STS – 2015 Dec – Death and Taxes
Death and Taxes by Lorn Stanners, CAPS Edmonton
It has been said that there are only two things a person cannot avoid - death and taxes. It seems apropos that this last article of the year in our Finances Matter series by Lorn. B Stanners, CPA, CMA should cover just that! As self-employed speakers, we have complicated financial lives and thinking ahead and planning regarding these issues can help our loved ones make easier decisions. Thank you Lorn for this article and this year’s series on finances.
Every week, I guide executors and people with deceased family members through the income tax maze. They come to me for help dealing with the various tax returns of the deceased. They want to know what happens, what they have to do, and what can be done to save taxes.
When a person dies, they are deemed to have disposed of all their assets for income tax purposes. Their assets may be taxable, non-taxable or qualify to be transferred (rolled over) to their spouse.
Taxable assets include: gains on investments (such as stocks and mutual funds), the value at death of RRSPs and RRIFs, real estate, businesses owned, etc. Non-taxable items may include: a principal residence, bank accounts, TFSAs, and most personal items (such as clothes, jewelry, furniture, and vehicles). Common items which may be rolled over tax-free to a spouse include: stocks, mutual funds, RRSPs, and RRIFs. These items may be transferred at the original cost of purchase by the deceased or they may be reported as losses (if they can be carried back against prior taxable gains).
A ‘Terminal’ tax return is prepared for income earned from Jan 1st to the date of death and includes any taxable gains from the deemed dispositions. On this return, the full amount of tax credits and exemptions may be claimed and they are not pro-rated based on the date of death. You may also claim up to 24 months of medical expenses not previously claimed.
There may be optional tax returns which may be filed to reduce the overall taxes payable. The most common is a Rights and Things (R&T’s) return. This return includes unpaid amounts owed to the deceased at the time of death which would have been included in income when received. Typical items are Old Age Security, Canada Pension and other pensions payed monthly. Most R&T returns are non-taxable as there are tax credits they may contain. Additionally, the transferring of qualifying income reduces the taxes on the terminal return.
For example, if at the date of death there were payments of $1,500 from CPP and OAS and a pension cheque of $2,500 all payable after death, the total of $4,000 would be deducted from the terminal return and claimed on the R&T. Often the deceased is in a high tax bracket, because of items deemed to have been disposed, and at a 44% tax rate this may save $1,760 in taxes.
An optional business return may be filed if the deceased was a partner in or the proprietor of a business. If the business fiscal year end isn’t the calendar year and the date of death was after the year end, but before the end of the calendar year in which the fiscal period ended, an optional return may be filed for the deceased.
The filing deadline for terminal returns is the later of April 30th, June 15th if the deceased or their spouse has self-employment income, or six-months following death.
The ‘Estate’ starts the day after death and a T3 Trust tax return is required if the estate has any income. The CPP death benefit is normally claimed on the T3 return, but could also be claimed on one of the beneficiaries’ personal returns.
The executor of the estate may use any fiscal year end he wants and most estates go one year from the day following death. Very simple estates may be settled in less than a year and the executor may pick a shorter time period and only have the one return. However, many estates take longer than a year to settle and more than one return is required.
Any income earned by the estate is reported on the T3 return. As at January 1, 2016, new rules come into play and basically all estates will become ‘Graduated Rate Estates’ (GREs). A GRE qualifies for the graduated personal tax rates, based on where the estate is deemed to reside, for up to 36 months. After this period, the estate income becomes taxable at the highest personal tax rates.
An option with estates is to distribute the estate income to the beneficiaries and they claim the income on their personal tax returns. This may be beneficial if the beneficiaries are in a low tax bracket, but many times they are in higher tax brackets and end up paying more taxes.
This is a basic overview of the tax implications on death. Estates are a very complex field. I recommend you seek professional assistance for your personal estate planning, or if you are an executor for the handling of the estate.
RETURN INCOME FILING
Terminal return Income from Jan 1st to date of death Later of Apr 30th (or June 15th
Taxable deemed dispositions if self-employed) or 6 months
after date of death.
Rights & Things Income earned but not yet paid at Filed after the terminal return
time of death is assessed.
Optional (Business) Income earned after business year end to June 15th or 6 months
date of death after date of death.
On each of these personal returns you may claim for the: basic personal, age, spouse, eligible dependant, infirm dependants age 18+, children born in 1997 or later; and caregiver credits. There are also other items which may be split between returns.
T3 Trust Return Income earned by the estate after death Up to one year after date of death
Lorn is your Estate and Entrepreneurs Tax Guide. Contact him at firstname.lastname@example.org