It was Benjamin Franklin who wrote in a 1789 letter that "in this world, nothing can be said to be certain, except death and taxes." Oh, how right he was. But many of us fail to account for the fact that tax is a certainty even after death. Part of a comprehensive estate plan includes planning for the taxes and other liabilities your estate will be responsible for upon your death. Here are a few things to consider:
Income Tax
Not surprisingly (or perhaps, surprisingly), you will be taxed on all income you earned in the year of your death and your estate will need to file a final tax return to determine if there are any income taxes owing. Like all other debts, income tax has to be paid by the estate before any beneficiaries can get their inheritance.
Capital Gains
Any capital property that you own at the time of your death is deemed to be disposed of when you die, which simply means the CRA will treat the property as if you had sold it at the time of your death. As a result of this “deemed disposition”, any capital gains or capital losses are included in the calculation of your final income.
In some cases, this may be subject to the lifetime capital gains exemption (which in 2017, is set at $835,716). The lifetime capital gains exemption can be applied to capital gains from rental or investment property or qualified small business shares (among other things). Since there is no guarantee this exemption will always be available, many people choose to crystallize some or all of their capital gains by triggering a disposition during their lifetime. This is something we encourage you to discuss with your accountant in the planning process.
RRSPs and RRIFs
The beneficiaries of RRSPs and RRIFs receive the money tax-free, but the value of the registered asset will be included as income on your final tax return and your estate will be responsible for the tax payable on it. The exception to this is if the RRSP or RRIF is transferred to a spouse (or sometimes a financially dependent child or grandchild), in which case the transfer is done on a tax-deferred basis.
TFSA
Tax-Free Savings Accounts lose their tax-free status when the account-holder dies. Amounts in the TFSA (including earnings accumulated to the date of death) are not taxable in a beneficiary’s hands, but any amounts that accumulate in the TFSA from the date of the account-holder’s death are taxable in the beneficiary’s hands. The exception to this is if a spouse or common law partner is named as the successor account-holder, in which case the tax deferral can be continued under the spouse’s name.
Probate Fees
Probate usually becomes necessary because third parties, such as financial institutions, ICBC, or the Land Title Office, want assurance that the executor has the authority to deal with a particular asset in your estate. If probate is required, the entire value of estate assets located within British Columbia is subject to probate fees. The fee is currently 1.4% of the portion of an estate in excess of $50,000, and 0.6% for the portion of an estate valued between $25,000 and $50,000.
Executor’s Fees
In British Columbia, executors of an estate are entitled to be compensated for their work in administering the estate. Sometimes, executor compensation is expressly set out by the will. If not, the beneficiaries will often agree on a reasonable amount up to a maximum allowed by legislation, which is currently 5% of the value of assets in an estate.
Final Thoughts
If not properly planned for, death can trigger a significant tax bill and leave your loved ones with an unexpected liability to deal with. An important part of the estate planning process is understanding the taxes you will owe after your death and planning for them accordingly. If you’d like to explore planning tools that can reduce income taxes and probate fees payable after your death, we encourage you to have a conversation with an estate planning lawyer.