It is surprising how often I am told by the executor or family member of a deceased taxpayer that the tax filings for the deceased will be simple to prepare. There are, of course, situations where this comment is true (i.e. no substantial assets at the time of death or all assets are transferred to a surviving spouse), but these situations are rare in my experience.
More often than not there is some form of planning available to help minimize tax payable by the deceased.
Let’s consider a fairly common scenario. An individual who was receiving monthly combined OAS, CPP and Pension income of $6,000 dies on June 15th, 2018.. Let us also assume that this individual’s only asset was a Registered Retirement Income Fund (“RRIF”) with a Fair Market Value (“FMV”) of $220,000 and the individual does not have a spouse to transfer the RRIF to. As a result, the individual would have income of $256,000 to report in their 2018 income tax return – $220,000 in deemed RRIF income as a result of death, and $36,000 of pension income.
If the “simple return” is prepared, the tax owing for this individual would be approximately $102,000.
With a little planning and consideration of the rules outlined in the Income Tax Act, an additional personal tax return, commonly known as a “rights or things” return, can be filed which reduces the amount of tax payable to approximately $97,700 representing a savings of more than $4,000.
Remember, this was a “simple return”. For the next example, let’s add a little bit of complexity. Assume the same individual dies on the same date with the same assets but also owns stock investments with a value of $100,000 and a cost of $50,000. Upon the date of death, an individual is deemed to dispose of all assets at FMV. As a result of this deemed disposal, the individual has a deemed capital gain of $50,000. Let’s also assume that this individual has prior year unused capital losses of $40,000.
If the “simple return” is prepared there will be an increase in tax owing for this taxpayer of approximately $12,500 (being the tax on the capital gain) in the year of death, bringing the total “simple return” taxes to about $114,500.
Once again, with a little planning and the appropriate reporting, we can reduce this amount by applying the prior year unused capital losses against the deemed capital gain. This effectively reduces the gain from $50,000 to $10,000 for tax purposes resulting in a reduction of taxes payable of approximately $10,000. This brings the total taxes down to $100,200, which is a savings of $14,300 in taxes.
As you can see, in both of these “simple” cases, a little tax planning can save the estate significant amounts of tax. It is for this reason that I suggest you talk to a professional to minimize the taxes paid even in the “simplest” of scenarios.