There is no true estate or inheritance tax in Canada. Instead, Canada Revenue Agency (CRA) deals with the estate as a sale, unless the estate is legally inherited by the common-law partner or spouse, which means the estate is supposed to pay the taxes rather than the beneficiaries. When people don’t give estate planning due attention, they leave behind unexpected financial liabilities when they pass away.
When a person dies, the final tax return is filed by legal representatives. All tax-related matters are resolved before settling the estate. There are at least three pseudo taxes that may be incurred at death:
A final tax return must be filed which includes all the income earned by the deceased up to the date of death. The net capital gain recognized under the disposition rules is also included in income at death. When a person dies, it is considered that the person has disposed of all the capital property and has received the deemed proceeds of disposition right before death. It is called deemed disposition. The Income Tax Act contains provisions that allow the spouse or the spousal trust to take ownership of the assets.
Deemed disposition can have an impact on your estate in terms of taxation. It triggers the payment of income tax on any assets that a person holds on a tax-deferred basis. For instance, if a person passes away without withdrawing money from RRSP, their estate will pay the tax on money that hasn’t been taxed yet.
Upon death, the executor of a deceased person’s estate will generally be required to probate the Will with the territorial or provincial court. The liquidator or executor must present to the court the original Will and an inventory of the deceased’s wealth that pass through the estate. When these documents are accepted by the court, letters of appointment of estate trustee with a Will or letters probate are issued. This document verifies that the submitted Will is valid and registered in the court and that the executor has been given the authority to administer the assets of the deceased. The probate tax is paid with the executor’s or liquidator’s submission to the court. The total value of the assets that flow through the Will determines the probate tax. However, the rate charged can vary from province to province.
RRIF and RRSP
Apart from the tax liability from recognized capital gains, it is important to deregister the registered assets such as registered retirement investment funds (RRIFs) and registered retirement saving plans (RRSPs) at death. The deceased ’s final tax return must include the full value of the RRIF and RRSP. If these funds were left to the surviving spouse or a financially dependent child, then exceptions to this deregistration requirement can be made.
If you haven’t yet allocated some of your time to put your estate plan in order, consult an estate planning expert right away to streamline your financial matters before it gets too late.
Kewcorp Financial is an Edmonton-based financial management company where we provide estate planning expertise to individuals and businesses. Contact us for more information!
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