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Canada
has no official
death, estate
or inheritance
taxes. So,
without proper
planning,
on death and
estate may
be faced with
large and
unexpected
tax liabilities.
The
General Rule
Though
special rules
apply to RRSPs
and RRIFs,
a tax-payer
is generally
deemed to
have disposed
of all his
or her capital
property (including
stocks, bonds,
mutual fund
units, real
estate, farms
etc.) Immediately
before death
at fair market
value. When
the proceeds
of disposition
exceed the
property's
adjusted cost
base (ACB),
the result
is a capital
gain. Three-quarters
(75 per cent)
of the capital
gain is taxable
to the deceased
and must be
reported in
the deceased's
final tax
return-the
terminal return.
On that
return, a
capital gains
deduction
may be claimed
against any
capital gains
arising from
qualifying
property,
such as shares
of a small
business corporation
or farm property.
Spouse
as Beneficiary
The
most common
exception
to the deemed
disposition
rules occurs
when the capital
property is
transferred
to a deceased
taxpayer's
spouse or
testamentary
spousal trust
(spouse trust).
A spouse trust
is a trust
that is created
by a taxpayer's
will. It must
meet specific
criteria,
but generally
entitles the
spouse to
receive all
of the income
of the trust
during his
or her lifetime.
When property
is transferred
to a spouse
or spouse
trust, the
transfer may
be done without
triggering
any immediate
capital gains
and the associated
tax liability.
Example
: Susan and
Bruce
Susan
and Bruce
are husband
and wife.
Bruce holds
a non-registered
investment
in say, Trimark
Fund, with
an original
cost of $150,000.
At Bruces
death on January
15, 1998,
the fair market
value of his
holdings had
grown to $250,000.
That represents
an accrued
capital gain
of $100,000.
If
Bruce left
his investment
in the Fund
to Susan (perhaps
by naming
her as the
beneficiary
of this property
in his will),
the investment
can simply
be transferred
into Susan's
name. Susan
will be deemed
to have acquired
the property
at the same
ACB of $150,000,
thereby deferring
tax on the
$100,000 accrued
capital gain.
If
Susan wasn't
the beneficiary
of Bruce's
mutual fund
investment,
Bruce will
be deemed
to have disposed
of his units
for proceeds
equal to the
fair market
value of $250,000.
That would
result in
a capital
gain of $100,000
-75 per cent
of it taxable.
Depending
on Bruce's
marginal tax
rate in the
year of death,
the estate
may be liable
for taxes
up to $40,000.
Our
suggestion
is that you
name specific
beneficiaries
on all RRSP's,
GIC's and
Segregated
Funds to keep
them out of
your estate.
We
are not tax
experts at
JD Smith Insurance
Brokers. The
above are
only things
to consider
and to think
about. It
would be wise
to contact
your lawyer
and accountant
for information.
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