CB

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.