On behalf of Sun Life, welcome to our "Estate & taxes: The essentials" session.
Although we are not able to speak to your situation specifically, we'll point out things for you to consider. It's a good idea to get professional advice specific to your own situation. This can be from a financial advisor (registered as financial security advisor in Quebec), a lawyer, notary or tax professional.
When you die, your assets are deemed disposed of at fair market value (FMV) and taxation on your assets applies. The tax due is calculated based on two rules: Rule 1: For tax purposes a deceased taxpayer is deemed to have disposed of all assets immediately prior to death. Tax is calculated from the value of the assets as of that date, and Rule 2: Income earned and accrued from January 1st to the date of death will need to be included in the deceased's tax return. This can include investment income, employment income and pension income, as some examples.
<On the slide:> TITLE: What happens to your assets when you die? <End slide>
The two main categories of income to consider are: capital gains, and regular investment and business income. Assets taxed as capital gains include: stocks and other investments in a non-registered account, unincorporated farm assets, shares in a Canadian controlled private corporation, and rental properties. Income from registered accounts, such as Registered Retirement Savings Plans (RRSPs) and Registered Retirement Income Funds (RRIFs) are taxed as regular income. This includes Deferred Profit Sharing Plans (DPSPs) and Defined Contribution Pension Plans (DCPPs) as well as other registered investment accounts. Any recapture of depreciable assets, including rental property buildings, farm buildings and equipment, are included as regular income. Now let's consider what can be tax-deferred.
Most assets can rollover to a spouse or common law partner. This will defer the tax until the surviving spouse disposes of, or is deemed to have disposed of, the asset. For example, if they sell it, or when they themselves die. But first, what is a spouse? The definition of a spouse as it pertains to an estate varies across the provinces and territories. Many people confuse the common law partner definition under the Federal Income Tax Act (ITA) as the general rule. However, the rules under the ITA tend to be quite broad compared to many provincial rules. Each province or territory has their own definition of "common law." The key to remember here is that common law definitions vary, so if you are not legally married it will be important for you to research and understand the rules as they apply to your province of residence.
• Assets eligible for spousal rollover include: Registered accounts, such as RRSPs. This is possible if the spouse is the beneficiary of the account. Joint Accounts that are joint with right of survivorship with the surviving spouse will roll tax-deferred to the spouse. Farm land: Whether the surviving spouse is on title or not, farm land may transfer at either the adjusted cost base (ACB) or fair market value (FMV) to the spouse. You generally do not have a capital gain or loss if you give capital property to your spouse or common-law partner during your lifetime or if they inherit through your will/estate, a spousal or common-law partner trust, a joint spousal or common-law partner trust, or an alter ego trust. For the rest of this recording we will assume that the beneficiary is not the spouse.
Probate is a legal approval process a will must go through. It confirms the validity of a will, and the appointment of the executor. Probate fees are not income tax. Provincial probate costs and fee structures vary across Canada. Depending on your province of residence, probate fees may be a flat rate, or a percentage of the assets that make up the estate. Generally speaking, probate can cost 3-7% of the value of the estate.
<On the slide:> 3 key points about probate:
- Probate confirms the validity and authenticity of the will.
- Probate fees are not income tax.
- The application for the Certificate of Appointment of estate administration (with or without a Will) confirms the appointment of the Estate Trustee <End slide>
Let's look at how real estate is taxed when someone dies.
Let's begin with the deceased's principal residence. Capital gains on a principal residence will typically not create a tax liability because of the principal residence exemption. If the residence includes land, roughly one and a quarter acres are included in the exemption. In 1982, the federal government changed the rules on ownership of a principal residence. Previously, a couple could each have a principal residence. As of 1982, there is only one principal residence exemption per couple. Since January 2017, it is required that you report the sale of real estate to the Canada Revenue Agency (CRA) on your tax return upon disposition of a property. This applies to your principal residence and any secondary property. A secondary residence could be a cottage or vacation home. A dilemma faced by many families who own more than one residence, is which property to claim the principal residence exemption on. Factors to consider are years of ownership and the gain or loss in each property at time of death. Generally, people choose to deem the property with the larger increase in value over the years of ownership as the principal residence.
<On the slide:> A comparison table with the following information:
Is the individual able to name a beneficiary of that asset? Principal residence: No. Secondary residence: No.
Are probate fees incurred by the deceased individual's estate? Principal residence: Yes. Secondary residence: Yes.
Are taxes applicable at death? Principal residence: No. Secondary residence: Yes.
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Let's look at how savings accounts are taxed when someone dies.
While Registered accounts such as RRSPs and RRIFs are generally subject to tax, there are certain family situations which can lead to deferral of any taxes on a deceased's RRSP or RRIF proceeds. These include if the deceased has a spouse or common-law partner, or other qualified survivor. Qualified survivors include: a financially dependent child or grandchild under the age of 18, and a financially dependent mentally or physically infirm child or grandchild of any age.
A TFSA is not taxable upon death. A TFSA that has a named beneficiary will also not have probate fees. Any post-death increases in the account balance from date of death to date of disbursement to the beneficiary is taxable to the beneficiary. If a TFSA is left to a surviving spouse it will transfer to the spouse without affecting their own contribution room. Probate fees and taxes payable depend on the type of non-registered account. There are some non-registered accounts for which you can name beneficiaries, for example a segregated fund with a life insurance company. For other account types, you can not name a beneficiary. If you can't name a beneficiary on the account, it will form part of the estate and probate fees will apply. From a tax perspective, there may be a capital gain or loss. The death benefit paid out from a life insurance policy is not taxable as income. If there is a named beneficiary, the life insurance proceeds will bypass the estate and probate would not apply. Sometimes the estate is the beneficiary of an insurance policy. When this happens the death benefit is still not taxable as income, but probate would apply. Some common reasons to have life insurance paid into the estate are: There are minor children who are the beneficiaries of the insurance policy. As minors are unable to handle large amounts of money, the insurance is paid to the estate and a trust is set up to meet the children's needs. The primary purpose of the insurance policy is to pay the estate taxes. Paying the insurance into the estate can help ensure no family assets need to be sold to pay the estate tax bill. You don't want a beneficiary of any age to receive the lump sum payout and instead wish to set up a trust.
Estate planning can be complicated and requires a periodic review as life events happen, or as your goals and needs change. While there are many tools at Sun Life to assist you, we recommend that you consult with professionals such as a lawyer, accountant, financial planner and/or notary. We hope you have found this information helpful. Thank you for your attention today.
<On the slide:> Thank you! The information provided is of a general nature and can not be construed as personal financial or legal advice. Neither Sun Life or its affiliates guarantees the accuracy or completeness of any such information. This information should not be acted on without obtaining counsel from your professional advisors, including a lawyer, notary, tax professional, or financial advisor (registered as Financial Security Advisors in Quebec) as may be applicable to your individual situation.
Group Retirement Services are provided by Sun Life Assurance Company of Canada, a member of the Sun Life group of companies. <End slide>