At the date of death
As a general rule, when an individual passes away, they are deemed to have disposed of their assets on their date of death at fair market value (“FMV”). As a result, any accrued gains on investments held in non-registered accounts, and the full value of certain registered accounts, such as registered retirement savings plans (“RRSP’s”) & registered retirement income funds (“RRIF’s”), typically must be included as income on the deceased’s terminal income tax return.
Where non-registered accounts are held by a deceased taxpayer, it is helpful to obtain a detailed report from the investment advisor listing the investments held in the account, their adjusted cost base (ACB) and FMV at the date of death. This report will be used to report any accrued gains or losses on the terminal income tax return as a result of the deemed disposition on death. The estate will then inherit these investments at FMV.
Non-registered accounts after the date of death
After the date of death, any income earned, or gains or losses realized, in a non-registered account becomes taxable to the estate.
To distribute investments in a non-registered account to the estate beneficiaries, the investments can be transferred to beneficiaries at either their ACB (previously FMV on the terminal income tax return) or their FMV at the date of transfer (which could trigger a gain or loss), or they can be liquidated into cash.
If investments are liquidated into cash in the first year of the estate and they are in a loss position, there may be an opportunity to carry back the losses to the terminal income tax return to reduce taxes. This is often referred to as a “164(6) loss carryback”. As taxes are typically higher on the terminal income tax return than the estate income tax return due to the deemed dispositions on death, having the ability to carry back the losses to the terminal income tax return can result in material tax savings. We often request a detailed report from the investment advisor listing the investments held in the account and their current FMV prior to the liquidation of the entire portfolio to see if any related tax planning opportunities exist.
Registered accounts after the date of death
Tax-free savings accounts (“TFSA’s”) are tax-free up to the date of death, but any income earned in a TFSA after the date of death becomes taxable to the estate or named beneficiary.
Any income earned in an RRSP or RIFF after the date of death becomes taxable to the estate or named beneficiary. One point to consider is that if you have named beneficiaries of an RRSP or RIFF, the full FMV of the account will go to the named beneficiary without any taxes deducted or paid. At the same time, the estate will be responsible to pay taxes on the FMV of the account on the terminal income tax return. Provided there is cash or other assets in the estate to cover these taxes, this should not be an issue for the estate. However, if there is insufficient cash or other assets in the estate to cover the taxes on the deemed disposition of the RRSP or RIFF, issues can arise as CRA will take measures to collect payment.
We are happy to assist with all of your estate and tax planning needs, so please feel free to connect with a trusted RLB advisor to help identify any planning opportunities.
*Please note that some or all of the above tax treatments may not apply when the deceased has a surviving spouse or other specific designated beneficiaries.