At the outset, we are a law firm and we do not provide tax advice. However, we strongly urge our clients at the earliest possible date to retain the services of a qualified and designated accountant to assist in filing the various tax returns that are necessarily filed as a result of the death of the testator.
This is not simply the tax return covering the last year of the life of the deceased. There generally is a requirement that the estate file one or more returns to cover the income and expenses of the estate.
The topics discussed below are pointed out in the most simplistic (relatively speaking) of terms possible and are only raised as a method of ensuring that an executor indeed does follow our advice and retain the services of a qualified accountant.
There is no capital gains exemption for real estate owned by an estate. We are all well aware of the fact that our principal residence during our lifetime is shelter from any capital gains the home enjoys. Our principal residence may have appreciated significantly as has been enjoyed by most properties in the GTA over the last decade. However, this capital gain exemption does not extend to an estate. The amount by which a property appreciates in value from the date of death until its liquidation is treated as a capital gain and taxed. If their increase is significant, a great deal of tax may be incurred. This is important when making decisions regarding the administration of an estate.
One year limitation for capital loss carryback. The death of a tax payor triggers tax under Section 70.5 of the Income Tax Act. A tax payor is deemed to have disposed of all of his capital property at its fair market value immediately before his or her death. The taxpayer’s estate is responsibile for the payment of any tax payable by the deceased on the gains so reported. There are some exceptions, the primary one being a rollover to a spouse. In general terms, to qualify for a spousal rollover, the property transferred as a result of death must be transferred or distributed to either the deceased taxpayer’s spouse or common law partner or a qualifying spousal trust. However, for the spousal rollover to be successful, it must be done within 36 months of death.
There is a double taxation problem dealing with shares held in a private company. There are a number of planning technics available to reduce or eliminate the risk of double taxation on private company shares. These need to be actively looked at and an executor who is managing an estate that includes such shares must seek competent tax advice on a prompt basis.
There can be complications when an estate is in the midst of litigation and an executor or an estate trustee during litigation must be alive to these problems and seek the court’s guidance.
Graduated rate estate status (“GRE”). An estate generally is taxed at the highest marginal rate and is granted virtually no deductions that the deceased had while alive. One exception is the creation of a GRE. To do so, the estate must designate itself in its very first Income Tax Return as the individuals’ GRE and the estate must qualify and continue to qualify as a testamentary trust. A GRE may not receive a loan or advance from one of the beneficiaries. A GRE has the following benefits and these only exist for a three year period.
- Graduated tax rates – a GRE is taxed at a graduated rate applicable to individuals rather than the highest marginal rate which presently is 53.3% in Ontario. (thank you Justin Trudeau)
- Non calendar year end – a GRE is not required to have a December 31 year end.
- Charitable Donations – their treatment is far more flexible when made by a GRE.
- Capital loss carryback- the benefit under section 164 (6) of the Income Tax Act is only available to an estate that is a GRE.
- No part 12.2 tax – GREs are exempt from this tax which can apply when an estate has non-resident beneficiaries and earns certain types of Canadian source income.
The Moral – get a good accountant.