Death and Taxes: One Certainty Explained
By Gabrielle Loren, CGA
Ask a religious authority, What happens when I die? and the answer will vary depending on the religion of the respondent. Ask the same question of an accountant and the response will be uniformly consistent: How have you prepared your estate thus far? Beyond that there is no simple reply; definitive answers are as varied as taxpayers' circumstances.
By considering the topics below, I hope you will be equipped to consider follow-up questions – of your accountant, that is.
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 principal residence while alive, and that will continue to your death. If, however, it takes your estate awhile to get resolved, and there is an increase in value between the date of death and the date the house is sold, capital gains – tax levied on the profit from the sale – may be due.
RRSP or RIF
Funds held in these types of investments are after-tax monies and thus will be taxed when withdrawn. Upon death, you are deemed to have withdrawn all the funds on the date of your death and, thus, the entire value of the RRSP or RIF will be added to your final tax return and taxed there.
GIC or Term Deposits
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.
Stocks, Bonds and Mutual Funds
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. Fifty per cent of this gain will then be added to your income for the year.
Rental or Vacation Property or Other Land
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 the time 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 principal residence. The cost amount could be different than the actual price paid if bought before 1971, if an election was made in 1994 to adjust the cost basis of the asset, 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 they do to stock and property.
What I cannot 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 by making certain that those who survive you have all the information they need, you will ensure that your beneficiaries – and not just the government – get their fair share.
As you can see, many tax rules 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!
Gabrielle Loren is a Certified General Accountant and partner with Loren & Company located in North Vancouver, B.C. She can be reached at (604) 904-3807 or at