I’m not sure how many people believe that there is life after death these days, but I have incontrovertible evidence that life does continue after death.
At least in terms of Canadian tax.
Should I start with the good news or the bad news?
Inheritance Tax After Death
Let’s start with the good news.
Canada, technically speaking, does not have an inheritance tax.
If you inherit funds from a loved one or a not-so-loved one, these funds are typically tax-free when you receive them.
Things To Consider Before Death
Now, let’s move on to the bad news.
Death and taxes can be complicated, and there’s a lot to consider.
Please note the information in this article should not be relied upon as official advice.
These issues are very complicated, and one should consult with a competent tax advisor to ensure your specific situation is handled correctly.
Notify CRA and Service Canada
As soon as possible after the death of a taxpayer, Service Canada and CRA should be notified.
This ensures that Canada Pension Plan (CPP) and Old Age Security (OAS) payments are stopped.
Also, if the taxpayer received GST credits, Guaranteed Income Supplement (GIS), and other such benefits, these will be stopped once Service Canada and CRA are notified of the death.
Service Canada and CRA should notice who the estate executor is or who the legal representative will be for the deceased taxpayer.
They will verify this when you send them a copy of the Will and death certificate.
CPP Death Benefits
For those taxpayers who were receiving CPP during their lifetime, remember that the CPP death benefit of $2,500 must be applied for.
Remember that the CPP death benefit is taxable income and must be reported in the estate’s tax return or the beneficiary’s tax return if there is no estate.
The Final Tax Return After Death
After you die, whoever is dealing with your affairs, such as the executor of your Will or other legal representatives, will have to file what is known as the “final” tax return.
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This tax return will be for the period of January 1st until the date of death.
Here are the due dates for the filing of the final tax return:
- If the death occurred between January 1st and October 31st: April 30th of the following year
- If the death occurred between November 1st and December 31st: six months from the date of death
You can check out the Canada Revenue Agency (CRA) website, which has some helpful information on the final tax return.
Related: Epilogue is a simple, fast, and affordable way for Canadians to create their Will and Powers of Attorney online.
One of the Most Common Death-Related Tax Traps: RRSP/RRIF
Remember all that money you contributed to your RRSP throughout all your working years?
In the year after you turn 71, your RRSP becomes a RRIF (Registered Retirement Income Fund) or an annuity and will start to have funds withdrawn each year with minimum amounts set by the government.
These withdrawals are included in your personal income.
If you die too early and still have a large amount in your RRIF on the date of death, the entire amount of the RRIF (or RRSP if not yet converted into a RRIF) is included in your income on the final tax return and taxed at your marginal rates.
This is one of the most common “death and taxes” traps that Canadians can fall into.
You must plan for this eventuality and discuss this issue with a tax advisor and/or financial advisor/planner.
Perhaps purchasing some life insurance (which is mostly tax-free when paid out to the beneficiaries) to be able to pay one’s tax bill upon death is a good idea.
Related: Sun Life Go gives people the flexibility to help meet health and financial needs with convenient access to insurance coverage.
However, if you are in a low-income tax bracket in retirement, maybe withdrawing a bit more than the required minimum from the RRSP/RRIF could be a good idea.
One must be careful not to push themselves into too high a tax bracket because that could jeopardize one’s Old Age Security (OAS) payments and other tax credits only available to those below certain income levels.
Deemed Disposition and Capital Gains
Even though Canada does not have an inheritance tax, that does not mean there are no death taxes in Canada.
On the date of death of a taxpayer, all of one’s assets are considered as if they were sold.
This type of Orwellian idea can only exist in the world of tax. The assets, of course, in reality, were not sold.
However, according to the Government of Canada, the assets are “deemed” to have been sold.
Related: How To Hold A Successful Estate Sale
This is known as a “deemed disposition.” When someone sells an asset, a capital gain (or loss) must be reported in one’s tax return.
When a taxpayer dies if they had assets, the assets are considered if they were sold, and capital gains taxes might be payable in the final tax return.
Capital Gains Upon Death Example
Capital gains are calculated as the “proceeds of disposition” less the “adjusted cost base.”
So, for example, if you bought some stocks for $100,000 and sold them for $200,000, the capital gain would be:
$200,000 minus $100,000 = $100,000.
Half of the capital gain is tax-free, so 50% * $100,000 = $50,000.
This taxable capital gain of $50,000 would be included in the income of the final tax return, and income tax would be payable at one’s marginal tax rate.
Before you have a heart attack as you read this, remember some exceptions to this rule.
For example, if one holds cash and cash equivalents in their bank account, this is not included because the original cost and the market value are the same, so there is no capital gain.
Also, one’s principal residence is, of course, also exempt from capital gains tax.
The deemed sale of the principal residence must still be reported in Schedule 3 of the final tax return, but the capital gain would be exempt from tax because of the principal residence exemption.
The value of one’s TFSA will also be exempt from this deemed disposition.
So the types of assets that are included in this are non-registered investments, rental properties etc.
It’s important to plan for this eventuality, and I would recommend everyone draw up a list of all one’s assets, estimate the potential tax bill and plan how this tax bill will be paid or reduced by some tax and estate planning.
Probate and Death
Depending on the province one lives in, there might be “probate” fees to “probate” the Will.
The following provinces have flat probate fees:
- Alberta has flat fees ranging from $35 to $525 depending on the net value of the estate.
- Northwest Territories probate fees range from $30 to $435 depending on the value of the estate.
- Nunavut probate fees range from $25 to $400 depending on the value of the estate.
- Quebec has a flat court fee of $211 to verify a will but otherwise does not have probate fees.
- Yukon has a flat probate fee of $140.
Provinces With Probate Fees
The following provinces have probate fees that could end up being significant if one has a large estate:
- Ontario exempts the first $50,000 of the estate but a 1.5% fee applies for the value above $50,000.
- Prince Edward Island probate fees start at $50 and a 0.4% fee applies on the value of the estate above $100,000.
- Saskatchewan probate fees are 0.7% for the value of the estate.
- British Columbia probate fees apply if the value of the estate exceeds $25,000. A fee of 0.6% applies on the value of the assets from $25,000 to $50,000 and 1.4% on the value above $50,000.
- New Brunswick has probate fees starting at $25 and a 0.5% fee applies on the value above $20,000.
- Newfoundland probate fees start at $60 and a 0.6% fee applies on the value above $1,000.
- Nova Scotia probate fees start at $85.60 and a 1.695% fee applies on the value of the estate above $100,000.
Manitoba eliminated its probate fees as of November 6, 2020.
Those living in provinces with potentially high probate fees should also plan for this by speaking to a tax advisor and estate and Wills lawyer.
How To Avoid Probabte Upon Death
Some strategies can be used to avoid probate by creating “trusts,” holding assets jointly and others.
Married couples should try to hold all their assets, bank accounts and investment accounts jointly.
This way, when the first spouse passes away, probate fees can be avoided as all assets pass to the surviving spouse.
One should also ensure that one designates their spouse as a “successor holder” of one’s TFSA to ensure the surviving spouse becomes the new TFSA holder.
Having a successor will also avoid the TFSA value being included in the value of one’s estate to reduce probate fees.
These rules are different in Quebec, so taxpayers in Quebec should consult their local tax advisor.
Trust and Estate Returns
After the date of death, if one’s assets and investments are still generating income, then it is likely that a “T3” trust return will need to be filed each year until the estate is completely wound up.
These trust returns can seem simple at first but can get pretty complicated.
The trust returns usually have calendar year-ends (January to December), and the filing due date is March 31st for the previous year.
Final Thoughts On Death and Taxes
The main takeaway from this should be to stop what you are doing right now and plan.
Make sure you have a Will, and the Will is up to date.
Always consult with a tax advisor and/or estate planning lawyer/advisor to create a plan for your inevitable final demise.
You do not want to leave your loved ones with a complicated tax mess or sizeable unexpected tax bill when you leave this crazy world, so plan for death and taxes.
The best time to start planning is now!
Post Contribution By:
Neal Winokur, CPA, CA, is the co-founder of Realty Tax and the author of The Grumpy Accountant – One Fed Up Tax Pro’s Practical Plan to Fix Canada’s Senselessly Complicated Tax System.
Neal feels a moral obligation to speak out against the inherent flaws, unfairness and needless complexities that define Canadian tax.
His dream is for the tax system to be simplified to the extent that his job is no longer necessary. He would appreciate it if everyone signed his petition to call on the government to “simplify the overly complex frustrating Canadian tax system once and for all.”