A person who has passed away may leave much of their estate to their surviving spouse, which, for the time being, delays tax liability until your surviving spouse passes. If there is no surviving spouse, however, the CRA deems the assets to have been “disposed”. Let’s look at what that means and why it’s important.
What’s the Damage?
The CRA treats a “deemed disposition” the same way that they would treat the sale of the decedent’s estate at fair market value. Exactly what property does this rule encompass? In short, virtually all non-registered assets, whether it’s cash, real estate, cars, investments, or shares in a private company. For assets that have accrued in value, this results in capital gains which are, of course, taxable. In addition, you are deemed to have disposed of your RRSPs and RRIFs immediately prior to your death. This eliminates their tax-deferred status and results in the entire balance being taxed as income in the year of death.
One particularly challenging issue in the context of deemed disposition is double taxation, especially if a family business is at stake. If at the time of your death you own shares of a private company that houses your investments, they will be deemed to be disposed of at the fair market value of those shares. Further, if you wish to bequeath the company, taxation may effectively occur twice; once on the value of the shares themselves and again on the value of the company’s assets when they are subsequently sold by the beneficiaries. Once again, this can significantly deplete the estate.
Although this double taxation of company shares and assets may seem to be cause for panic, you’ll be relieved to know that there are tax planning solutions available to alleviate the problem. Subsection 88(1)(d) of the Income Tax Act, for instance, may allow you to “bump up” the cost basis of the company’s non-depreciable capital assets to fair market value, thus alleviating the double taxation that occurs on the sale of the assets. A number of other conditions may need to be met depending on your individual situation, so remember that working with an estate planning professional will ensure that this election is structured properly.
For many forms of tax liability that threaten the value of your estate, there are tax planning strategies waiting to be found. Working with the Calgary estate planning experts here at MacMillan is the best way to utilize them. Call 1 (833) 266-6464 to find the solutions you need.