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Fredericton Daily Gleaner ~ Capital Appreciation ~ 9/11 ~ September 11, 2006 - 17 Sep 2006 by TaxHelp

Have you ever noticed how sometimes certain touchstones frame your life? Hopefully most of them are happy. However, there are some events that tragically affect us as a community of citizens. In my lifetime, I remember as a little kid the outpouring of grief from the adults around me when J.F.K. was assassinated. Then there was the loss of innocence many of my generation felt more than 25 years ago when John Lennon was taken. And today we mark the fifth anniversary of 9/11 – the symbol that now needs no explanation.

Then there are the personal moments that are shared by just a few. My father-in-law, Bob, would have been 75 in a couple of weeks. He died quite suddenly a few years back during the last week of tax season. And while nothing can ease the pain and suffering at a time like that, one could go so far as to say that it helps to be prepared. You see, a number of years back Bob had asked me to be the executor of his estate. While the certainty of death and taxes may be an old phrase, it certainly rings true for those involved with the immediacy of the situation. Today I’d like to share some points that may help you at some time in the future.

The first thing that I did when he asked me to be the executor was I read the will that I was given. Although it was quite simple - estate assets were paid to the survivor - it gave me a chance to discuss the possibility of what is euphemistically referred to as common disaster where both spouses die at the same time. For many people, over the years, multiple families can develop, and it's best to know exactly who gets what when the time comes. It also gives one the chance to talk about the various sources of income that people have and any life insurance or other benefits that might come into play.

Speaking of life insurance, when the proceeds are paid as a death benefit, they are tax-free. However, there should be a beneficiary named if possible. Otherwise the funds go to the estate and become an asset for creditors to attach, and an opportunity for the various fees to increase. Life insurance paid, as an example, directly to a spouse or child is creditor proof. Another type of death benefit that is tax-free is one that is paid by the employer (not to be confused with any group insurance). There is a specific allowance for an employer to pay up to $10,000 tax-free if they so choose as recognition of the employee's contribution. The Canada Pension Plan also has a death benefit in the amount of $2,500. Unfortunately, this is taxable and is income of the recipient and not included in the deceased's final return. Anyone receiving this payment should file a T3 Trust Return, if their taxable income is more than approximately $34,000, since the tax liability is less than $620 on the trust return.

Whenever someone dies, not everything is taxed. For instance, under current Canadian tax law the profit from the sale of your principal residence is tax-free no matter how large it is. Any money in the bank, savings bonds, GIC's, and the like are also not taxed. However, any income those accounts have earned from the prior tax year to the date of death are subject to tax and are normally reported to the estate on a T5 slip. Monies in RRSP's are deemed to have been collapsed and are fully taxable at death. Securities on the other hand either in their own right or within mutual funds are subject to capital gains treatment and are deemed to be disposed of at the date of death. The same is true of other capital assets like real estate. The decedent may have owned a cottage that was bought many years ago, and the estate is tax liable for the capital gains as of the date of death whether the cottage is sold or not. I should add that if there is a surviving spouse these types of assets might be rolled over to the widow, deferring the tax liability to a later date.

The most common final or terminal return is technically referred to as a 70(1) T1 filing. This includes the previously discussed income as well as any employment income, CPP, OAS and private pension income. There is a second helpful filing that the executor can undertake known as a 70(2) T1 filing. This is often referred to as a "rights or things" return. Any payments due at time of death that are owed but not paid can be included on this return. Usually we see stock dividends or retroactive payments in this case. The attractive part of this is that all personal amounts are made available a second time. To put it more clearly, since everyone normally gets at least the basic personal amount, a "rights or things" return allows for a minimum of almost $8,000 to be reported without attracting tax.

Unfortunately funeral expenses are not a deduction to the estate for tax purposes. Any income earned after the date of death and before the estate is fully distributed to the beneficiaries is subject to tax and is reported on a trust return. Since the executor's job is to look after the final wishes, he or she is usually placed in a position of negotiating any debts if there is not much money available. My understanding is that if there is not much solvency, financial institution creditors will be kindly, depending on the circumstances.

As a last point, the executor is legally liable for the tax position of the deceased. One should make a request for a clearance certificate from our friends at the Canada Revenue Agency, before paying out all the proceeds. You won't be very happy if you have to ask for some of the money back to pay the bill, and ultimately you are responsible.

Roger Haineault is with Help 4 Taxes. He can be reached by email at roger@help4taxes.ca or by calling 1 (888) 450-1212. His column appears Mondays.