1. Taxes at Death Insurance Concepts

2. Tax on What you Own at Death When a taxpayer dies, they are subjected to paragraph 70(5) of the Income Tax Act which provides that they are “deemed” to have disposed of all their non-depreciable and depreciable property for the fair market value, immediately prior to their death. If these dispositions create any taxable income, there will be tax to pay.

3. Terminal Return Any resulting income must be included in the taxpayer’s “terminal return”, the final tax return including all income earned from the date of the last filed tax return up to the date of death.

4. Non-depreciable property For non-depreciable property, this means that any gain (the difference between the cost of the property and the fair market value) must be reported. The taxable portion of the gain (50%) must be added to the terminal tax return for income tax purposes. Any capital losses must first be used against the capital gains of the taxpayer. Any capital gains exemption claimed in all previous years will reduce the loss. Any excess capital losses can be deducted against other income in the year of death or the previous year.

5. Depreciable capital property For depreciable capital property, things like rental buildings and equipment, not only is property deemed disposed of for fair market value immediately prior to death, but any depreciation will need to be recaptured. If depreciation has been taken, this reduces the original cost. At death, if the fair market value exceeds the Undepreciated Capital cost, then any depreciation must be brought back into income. This results in a higher tax cost to the deceased taxpayer.

6. Rollovers to a Spouse Often, a taxpayer or their legal representative will elect to have their capital property “rollover” to the deceased’s spouse or a qualified spousal trust on a tax-free basis. This “rollover” only defers taxes until the subsequent disposition by the spouse or the spousal trust or until the surviving spouse dies. The tax is then payable based on the asset’s increase in value at that point in time.

7. RRSPs and RRIFs In addition to the potentially significant tax liability from recognized capital gains, it is also necessary to deregister (i.e. collapse) any registered assets such as RRSPs or RRIFs at the point of death. The full value of the RSP or RIF must be included on the deceased's final (terminal) tax return. There are exceptions to this deregistration requirement if the RRSP or RRIF is left to the surviving spouse, a common law spouse and in some cases to a surviving child or grandchild.

8. Tax free transfers… An RRSP or RRIF can be transferred tax free to a surviving spouse's own plan. Also, the RRSP or RRIF can be transferred tax-free to a financially dependent child or grandchild who is under age 18, or who is mentally or physically infirm, even if there is a surviving spouse. The registered funds must be used to purchase a term certain annuity with a term not exceeding the child's 18th year.

9. Impact of these taxes…… If an individual has the following investments : Cost Current Value RRSP’s $300,000 Cottage $ 80,000 $225,000 Mutual Funds $100,000 $250,000 Total Investments $775,000

10. Simplified example only….. Upon death, these investments are subject to tax as follows: RRSP’s $300,000 Cottage (gain of $145,000 @ 50%) $ 72,500 Mutual funds (gain of $150,000 @ 50%) $ 75,000 Total taxable amounts $447,500 Potential Tax liability (Alberta max 39%*) $174,525 *2003

11. How can the Tax be paid? The tax liability can cause significant liquidity problems for the deceased’s estate and heirs. If no other cash is available, the income tax owing in the year of death may be paid in annual installments for up to 10 years. Interest is charged at the government’s prescribed rate from the date taxes should have been paid, and the interest on the loan is not tax deductible. When this option is exercised, the estate must provide security to the tax authorities such as a lien against another property or a guarantee by another person.

12. Obviously in cases such as these, there is a much more efficient and cost effective method of paying taxes. Is there anything that can be done about this? In some cases, no. However, whenever there is a potential for tax, there is also an opportunity for some income tax planning.

13. Can we help? We have excellent planning tools which will calculate your potential tax liability based on your various Capital Assets (depreciable and non depreciable), RRSPs, RRIFs, etc. We can also illustrate various scenarios using projected rates of inflation, draw down of your registered and non registered funds, impact of a potential sale of some of your assets at a future date, and arrive at your potential tax liability at an assumed mortality date.

14. Address your future need today… We will provide you with a detailed conceptual analysis of the lowest cost solution for you to fund your future tax liability using the following alternative funding methods:  1. Sinking Fund  2. Current Account  3. Life Insurance  4. Loan

15. Questions or Comments? Please give us your feedback and comments to help make our site more interesting and educational. Call or e-mail us to get your personalized cost effective alternate funding analysis now. info@insuranceconcepts.ca Tel: 239 3850info@insuranceconcepts.ca Thank You