Companion Advisor: Taxes
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.
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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, Fiscal Agents Money Management Newsletter
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