Estate Taxes
Capital Gains
When you die, your capital assets are “deemed” sold and the net gain (or loss) is included in your final tax return. The “capital gain” is usually the difference between the at-purchase and at-death value of the assets. The total tax can be substantial. To pay the tax, your executors may have to sell more estate assets than expected.
There is an exemption for your principal residence—for the gain accrued during the time you lived there. There are other capital gains exemptions and special deferrals of taxes for estates which you should discuss with your lawyer or accountant.
In certain circumstances, property can be “rolled over” to a spouse. This means that your spouse is “deemed” to receive your property at your original cost; therefore, your spouse pays no capital gains tax because there is no gain. However, when your spouse later transfers or sells the property, the full tax calculated from your original purchase-cost to your spouse’s ultimate market value must be paid.
RRSPs
Special rollovers are also permitted for RRSPs. Ordinarily, the deceased taxpayer must pay an income tax (not capital gains) on the fair market value of all property in the RRSP as though the taxpayer collapsed the RRSP immediately before death. Also, since this is included as income, none of the capital gains rollovers or exemptions are available and the full amount is taxable.
However, if designated as a beneficiary of your RRSP, your spouse (including a common-law spouse) is “deemed” to receive the income. And if the RRSP is unmatured, the receipt is a “refund of premiums”, and your spouse can transfer all of it to his or her own RRSP. In effect, the RRSP is rolled over tax-free. Also, if the RRSP is left to your spouse through your will, your executor and spouse can file a joint election that achieves the same effect. In certain circumstances, an unmarried deceased taxpayer’s RRSP receipt can be rolled over to a dependent child or grandchild.
ESTATE (PROBATE) TAX:
Estate tax (formerly probate tax) is expensive: Unless the total assets are less than $1,000, the tax is 0.5% on the first $50,000 and 1.5% on the excess. So, if the deceased’s assets are $200,000, the tax is $2,500. In addition, there are legal fees to file the necessary probate forms.
Property held in joint ownership automatically passes to the survivor without probate. Also, some assets do not require probate in order to transfer to the survivors, such as ownership of shares in a private corporation, some bank accounts with relatively small deposits, and personal effects. Careful planning of how you hold assets can save your estate substantial probate tax. You should discuss these details with your financial adviser.