Under subsection 70(5)(a) of the Income Tax Act, when a taxpayer passes away, they are deemed to sell, and re-purchase all non-depreciable, and depreciable capital property. This can create a very large tax bill for the estate of the taxpayer.
Spousal Trust or Rollover
If the taxpayer is married, his or her capital assets may be transferred to their spouse, common-law partner, or to a spousal trust, with no tax consequences. Subsection 70(6) of the Income Tax Act allows the capital assets to be transferred at the adjusted cost base of the original owner so that taxes are deferred until the spouse, or common-law partner passes away.
Lifetime Capital Gains Exemption
Capital gains taxes owing in the year of death may qualify for the lifetime capital gains exemption. This is an excellent tax planning opportunity, where a mix of a rollover, trust and the exemption may be utilized to ensure the lowest amount of taxes possible are owed to the Canadian government.
The rules above may create a very large tax debt in the year of death for some taxpayers and their estates. Subsection 159(5) of the Income Tax Act provides some relief by allowing estates to elect to pay the taxes owing in instalment payments. The instalment plan cannot last longer than ten payments. Taxpayers must also provide security acceptable to the Canada Revenue Agency in order to take advantage of this election. Taxpayers should be aware that interest will be charged.
If you are tax planning for the future, taxes owing upon death should be a major consideration. Contact R&A Tax Law to see how we can help you, your spouse, and your children pay the lowest amount of taxes possible!
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.