Death and Taxes
It has been said that the only two things we can be certain of are death and taxes. In my experience, there is a lot of misunderstanding about taxation on death. Taxes can impose a significant burden on an estate and where possible, should be considered as part of estate planning and will drafting. There are several types of taxes that arise in relation to and at the time of death. There are estate administration taxes that are payable under the Estate Administration Tax Act in the event that a Certificate of Appointment of Estate Trustee with or without a will is obtained in court. There are taxes that must be paid under the Income Tax Act. There may also be taxes payable upon the transfer of property under the Land Transfer Tax Act. This article will touch on and give some general information regarding the differences between these taxes, who usually pays them and whether they are avoidable. It is intended for general information purposes only and provides a review of what generally happens. For specific advice related to your particular circumstances, you should not rely on this information and should consult a professional advisor.
Is there a death tax in Canada?
There is no such thing as a death tax in Canada. That being said, there are taxes that are payable when a person dies.
What taxes have to be paid?
Income tax is usually the largest tax that a person will have to pay. It is the responsibility of the Estate Trustee to file what is called a Terminal T1 Return for the deceased. In that return, there is what is called a “deemed disposition” of all property. That means that, for example, if you own an office building it will be considered to have been sold on the date of your death and you would have to pay capital gains taxes on the office building as though the office building had been sold, even though it may not actually have been sold. All income earned in the year of death is also taxed as usual and any taxes owing have to be paid by the deadline for paying them which changes depending on the date of death.
Are there taxes other than income tax to worry about?
In some cases, to transfer property that was owned by the deceased, it is necessary to obtain the approval of the court. This is done by obtaining what is now called a “Certificate of Estate Trustee”, formally called “Letters Probate”. In order to file the Application for a Certificate of Estate Trustee, subject to some exceptions, Estate Administration Taxes are required to be paid. Estate Administration Tax is equal to $5.00 on every $1,000.00 up to the first $50,000.00 in value of the estate, and then $15.00 on every $1,000.00 thereafter. The risk of an audit and therefore the need to properly value both real and personal property has increased with changes to the Estate Administration Tax Act that came into force in January of 2013. Another tax that might have to be paid is when property is transferred. That tax is the Land Transfer Tax and is usually paid and payable by the person to whom property is transferred.
Can I get out of paying taxes?
There are some provisions in the Income Tax Act that allow certain property to be transferred to certain beneficiaries – usually spouses – without having to pay the tax at the time of the transfer. If there is no real property in the will and no other assets are owned by the deceased that can only be transferred with the approval of the court, then no Estate Administration Tax will have to be paid.
What if I transfer property before I die?
If you transfer property before you die, for example, you give your office building to your children as a gift, there would still be a deemed disposition of it at the time of the transfer and you would pay tax on the capital gains related to the deemed sale of the building in the tax year that you completed the transfer. Certain transfers may qualify for tax exemptions. Corporations can also be used to hold property and defer payment of taxes.
What about property that is held in joint tenancy?
Property that is held in joint tenancy is transferred by right of survivorship. That means that you do not need to include it in your will and it does not form part of your estate for purposes of calculating Estate Administration Taxes, but, it is still forms part of the assets that are deemed disposed of for purposes of income taxes.
What can I do to plan for taxes?
What to do, if anything, to plan for payment of taxes will depend on how important it is to you to ensure your beneficiaries get your assets outright without having to sell or encumber them (get loans) to pay taxes. Consulting an accountant, financial advisor or lawyer can be helpful in order to get advice on the options that make the most sense for you given the nature of your assets, liabilities and goals for your estate.
The article posted here is for general information. We hope you find it useful. For advice specific to your circumstances you should consult a lawyer. We would be pleased to speak with you if you have questions about our services or need the assistance of a lawyer.