It may come as a surprise that Canadians often owe tax after they have passed away. Unlike the US, Canada does not have an estate tax. Canada does impose taxes on estates in several other ways, though. It is important to consider your taxes at the time of death as a part of your estate plan.
Taxes at the time of death can be important for several reasons. Many Canadians take advantage of tax-advantaged investment strategies during life, such as investing through a Registered Retirement Savings Plan (“RRSP”) or holding assets with unrealized capital gains like mutual funds or real estate. In many cases, the benefit of these tax-advantaged strategies ends at the time of death. Unless you plan in advance, this can have a noticeable impact on your ability to leave wealth to the next generation. In some cases, an estate could even be forced to sell assets to fund its tax bill. Understanding your tax exposure at death is the first step to planning for it during life.
Deemed disposition of capital assets
When a Canadian resident dies, they are treated as if they sold all of their capital assets immediately before death for a fair market value price. “Capital assets” generally refers to property such as mutual funds, stocks and bonds in a non-registered account; real estate; and shares of a private corporation. Effectively, this rule forces the deceased to realize the capital gains or losses that have accrued on those properties during life.
The executor of your estate will be responsible for filing a tax return on your behalf and paying the tax bill from your estate’s assets. One key objective for any good estate plan is to consider how your executor will find the funds to pay for this bill. This can be a concern for people with much of their wealth tied up in illiquid assets like real estate. Without access to a good source of liquid cash like investments or life insurance, an executor may sometimes need to sell assets you would otherwise prefer to keep in the family, like a vacation property.
This deemed disposition also applies to the principal residence of the deceased. However, that gain may be exempt from tax in many cases. For more information about the principal residence exemption, please refer to our article, Some tax considerations for investments in real estate.
Exceptions to this rule
The capital gain on death can be delayed until a future year, in some situations. The most common exception is the spousal rollover. The spousal rollover is a set of rules that allows the deceased to avoid triggering a capital gain on capital assets they leave to a spouse or to a special-purpose spousal trust. That is, your spouse can inherit not just your assets, but also the tax cost on those assets. When the spouse or spousal trust later sells the assets or passes away, the capital gain would be triggered at that time, instead. Though this does not make the capital gain disappear, it can sometimes defer your tax bill on those assets for several years and simplify life for your surviving spouse.
There are also special rules to defer this tax bill when assets used in a family farming business are left to the next generation. For more information about how to plan for your estate as a farmer, please ask your ATB Advisor for a copy of our Farm Succession Guide.
De-registration of registered plans
The deemed disposition rule applies to capital properties, but not to assets in registered accounts like an RRSP or Registered Retirement Income Fund (“RRIF”). Tax-advantaged accounts like these may also be taxed at death, however. An RRSP or RRIF is de-registered immediately before death, unless the plan is transferred to a spouse. The effect of this de-registration is that the entire value of the RRSP or RRIF may be taxable on the deceased’s final tax return.
The de-registration of registered assets can sometimes be more costly than the deemed disposition of capital property. Unlike capital gains, the de-registration of an RRSP or RRIF is treated as regular income. In Alberta in 2019, income from an RRSP can be taxed at rates of up to 48%, compared to a maximum rate of only 24% for capital gains.
Other tax considerations at death
While the deemed disposition of capital assets and de-registration of RRSPs and RRIFs are the most common taxes to expect at death, there can be other important tax considerations for your estate plan. Your tax situation can quickly become complicated if you reside in or own real estate in a province other than Alberta, own property in the US, or own shares of a private corporation (whether it is used for holding investments or for operating an active business). If one of these situations applies to you, your ATB Advisor can provide more information to help ensure your estate plan is on-pace to meet your wishes, goals, and dreams.
The information provided in this article is a simplified general summary and is not intended to replace or serve as a substitute for professional advice. Professional tax advice should always be obtained when dealing with taxation issues as each individual’s situation is different. This information has been obtained from sources believed to be reliable but no representation or warranty, expressed or implied, is made as to their accuracy or completeness. This information is subject to change and ATB Securities Inc. (Member Investment Industry Regulatory Organization of Canada and Canadian Investor Protection Fund), ATB Investment Management Inc. and ATB Insurance Advisors Inc. reserves the right to change the information without prior notice, and does not undertake to provide updated information should a change occur. ATB Financial, ATB Investment Management Inc., ATB Securities Inc. and ATB Insurance Advisors Inc. do not accept any liability whatsoever for any losses arising from the use of this document or its contents.