Unlike the U.S., Canada no longer has any form of estate or inheritance tax. Yet despite this, death can trigger a significant income tax bill that, if not properly planned for, can leave an unexpected liability when a loved one passes away. Here is what happens to your non-registered and registered assets when you die:
Non-Registered Assets
The general rule for non-registered assets is that a taxpayer is deemed to have disposed of all his or her property, such as stocks, bonds, mutual funds and real estate immediately before death at their fair market value (FMV).
When the FMV exceeds the property’s adjusted cost base (ACB), the result is a capital gain, half of which is taxable to the deceased and must be reported in the deceased’s final tax return, known as the “terminal return.” There is an exception for the capital gain arising on the deemed disposition upon death of your principal residence, which is generally exempt.
For example, let’s say you die with a portfolio worth $1,000,000 that had an ACB of $400,000. The capital gain on the deemed disposition at death would be $600,000. Since only half the gain is taxable, tax would be owing on a $300,000 taxable gain. Assuming a 45% marginal tax rate for the year of death, $135,000 of taxes would be payable on the terminal return as a result of this deemed disposition.
If you own qualified small business corporation (QSBC) shares, a qualified farm or fishing property upon death, you can claim on your terminal return any remaining lifetime capital gains exemption (currently $750,000 but rising to $800,000 in 2014) against any capital gains arising from the deemed disposition of that property.
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