2017 ESTATE PLANNING WORKSHOP IN PARTNERSHIP WITH - March 14, 2017 Community Foundation of Whistler (CFOW) Mature Action Committee Better in Home ...
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2017 ESTATE PLANNING WORKSHOP
IN PARTNERSHIP WITH
Community Foundation of Whistler (CFOW)
Mature Action Committee
Better in Home
Whistler Public Library
March 14, 2017
Page 1Your Local BDO Team
Business and personal tax
Theresa Partner
Walterhouse
Kim Huggard Senior Manager
Frank St. Amand
Senior Accountants
and
Karen Richardson
Page 22017 CFOW ESTATE PLANNING WORKSHOP
Tax returns
Be informed and seek advice
• Almost everything that can impact your taxes at points in your life may
impact your taxes when you die
• Difficult to cover everything you could encounter
• Seek advice to your specific situation
Tax return requirements when we die
• “Terminal” T1 tax return, Jan 1 to date of death – usual due dates apply
(April 30 or June 15th) or later to allow min. 6 months post death
• Executors “estate” return(s) for period following death – annually until
estate is wound up – T3 (testamentary trust return)
• Optional returns available in some cases
• Recommend executors obtain TX-19, clearance certificate, to protect
their liability before winding up a trust; dispersing 100%
Page 32017 CFOW ESTATE PLANNING WORKSHOP
Optional tax returns
Optional tax returns available
• Rights and Things return (to report rights to income that existed on death
but received later) – some examples:
• declared but unpaid dividends;
• unpaid salary for pay periods ended before death
• Unpaid retiring allowance if eligible before death
• Bond interest earned to a payment date before death
• WIP addback for professionals
• OAS, CPP, etc. if unpaid prior to death for month of death
• EXCLUDES ITEMS THAT ACCRUE OVER TIME LIKE INTEREST
• Business income for remaining stub period if non calendar year end
• Income from a stub period of a testamentary trust
• Benefit is duplicate access to lower marginal tax rates, certain personal
credits; offset by cost of additional filings
Page 42017 CFOW ESTATE PLANNING WORKSHOP
Taxes when we die
Generally what happens when we die?
• Deemed disposition of assets held at death at FMV
• To the extent FMV exceeds cost “ACB” in capital property, will have a
capital gain unless capital gains exemption applies
• Deferred income plans – RRSPs, RIFs, also fully taxable
• Rollover provisions to a spouse exist to allow transfer at cost (unless opt
out on specific assets then at full FMV - no in between).
Impact on terminal / date of death return
• In addition to your typical income that you would report for Jan 1 to date
of death, you may have these additional gains or sources of income to
claim too
• Can result in large tax bill and income at larger than your normal
marginal tax rates
Page 52017 CFOW ESTATE PLANNING WORKSHOP
Taxes when we die
Capital gains exemptions that may apply
• Principal residence exemptions, just like they do if you are alive and sell
your property
• But watch CRA new reporting requirements on sale of principal
residence effective Jan 1, 2016
• Can only claim 1 principal residence per yr (annual election), be
careful if multiple properties have been owned
• $800K + lifetime exemption on QSBC (qualified small business corporation
shares)
• Private companies, 90% of FV assets are “active”, holding period
test met
• Caution not to accumulate excess cash that might throw this
offside – no opportunity to purify when you die
• Exemptions on farming and fishing properties
• Also some intergenerational rollovers at cost
Page 62017 CFOW ESTATE PLANNING WORKSHOP
Taxes when we die
Typical items that will be taxable
• Rental properties - Capital gain and recapture of CCA
• Capital gain vacation properties
• Capital gain on investment portfolios / public corporations
• Capital gain on shares in a private corporations that do not qualify for
capital gains exemption or exceed lifetime limit
• Stock options
• Goodwill / property owned in a sole proprietorship
• Land inventory
• Full value of RRSPs, RRIFs
Typical items that will NOT be taxable
• Cash (FMV and ACB are the same)
• Life insurance proceeds
• Value of TFSA at time of death
Page 7
• Principal residence if fully eligible2017 CFOW ESTATE PLANNING WORKSHOP
Taxes when we die
Options to use capital losses
• If incurred in date of death, offset gains in that year, then carryback up
to 3 prior years (usual rule)
• Or, can use capital losses in year of death or from prior years to offset
REGULAR INCOME in year of death or the prior to date of death
• Some restrictions when capital gains exemptions have been
claimed
• If capital losses are available, you may want to elect to out of the
rollovers at cost to a spouse and have a deemed disposition of certain
assets at fair value. Spouse will then receive the fair value as their cost
base
Page 82017 CFOW ESTATE PLANNING WORKSHOP
Taxes when we die
Beware of double taxation - shares of private companies owned at death
• Deemed disposition at time of death can trigger a capital gain
• If company is wound up with net assets paid out to estate or beneficiary –
it is a dividend - now double tax is paid
• Two options:
• Wind-up company within 1 year after death, trigger a capital
loss in the estate (equal to the gain on death), and can be
carried back to the date of death return to eliminate the gain
• Need to be able to windup within 1 year and elect
under 164(6)
• Must be a GRE (graduated rate estate – discussed later)
• “Pipeline” approach can retain capital gain treatment but costs
to setup so need to consider tax savings
• Consider simplifying before death to ensure 2 options are possible
Page 92017 CFOW ESTATE PLANNING WORKSHOP
RRSPs
Rules on Death
• Deemed collapsed - taxable on fair market value of the plan at that time
• Property will be distributed to your beneficiaries
• Post-death decreases in value of investments between date of death and date
of distribution
• Can be carried back and deducted against the RRSP income inclusion final return
• Final distribution needs to be made before the end of the year that follows the year of death
• If spouse is beneficiary - value of RRSP included in their income, they can then
transfer this amount to their RRSP
• If financially dependent child (or grandchild) is beneficiary of the RRSP, the
income from the collapse of the RRSP will be taxable to them
• Roll to RDSP after March 3, 2010
• Special rules if under 18
Page 102017 CFOW ESTATE PLANNING WORKSHOP
TFSAs
Rules on Death
• Generally, earnings that accrue before death will remain tax-exempt, while
earnings that accrue after death will be taxable
- Spouse designated as successor holder - transfer a TFSA to the spouse without
affecting the spouse’s TFSA contribution room
- Spouse is designated beneficiary - payments out of a deceased individual’s TFSA can
be transferred to that surviving spouse’s TFSA without affecting unused TFSA
contribution room, subject to certain conditions and limits
Page 112017 CFOW ESTATE PLANNING WORKSHOP
Trust returns for estate
Executor’s T3 Testamentary trust return – post death
• Death / will create a testamentary trust
• Date of death to wind-up of estate (all assets sold or transferred)
• Taxed as person; should have access to marginal rates – conditions apply
• If all assets left to a spouse where rollovers apply, only income item
might be $2,500 death benefit and spouse could report that and no T3
return; but most times there is at least 1 annual T3
• Any income earned post death included on this return:
• Investment income; dividends on private shares
• Capital gains if assets are sold for more than the FMV at time of
death (this forms your new cost base of the asset)
• Even for principal residence
• Be careful not to understate value at time of death
Page 122017 CFOW ESTATE PLANNING WORKSHOP
Trust returns for estate
Important to keep the T3 Estate Return a GRE (graduated tax estate)
• Otherwise trust is taxed at top marginal rate all income (~48%)
• CRA introduced new rules for 2016 to avoid multiple testamentary trusts
created on death (eliminates tax planning opportunity to access the
graduated rates for more than one person; multiple years, separate from
and in addition to beneficiary regular T1)
• CRA intent was always administration purposes, not long term tax perk!
• If old will and you think it was set up to create multiple trusts, have it
reviewed as consequences may not be desirable
• General rules to be a GRE:
• Max. 36 months post death
• Must designate as GRE first T3, can’t be late
• Use deceased SIN on each return
• No other estate can be a GRE
• Avoid tainting the GRE by contributing assets post death
Page 13 • Simply put – if you use it as intended, s/b ok!2017 CFOW ESTATE PLANNING WORKSHOP
Charitable giving / GRE
Important Benefits of a GRE - Donation flexibility & tax treatment!
• When made on date of death or after, deemed to be made by estate not
the deceased - tremendous flexibility in claiming donation tax credits,
including:
• GRE in year donation or any of the 3 (or 5?)GRE years;
• Deceased year of death or prior year
• CRA amended rules to allow donations between 36 to 60 months to
qualify for the carryback if GRE during first the 36 months – important
when estates take awhile to wind up or bequest is on residue of estate
• Why is this important?
• When alive, max. donation is 75% of net income in the year (5
year carryforward) and 100% of net income in final two years
• Non refundable tax credit, so it only offsets tax that would be
paid when there is income – you need income to get the benefit
Page 14
• Now more opportunity to match income and donation2017 CFOW ESTATE PLANNING WORKSHOP
Charitable giving / GRE
Important Benefits of a GRE - Donation flexibility & tax treatment!
• Donations of publically traded securities / mutual funds on or after death
• Nil capital gains inclusion rate (same as a living person) but
donation is for the full value donated
• Tax break only available to GRE
• Other GRE benefits
• Private company share windups; carryback of loss to avoid
double taxation
• Stock options taxed on death reduced if losses occur post death
• Non calendar year ends
• Exempt from instalment requirements
• If become non GRE – trigger yr end and switch to Dec 31
• (2 T3s that year)
Page 152017 CFOW ESTATE PLANNING WORKSHOP
Tips and Considerations
Other Tips and Things to Consider
• Simplify before death if you can
• Ask questions before their death to identify risks to be informed
• Be aware of need for cash flow and tax liability in an estate, and what
might happen if you designate specific assets (either in a will or direct
beneficiary outside of a will) to specific beneficiaries rather than sell
assets and allocate residue
• How will tax get paid? Match to beneficiary – but complicated
• RRSPs go to new spouse as direct designate – thought was this
would roll over tax free, but new spouse does not want to
rollover, estate would likely then bear the cost of the tax
• See “Common tax errors related to RRSPs”
Page 16 • Insurance is an option to help pay the tax bill2017 CFOW ESTATE PLANNING WORKSHOP
Tips and Considerations
Other Tips and Things to Consider
• Various types of trusts that can be set up and might be beneficial
• If a regular discretionary inter vivos trust, for example, owns assets such
as the common shares of a private corporation, those shares are not
subject to the deemed disposition rules on death as not technically
owned by the deceased
• Introduction of Qualified Disability Trust (QDT) when the new GRE rules
were introduced – to allow ongoing trusts for those with disabilities to
maintain some benefits of the old testamentary trust rules
• Options to transfer ownership before you die – but not clear cut
• Corp can pay up to $10K tax free tax benefit to employee
Page 172017 CFOW ESTATE PLANNING WORKSHOP
Tips and Considerations
Other Tips and Things to Consider
• If own assets in the US or other countries – get advice
• Preferable to have a Canadian executor, but if you do have a non resident
executor, get advice
• Manage marginal tax rates - avoid where possible contributions to RRSP
at low tax rate but withdrawals or death at high rate
• Plan to have income to utilize donation credits if possible, otherwise
consider donating while alive
• Corporation example
• Note corporations can only deduct donations if they
have income; better to redeem shares to trigger a
dividend – creating income for the shareholder, and
then shareholder does the donation
• Foundations / endowments can help
• Finalize estate and donations but control of donations
over time
Page 182017 CFOW ESTATE PLANNING WORKSHOP
Resources
CRA Website
Contract your Local BDO professional
twalterhouse@bdo.ca or khuggard@bdo.ca
fstamand@bdo.ca or krichardson@bdo.ca
BDO Website (www.bdo.ca)
• Insights – Tax, in “Insight Title” search for a topic or our publications,
such as:
• Tax Bulletins
• Tax Alerts
• Tax Factors
• Tax Facts (2016 Tax Facts will give you tax brackets by type of
income)
• Weekly Tax Tips
Page 19Page 20
APPENDIX – COMMON ERRORS RRSPS Page 21
RRSPS
Common Income Tax Errors
RRSPs - Taxation at Death
• General rule
– Annuitant deemed receipt at death = the fair market value of assets of plan immediately before
death
– T4RSP slip to annuitant
– Reported on the terminal year return and taxes paid
• Taxable amount to deceased can be reduced or eliminated
– Paid to certain types of beneficiaries as “refund of premiums”
- Income inclusion to beneficiary when fund received
- Deduction for contribution to his/her own RRSP/RRIF
effectively results in no tax owing (until funds are withdrawn or spouse dies)
Page 22RRSPS Common Income Tax Errors RRSPs - Taxation at Death RRSP Beneficiary 1) Estate as beneficiary 2) Direct beneficiary designation 1) Estate as beneficiary • No direct beneficiary designation, funds payable to the estate • Designation can be filed to have the funds treated as refund of premiums and taxed in hands of a spouse, assuming the will provides for a sufficient amount to the spouse • Designation done jointly - estate’s legal representative and the spouse • Spouse has to agree to this Page 23
RRSPS
Common Income Tax Errors
RRSPs - Taxation at Death
2) Direct beneficiary designation
• No designation form is required
• Funds are paid directly to spouse – no withholding tax is required
• Who pays the tax?
– Financial institution does not automatically issue tax slip in the name of spouse beneficiary
– CRA policy – “exception” where spouse is sole beneficiary of the RRSP and 2 conditions are met:
– Spouse named as direct and sole beneficiary of the RRSP and
– By Dec 31 of the year following the year of death, all the RRSP property is directly
transferred to an RRSP or RRIF that spouse is annuitant
• If both conditions are met, only the spouse will receive the T4RSP slip and
must be included in spouse’s income for the year the transfer was made
Page 24RRSPS
Common Income Tax Errors
RRSPs - Taxation at Death
RRIFs
• General rule
– When annuitant dies, FMV of plan included in their final tax return
• Deduction allowed under 146.3(6.2) if transferred to spouse
– Allows for a deduction from the deceased’s income for the year of death of an “eligible portion”
– Eligible portion can then be reported by the spouse and transferred to their own RRSP or RRIF or
eligible annuity
– If spouse chooses not to continue the tax deferral, the tax slip is issued to the deceased
• Successor annuitant designation
– Possible to designate a spouse as “successor annuitant” of the RRIF
– No deemed disposition of the RRIF at death, survivor spouse simply becomes new annuitant
Page 25RRSPS Common Income Tax Errors RRSPs - Taxation at Death Difficulties in Increasingly Complex Family Situations • Annuitant chose to leave RRSPs to new spouse with residue of estate going to children from a previous relationship • New spouse could take the gross funds in the plan and leave the estate (ie. the step-children) with the tax liability • If the intention is that the gross amount is to go to the spouse only in the event that they choose to defer the tax, the above would be avoided by including a clause in the will to this effect and the funds should be distributed through the will rather than direct beneficiary designation Page 26
RRSPs
Common Income Tax Errors
RRSPs - Taxation at Death
Recovering tax owing – who is liable?
• Withholding requirements
– RRSP and financial institution
– 153(1) says withholding does not apply on payment to a beneficiary (unless non-resident)
• Suing the beneficiary
– Only after the residue has been exhausted
– Difficult for estate to assert claim over RRSP with direct beneficiary designation as they don’t pass
through the estate
• Joint and several Liability
– 160.2(1) provides that beneficiaries are jointly liable for taxes arising from proceeds of an RRSP
belonging to a deceased annuitant
– However, section 160 is only a method by which the CRA may collect the tax owing only if there
are insufficient assets in the estate.
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