Article written by Jennifer Black and Dedicated Financial Solutions.
Five Things You Need to Know about Death and Taxes
We all know that death and taxes are inevitable and also that they are linked: when someone dies, significant taxes may become payable. By planning for your final taxes, you can ease the burden on your family and preserve the value of your estate. Here are a few things you should know:
1. Your final tax return, called your terminal return, must report all of your income, from anywhere in the world, for the year of death. That includes employment income, investment income and the value of any RRSPs or RRIFs you may own.
2. When someone dies, the Canada Revenue Agency deems that the person disposed of any capital property they may own on the date of death. That means that if you own property, your terminal tax return will need to report any capital gains or losses that result from disposing of the property. The gain or loss is based on the market value of the property. Much of your estate planning may revolve around the rules for disposing of property and the provisions the Income Tax Act includes for reducing the impact of property disposition, outlined below.
3. You may roll over, or transfer, capital property and RRSPs/RRIFs to your spouse. You can do this through your will, by designating your spouse as the beneficiary of the asset or by owning assets jointly with your spouse. When assets are transferred to your spouse this way, there are no tax consequences for your estate – taxes are delayed until your spouse passes away. Some assets can also be transferred to children or grandchildren.
4. Your principal residence – your home – is a special case. This piece of property is exempt from the property disposition rules that generate capital gains or losses, so if it’s sold, the proceeds of the sale do not need to be reported.
5. Income your estate earns after you have passed away must also be reported. This kind of income could include income on rental properties you may own or income on investments you may have held at the time of death. There are two ways to do this: your beneficiary can report the income on his or her personal tax return, or your estate can file what’s called a trust return. Another example of income that needs to be reported after death is the Canada Pension Plan death benefit. Talk to your accountant or tax-planning professional about whether it’s better for the recipient (such as your spouse) to report that income on their personal return or whether it’s better for your estate to report it on a trust return.
Get advice tailored to your specific circumstances on these and other estate-planning approaches by contacting the tax and estate-planning experts at Dedicated Financial Solutions. They will talk with you to determine the best approach for your unique situation.