Tag: Capital Gains Tax
Listen to The Core Issues Concerning Estate Taxes
With the long weekend nearly upon us, what better time to discuss the family cottage?
If you transfer your cottage to your children while you are living, you will be deemed to have disposed of it at its fair market value and be liable for the resulting capital gains tax which, depending on how long you have owned the cottage and how much it has appreciated, might be astronomical.
One way of reducing tax liability is to take advantage of the principle residence exemption. In doing so, the size of the capital gain will be calculated using a formula involving the number of years you have owned the cottage and the number of years it has been designated as the principal residence.
Keep in mind, however, that after 1982, spouses could no longer designate different properties as their principal residences and, as a result, consideration should be given to the increase of value in your city residence – if the capital gain on it is greater than on your cottage, designating your cottage as your principal residence may end up increasing, not decreasing your tax liability.
Another option, of course, is to simply allow your children to inherit the property after both you and your spouse have died. At that time, there will hopefully be sufficient assets in the estate to pay the capital gains taxes which arise.
In any event, if you have a cottage which has increased substantially in value, it might be worth your while to discuss ways to reduce tax liability with an expert in estate planning.
Have a great long weekend!
It’s tax season. That wonderful time of year for number crunching, hunting for receipts and depending on your situation, hair pulling.
If you are an executor of the estate of a deceased person, you also have the responsibility of filing the deceased’s "final return." To borrow from a popular expression, the two certainties, death and taxes, follow each other. Final tax returns for those who die during the period from January 1 to October 31 are due April 30 of the following year.*
While there are no inheritance taxes in Canada there are a number of taxes that arise as a result of your death and must be included in the final return. Some of those taxes include the following:
Capital Gains Tax. For the purpose of calculating tax, the CRA deems a deceased to have disposed of all her capital property immediately before her death. This is referred to as a “deemed disposition.“ Depending on the deemed proceeds of disposition, there may be a capital gain or loss. Certain types of capital property are exempt from this rule and an expert should be consulted for specific advice.
RRSPs and RRIFs. These tax sheltered investment vehicles lose their status as such at death. When you die, the tax holiday ends and your RRSPs and RRIFs are collapsed. There is a deemed sale of any securities held in the RRSP or RRIF and any income made in the year preceding your death must be included in the final return. There are a few notable exceptions to this rule, such as a spousal rollover and transfers of your plan to minor and/or mentally infirm children.
There are many creative ways of reducing the taxes that surface after your death. The benefits of doing so may be substantial and result in considerable savings for your estate. When you consider the fact that you spend a lifetime building your assets, speaking to a profession about your estate is advisable. Your beneficiaries will thank you.
*For more information on how to file a final return, visit the Canada Revenue Agency’s website
In addition to establishing the registered disability savings plan, the 2007 federal budget also provides the estate planner with even greater latitude in planning his or her estate.
The proposed budget eliminates capital gains tax on publicly traded shares that are donated to private foundations.
Previously, the capital gains tax was eliminated on publicly traded shares donated to public foundations or charities. This proposal, therefore, broadens the range of recipients of such a donation, which will presumably encourage more giving.
In conjunction with the changes to tax treatment, there are a number of “excess business holdings rules” that attempt to prevent private foundations from being misused by individuals who have extensive holdings in a corporation and who also have influence over the management of a foundation that also holds shares in the same corporation.
The Government indicates that the change in 2006 led to donations of publicly-traded shares to public foundations of $300m since the 2006 budget was passed. We will have to wait and see if the extension of preferable tax treatment to private foundations will have a similar effect. The BMO Financial Group has stated that the change “will likely generate very substantial donations to private foundations and, consequently, to charities”.
We will also have to wait and see if the rules implemented prevent abuses.
Recently, a client came to me regarding the purchase of a family cottage. The client was obviously excited about his new purchase, and wanted advice as to whether he should include his minor children on title. As his children would ultimately inherit the cottage, he thought it would be a good idea to include them on title from the start. My client knew that if his children were joint owners, they would continue to own the cottage after he died by right of survivorship. Not only would capital gains taxes be deferred (until the children ultimately disposed of the cottage), but the cottage would not be included as an estate asset for the purposes of calculating the estate administration tax (i.e. probate fees). It seemed like the perfect plan.
However, despite my client’s best intentions, my advice was not to put his children on title. The problem was that if the cottage had to be sold or mortgaged while his children were still minors, a court order would be required. Moreover, The Children’s Lawyer would have to be put on notice if such a court order were requested. Finally, the court would only grant an order when it was of the opinion that the sale or encumbrance of the cottage was necessary or proper for the support or education of the children, or would substantially benefit them. In the end, it was better for my client to simply wait until his children were adults before transferring his interest in the cottage to them.