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The Companion Advisor: Taxes & Estates
Death and taxes - Part 1/7
Everyone knows that life has two certainties: Death and taxes. Fewer know the two often coincide.

Canada has no official death, estate or inheritance taxes. However, without proper planning, on death an estate may be faced with large and unexpected tax liabilities. This Taxation Bulletin describes how registered or non-registered (open) investments in mutual funds might be taxed on the death of the annuitant/unitholder.

The general rule - open (non-registered) accounts
Though special rules apply to RRSPs and RRIFs, a taxpayer is generally deemed to have disposed of all his or her capital property (including stocks, bonds, mutual fund units, real estate, farms, etc.) immediately before death and at fair market value.

When the proceeds of disposition exceed the property's adjusted cost base (ACB), the result is a capital gain. Fifty per cent of the capital gain (for gains realized after October 17, 2000) is taxable to the deceased and must be reported in the deceased's final tax return - the terminal return. On that return, a capital gains deduction may be claimed against any capital gains arising from qualifying property, such as shares of a small business corporation or farm property.

Spouse as beneficiary

The most common exception to the deemed disposition rules occurs when the capital property is transferred to a deceased taxpayer's spouse or testamentary spousal trust (spouse trust). A spouse trust is a trust that is created by a taxpayer's will. It must meet specific criteria, but generally entitles the spouse to receive all of the income of the trust during his or her lifetime. When property is transferred to a spouse or spouse trust, the transfer may be done without triggering any immediate capital gains and the associated tax liability.

Example #1

Jack and Nancy are husband and wife. Jack holds a non-registered investment in a mutual fund with an original cost of $150,000. At Jack's death on January 15, 2001, the fair market value of his holdings had grown to $250,000. That represents an accrued capital gain of $100,000.

If Jack left his investments in the mutual fund to Nancy (perhaps by naming her as the beneficiary of this property in his will), the investment can simply be transferred into Nancy's name. Nancy will be deemed to have acquired the property at the same ACB of $150,000, thereby deferring tax on the $100,000 accrued capital gain.

If Nancy wasn't the beneficiary of Jack's mutual fund investment, Jack will be deemed to have disposed of his units for proceeds equal to the fair market value of $250,000. That would result in a capital gain of $100,000 - 50 per cent of it taxable. Depending on Jack's marginal tax rate in the year of death, the estate may be liable for taxes of up to $23,000.

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Death and Taxes
Companion Advisor
Taxes and Estates
Tax Articles
RRSP savings through reduced income tax

The more you make, the more you pay!

Compounding your tax refund for a richer future

A dollar is not a dollar

Taxes on Mutual Funds

Mutual Funds - Year end distributions tax tips
Estate Articles
Joint Accounts

Estate planning from the Muskoka chair

A matter of trust

Income splitting using testamentary trusts

Income-splitting opportunities and the income attribution rules that may prevent them

The RRIF basics

The Money Management Newsletter:
Taxes and Estate Planning