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The death of a taxpayer can result in significant
income tax consequences. Understandably, the family's grief upon the
passing of an individual far outweighs the family's concern about income
taxes. However, it is important that a family representative or friend
of the family addresses the income tax implications as soon as possible,
especially where no estate planning had previously taken place. The article
below details some of the administrative and income tax consequences upon the
death of a taxpayer.
The following income tax returns
are/maybe required to be filed by a deceased persons representatives:
(1) Terminal tax return from January
1st, to date of death. This return must be filed the later of April
30th, of the following year or six months following the date of death.
(2) The executors may also elect to file a "rights or things" tax
return. This return must be filed within one year from the date of
death or 90 days following the assessment of the terminal return.
Examples of rights or things include uncashed bond coupons, unpaid
salary, declared and unpaid dividends. The advantage of a rights
or things return is that it is a separate return in which the taxpayer
is entitled to a personal exemption and the marginal tax rates as
if it were a regular tax return.
(3) Estate Tax Return. The first taxation period of the estate begins
on the day following the death of the taxpayer and will end at any
time within the next twelve months. A testamentary trust is taxed at
the same marginal rates as an individual. This return must be filed
within 90 days after the end of the taxation year.
Executors often consider utilizing a December 31st taxation year for two reasons:
(1) Availability of forms and (2) availability of information (ie: T5 slips
that coincide with a calender year). However, where double taxation is a
concern (see below), it may be a mistake to reduce the period available for
winding-up a corporation.
A deceased taxpayer is deemed to dispose of each
capital property owned by them immediately before their death. The
deemed proceeds of disposition for each property is its fair market
value ("FMV") at the taxpayer's date of death.
Thus, for example, if a taxpayer has 100 shares of ABC Co. that they bought for
$5.00 a share and on the date of their death the shares are worth $8.00, the
taxpayer's representatives will have to report a capital gain of $300 (100 shares
x $3 gain) on the terminal income tax return.
As noted above, where capital property comprises shares of a private corporation,
double taxation can often result. The FMV of the private shares reflect the underlying
business assets of the corporation. The taxpayer will recognize a capital gain
equal to the appreciation in the value of the underlying assets of their corporation
on their terminal return. This is the first incidence of tax (subject to utilization
of the $500,000 QSBC exemption). The second incidence of income tax will occur
when the corporation disposes of its underlying business assets. The corporation
will recognize a capital gain or inventory gain that is also subject to income
tax. Therefore, tax occurs on the same economic gain twice. It is therefore extremely
important that any tax planning that can be implemented to reduce the double
taxation be implemented.
Where a taxpayer is survived by a spouse and
the taxpayer's will stipulates that their capital property is to pass
to their spouse or a qualifying spousal trust, the capital property
is not subject to the deemed disposition rules noted above, unless
a special election is filed.
Where the property passes to a spouse, the property is deemed to be transferred
to the taxpayer's spouse at the adjusted cost base of the property, not at the
FMV. Thus, in the example described above, the ABC Co. shares would be transferred
to the taxpayer's spouse at their $5.00 cost and no capital gain will arise until
the spouse subsequently sells the shares.
When the annuitant of a RRSP dies, the full amount
of the RRSP value is included in the income of the deceased on their
final tax return. Where the taxpayer is survived by a spouse who is
entitled to the RRSP, the RRSP "rolls" tax-free to their spouse with
no income tax consequences.
An executor will be held liable for unpaid taxes
of an estate, unless they obtain a clearance certificate from Revenue
Canada before distributing any property under their control. The certificate
will not be issued until all T3 returns are filed and assessed.
The above discussion is a very brief overview of the income tax consequences
on the death of a taxpayer. Professional advice should be sought in regard to
any estate with significant assets.
The above discussion is general in nature and is not intended
to provide income tax advice. |
