Published: 21 July 2006
The question of what is the tax implications when one dies unfortunately comes up far too often. There is really no simple answer so hopefully the following will give you enough information to know that more questions need to be asked in certain circumstances.
When a resident of Canada dies, inventory of their assets on that date are taken and taxes applied depending on the type of asset owned.
There are no taxes to pay when you sell your principle residence while alive, and that will continue to your death. If, however, it takes your estate a while to get resolved, and there is an increase in value between the date of death and the date the house is sold, capital gains may be due.
The funds inside these types of investments are after tax monies and thus will be taxed when withdrawn. Upon death, you are deemed to have withdrawn all the funds on the date of your death and thus the entire value of the RRSP or RIF will be added to your final tax return and taxed there.
As these are after tax dollars, the only tax implication is that the interest income earned pre-death will be taxed on your final tax return whereas the interest income earned after death will be taxed on your estate return
The value on the date of death will determine the proceeds of sale for capital gain purposes. In other words, you are deemed to have sold all of these items on your date of death and the difference between that amount and what you paid for them will be your capital gain. 50% of this gain will then be added to your income for the year.
As with stocks, you will be deemed to have sold the property at the fair market value on the date of death and be subject to taxes on half of the increased value from when you bought the property. For some, the property may have been in your family for generations, even going back to the days when there were no capital gains or to the days when a husband and wife could each designate a principle residence. The cost amount could be different than the actual price paid if bought before 1971, if an election was made in 1994 or if the property was inherited.
Cars, jewelry, artwork etc are all classified as personal property and are subject to capital gains taxes if their value on your date of death is more than what you paid for them. The same capital gains rules will apply as do to stock and property.
What I can not stress enough is that the cost of anything you own should always be known to the person you have trusted to take care of your affairs should something happen to you. If you arrived in Canada with assets such as stock or owned property outside of Canada upon your arrival, your cost is actually the value of these assets on the date you became a resident of Canada. Too many times I have seen delays causing penalties and interest because we were unable to finish a tax return, as we had to hunt down the cost of an asset.
The above rules do not apply to all people who die. There are provisions that allow a spouse to transfer all assets at death to the surviving spouse at cost and thus the tax implications are deferred until the surviving spouse dies. There are no inheritance taxes (yet) in Canada but ensuring those who survive you have all the information they need will ensure that your beneficiaries get their fair share as opposed to the government.
As you can see from the above, there are many rules that apply when you die so make sure to speak to a professional accountant to assist you in these matters. Planning ahead can sometimes reduce taxes so consult your advisor today!
This article was written by Gabrielle Loren -- a partner with Loren & Company, CGA's located in North Vancouver, BC and can be reached at firstname.lastname@example.org, at 604-904-3807 or check out their website at www.loren.bc.ca