Tax Implications in Estate Transitions
In 1789, American politician and scientist Benjamin Franklin famously noted that nothing is certain but death and taxes. And while he was talking about two separate events, the same idiom holds true when it comes to estate planning and paying taxes after you pass on.
Technically, there is no inheritance tax in Canada, but property and other assets left to heirs can still be taxed. These assets are taxed and collected by the Canada Revenue Agency before the inheritance is distributed.
Then there are probate taxes or fees. Probate is a legal process that ensures a will is valid and allows the Executor to carry out the deceased person’s wishes and distribute the assets to listed beneficiaries. Throughout the probate period, debts are settled, taxes are paid, and assets are legally distributed.
Depending on the complexity of a will, probate can last anywhere from a few months to a year or more. Probate fees are calculated on the total value of the person’s estate. Every province and territory in Canada has its own formula for calculating probate fees. Alberta, for instance, charges a small flat fee while Ontario has one of the highest fees at 1.5% of assets over $50,000.
How Can Estate Planning Help Reduce Inheritance Tax?
The best way to minimize probate fees is to gift assets to beneficiaries before you pass away. This can both reduce the value of the overall estate and reduce probate taxes.
Understanding the broader tax implications on everything from capital gains to probate fees, primary residences, and other assets you own can minimize the taxes an estate pays and help ease the overall transition.
In fact, talking to a certified wealth management professional can help reduce or even defer the taxes an estate must pay.
Are There Any Assets That Do Not Get Taxed When Someone Dies?
There are a number of assets that may not be taxed when someone dies.
RRSP or RRIF: You can “roll over” a registered retirement savings plan (RRSP) or registered retirement income fund (RRIF) to a spouse or common-law partner, child, or grandchild who is physically or mentally disabled and financially dependent on you. If they are designated as beneficiaries on those accounts, they simply “roll over” to them without being taxed.
TFSA: Money held in a tax-free savings account is never taxed (TFSA). The money deposited into a TFSA is done with money that has already been taxed. Income earned on that money is not taxed either. There is one caveat. Any earnings on that money from the date of your death to when the estate is settled could be taxed unless the TFSA is left to your spouse or common-law partner as a successor holder. After taking over the TFSA, the successor holder can make tax-free withdrawals and make new contributions.
Principal Residence: Thanks to the principal residence exemptions, heirs do not have to pay capital gains tax should they ever sell the property. A principal residence can include your home, condominium, cottage, houseboat, mobile home, trailer, or even shares in a cooperative building. Income from investment properties, which can include rentals or a flipped property, is considered business income and does not qualify for capital gains exemptions.
What Assets Can Be Taxed On the Final Income Tax Return?
RRSP or RRIF: An RRSP or RRIF can be full-taxed in the year someone dies if they do not have a spouse, common-law partners, or qualified person to inherit the investments. These investments can also be taxed should the heir decline the roll-over.
Real Estate: Capital gains on properties that do not qualify as the principal residence are fully taxed.
Personal Use Property: Capital gains on personal-use property with a value of $1,000 or more are taxable. Examples of capital property include real estate, mutual funds, cryptocurrency, and personal belongings like a boat, artwork, coin collection, or cars.
Stocks: Investments such as stocks are considered to be capital property by the Canada Revenue Agency. The CRA considers those investments as sold for fair market value at the time of death. The capital gain then is the difference between the adjusted cost basis when the stock was purchased and the fair market value when they were “sold.” Capital gains are taxed at 50% of the deceased person’s income.
Sharp Asset Management – Helping You Reach Your Financial Goals
Taxes are an undeniable reality, even in estate transitions. If you live in Toronto and want to understand the impact of taxes like capital gains and probate fees, speak with a certified wealth management professional at Sharp Asset Management.
Sharp Asset Management is an asset management firm that is 100% owner-operated. All of our investment counsellors are charter financial analysts, have the highest level of achievement, and have over 10 years of experience managing portfolios. To learn more about how Sharp Asset Management can help you with your retirement planning, contact us today.
