposition and acquisition at ACB and UCC of deceased postpones capital gain.

Tax Calculations Example

• Scenario: A deceased owned a building with specified tax attributes:

  • FMV = $1,700,000

  • UCC = $1,200,000

  • ACB = $1,500,000.

• Question: What amount is added to income on terminal return?

Death & Taxes—The Final Return

Final Tax or Terminal Period Return

• Must file a return for the terminal period (January 1 to date of death).

• Income must be reported that hasn’t been taxed.

• Must also factor in capital gains and losses.

• Estates may need separate returns.

Legal Representative Responsibilities

• Executor or administrator has duties including:

  • Filing all necessary returns and paying taxes due.