Death and Taxes

Jun 2016

By Fin MacDonald, Fin Tax Service

Fin MacDonald has over 20 years’ experience providing retirement and Income tax planning advise. Readers are however cautioned that responsibility falls on the taxpayer to ensure that all information is adequate and correct.

 

In this month’s article for The Beacon I am going to look briefly at: the New Notice Of Assessment, Installment Reminders, and the increases in the Child Tax Benefit and the Guaranteed Income Supplement for Seniors. The rest of the article will deal with Death and Taxes.

With much fanfare the Canada Revenue Agency (CRA) has brought forward its ‘new’ Notice of Assessment (NOA). New it may be, but improved it’s not. The major flaw with the NOA is that it does not take into account any payment you may have made when you filed your income tax return. So, for example, you owed $2,500 when you filed your return. You went to your financial institution, in person or online, and paid the $2,500. When you receive your NOA it states that you owe $2,500. If you have “My Account”, you can go online and see that your payment has been applied to your outstanding amount, leaving you with a nil balance. Maybe by next year the CRA will fix this little annoyance.

Installment reminders are issued in February and/or August of each year. You may have to make installment payments if a/ in either the 2014 or 2015 tax years you had Net Tax Owing of at least $3,000 when filing your return, and, b/ you will have Net Tax Owing of at  least $3,000 in the 2016 tax year. Reminders are sent out to tell you how much you must pay on March 15 and June 15 (the February Reminder) and how much on September 15 and December 15 (the August Reminder).  If you do not receive a Reminder, you do not need to make Installments; if you DO receive one and don’t make the required payments, you may be subject to penalty and interest.

In the Federal Election last year the winning party promised to make major increases to the Child Tax Benefit (CTB) for low and medium income parents. The increase is supposed to be $2,500 per month per child for families with incomes of less than $30,000. The Child Tax Benefit and Universal Child Care Benefit are being rolled into the CTB - which will NOT be taxable. The amount payable will be gradually reduced as income climbs above $30,000; with it ending at family income of $190,000.

The Guaranteed Income Supplement (GIS) for low income single seniors will be increased by up to $79 per month. The GIS will also be available to seniors who are separated due to one partner being in long term care. This will be based on their individual incomes. Both the CTB and the GIS are due to be increased with the July payments.

Death and Taxes

What to do when a person dies.

  • When a person dies, if there is a Last Will and Testament, send the CRA a copy of the Death Certificate, the Will and any Probate Documents there may be.
  • If you are the executor, or the administrator appointed by the court (when there is no will) it is your responsibility to file the last tax return(s) and to ensure that any taxes owing are paid.
  • There are up to four different returns that may be filed for the deceased person’s estate. The first is the Final Return; in this return include all the income received before the date of death as well as any income from deemed dispositions (see below). The second is the Rights and Things Return; in this return are included all income, from employment, investments, pensions or other programs that were payable before the death, but had not been paid. The third possible return is the Partner or Proprietor Return; this is for income from a partnership or business that the deceased was part of, income not payable until year end. Finally, there is Testamentary Trust Return; this is for income earned by the Estate before the proceeds are distributed to the beneficiaries. Why would you file the optional returns? The Non Refundable Tax Credits such as the Personal and Age Amount are available on all the returns; this lowers the total tax bill.
  • Some amounts are not income and do not need to be reported. Examples include the first $10,000 of non-CPP Death Benefits.( Income from the Canada Pension Plan Death Benefit is taxable, and is reported on the tax return of the person who receives it.)  Most life insurance benefits are not considered income; if a policy on the deceased is taxable, a T4A slip will be issued by the insurance company. This income would then be reported by the beneficiary. Principal Residences are not subject to capital gains. There are options available, for example: if your cottage has increased much more in value than your home. For each year the estate may designate one or the other as the principal residence – a tax professional can guide you through this and other details of Death and Taxes.

What does deemed disposition mean? An example: for RRSPs or RIFs, it means that the balance in the plan is added to your income for the year you die. For non-registered accounts such as mutual funds, stocks and bonds, rental property and other real property such as a cottage: from the value of the asset on the day you die, the Adjusted Cost Base of it is subtracted. The difference is subject to Capital Gains Tax, on 50% of that amount. So, why are 100% of the balance of the RIF and RRSP taken into income and only 50% of the non-registered proceeds? When money goes into an RRSP a tax deduction is provided. When the money in the RRSP is transferred (at age 71) to a RIF there is no taxation of it, so at death, all of the money that had been tax sheltered AND had provided a tax deduction is now taxable.

When a person dies, the CRA deems that all of their investments, whether in registered accounts such as RRSPs or RIFs, and all non-registered accounts, have been disposed of. (There are some exceptions: if your spouse survives you, both the registered and non-registered investments may pass, tax free, to him or her. Registered accounts may pass tax free to a son or daughter or grandson or granddaughter if that person is entitled to the Disability Tax Credit.)

For a person who dies without investments or other assets the final tax return can be quite simple. If there is a surviving spouse, measures on their final joint tax return can be taken to improve the financial position of the survivor. For example, pension splitting might not have been done before because the couple did not have any taxes payable. Transferring as much income to the deceased as possible can improve the access to programs like Shelter Aid For Elderly Renters, Medical Services Plan Premium Assistance or the Guaranteed Income Supplement.

For estates where there are substantial assets, bringing into the deceased’s income some of the deemed disposition may make financial sense. An example: if the deceased had suffered losses in earlier years on the investments and had not previously applied  the losses, taking sufficient capital gains into his/her final return would allow those gains to be offset by the earlier losses. This would lower the potential tax hit when the surviving partner passes away. The losses that had been carried forward may be applied against income in the year a person dies, or against income in the two previous years. If the deceased had died early in the year, taking more capital gains into their income can lower the total tax burden for that year.

Medical expenses are often a major expense in the last years of a person’s life. Normally only the current year’s expenses may be claimed; on the final return the last two years may be claimed.

This is just a survey of some of the issues surrounding Death and Taxes. Using my lens of Helping You to Keep More of YOUR Money, I hope you have found this informative and useful. Next time: RRSPs, TFSAs, RIFs and retirement planning.