Updated: Jul 10, 2018
Your first step towards learning on Executor's Guide on what to do following a death.
This is great guide to start learning of how the taxes done after loved one dies. This is not the guide only for executor but will help to the testator on getting more insight into expectations of Canada Revenue agency. This guide gives details on executor should be looking on closing various tax accounts, where to get the CRA contact information, Impact of GST/HST credits, CCTB credits, What is the paper paperwork CRA needs completing and more. Please visit CRA website and refer to latest Estate Planning is one of the things that is left at the end and rarely considered. There are many reasons why people tends not to pay attentions such as the form "RC4111 - What to do following death?"complexity of estate planning system.
Estate Planning is one of the things that is left at the end and rarely considered important. There are many reasons why people tends not to pay attentions such as the complexity of estate planning system,unknowns about issues may arise in future and reality is people are too busy in creating wealth, rather than thinking for prospective inheritors.
This article will give very high level but touching many important points on estate planning to help you BEGIN THINKING about it. Nothing is too late once you know the importance then just act up on it.
INHERITANCE TAX IN CANADA
There is no inheritance taxes, estate taxes or death taxes federally in Canada, However, some people have real estate, stocks, bonds and other investments which consider slightly different way in terms of taxes encountered for heirs. While saying there is no inheritance tax in Canada, the story does not end there as canadians pays the "DEEMED DISPOSITION TAX" on the property which is very similar to inheritance taxes.
ESTATE PLANNING TERMS
Deemed disposition tax: The "Deemed disposition tax" term is used when the a person is dead and owning a property that must be disposed off, even if the actual sale of the property did not take place.
Capital property vs Current cost: The capital property is the depreciable property on which business was established and income generated out of it. It includes stocks, bonds, securities, cottages, land, building, equipments as well as overlay expenses (such as finder's fee, commissions, broker fees, advertising fees, legal fees, land transfer fees etc) used for the business or rental. The capital cost of such property can be write off as Capital cost allowance over number of years. While current cost is the expenses for running or maintaining business and are not considered as a property.
Adjustable cost base (ACB) and Capital gain or loss: The capital gain or loss may incurred when the property is considered to have sold or sold actually. The adjustable cost base is closely links to the capital gain or loss. The adjustable cost base is the price of the capital property you bought for PLUS the additions or upgrades done on the property. It is not all time you will consider using actual selling cost rather consider based on fair market value for calculating ACB.
Adjustable cost base (ACB) and Gifts: If you receive capital property in a gift, then your ACB will be zero and in this case, Fair market value is irrelevant.
Deceased person tax return
There is tax obligation on the deceased person which will be completed by an executor, legal representative or liquidator as mentioned in the Will.
Make your will sooner than later to help your heirs finalizing tax return. As an executor of the Will, you will need to have death certification, last will of deceased person and most recent resident address.
The tax return information will differ based on the year the person has died and so, there is updated publication guide available on the Canada revenue agency website every year.
Clearance certificate: As the legal representative, you may want to get a clearance certificate before you distribute any property under your control. A clearance certificate certifies that all amounts for which the deceased is liable to us have been paid, or that we have accepted security for the payment. If you do not get a clearance certificate, you can be liable for any amount the deceased owes. A clearance certificate covers all tax years to the date of death. It is not a clearance for any amounts a trust owes. If there is a trust, a separate clearance certificate is needed for the trust. As an executor of Will, If you do not have a clearance certificate then you should apply.
Funeral expenses: The funeral expenses are considered personal expenses and so, are not deductible in taxes.
These definitions may change in the future, refer to Canada revenue agency website for most up to date information.
TAX SAVINGS ON DECEASE ESTATES
There are number of ways, canadian may be able to save taxes.
Make it easy for heirs: First thing first is your Will. All canadian should be make the Last Wills & Testament sooner than later to avoid hassles, complications and unexpected charges. You should make a Will to meet the moral, cultural and religious obligations to inheritors.
RSP/RRIF Transferring to Spouse: By transferring the RRSP or RRIF to your surviving spouse or partner, the taxes are deferred until withdrawn by your spouse at a later date and taxed at the marginal tax rate at the time.
RRSP/RRIF Transferring to Child: If you transfer your RRSP or RRIF to a financially dependent child or grandchild, he can purchase a registered annuity with the funds. The annuity must end by the time the child turns 18 years old. This also defers the taxes owed and spreads it out over a number of years, allowing the child to use his personal tax credits and lower marginal tax rates to take the funds into income.
GST/HST Tax credit: The GST/HST tax credit will be issued to deceased person's account or the beneficiary as per Will, However, if there was GST/HST credit issued already then executor or representative should return the payment to the tax center that serves in the area.
CCTB/UCCB/CCB Credits: If deceased person were receiving CCTB/UCCB/CCB benefits for the child then, Canada revenue agency will transfer these benefits to the survival spouse. If there is any other person than spouse, primary responsible for the care of children then, he or she should apply for receiving benefits.
CPP/QPP Death benefits: A CPP or QPP death benefit paid to the estate must be reported on the T3 Trust Income Tax and Information Return for the estate of the deceased in the year it is received by the estate. The estate will pay tax on that amount unless the death benefit is payable to a beneficiary in the year it is received by the estate, in which case a T3 slip will be issued in the beneficiary’s name and the beneficiary will be required to include the amount on his or her T1 return. Where the CPP or QPP death benefit is the only income of the estate and a T3 return is not required to be filed, the death benefit can be reported directly on the T1 return of the beneficiary.
Death benefits: It is an income of either the estate or the beneficiary who receives it. Up to $10,000 of total of all death benefits paid (other than CPP or QPP death benefits) which are not taxable.
LAST STEP TO ESTATE PLANNING
It is necessary that someone (or executor or Will) should be taking care of post affairs on deceased person.
One of the thing is to complete the final income tax return. Refer to Guide T4011, Preparing Returns for Deceased Persons.
Final income tax return will account for the capital gain or loss on investment, the taxes owe or payable on behalf of deceased person and any inheritance tax called as Deemed disposition taxes.
Estate planning acronyms (ACB - Adjusted cost base, CCTB - Canada Child tax benefits, CCB -Canada Child benefits, UCCB - Universal Child care benefits, CPP - Canada pension plan and QPP - Quebec pension plan)
Canada revenue agency publication
Due to the dynamic nature of tax laws, refer to Canada Revenue Agency (CRA) website for most accurate information. The information provided here is compliant to the Canada Revenue Agency Copyright terms and conditions found HERE.