Breakthrough Wills and Estate Planning Answers

#12 What You Need to Know About Canadian Income Taxes on Death

At the time of your death, you are considered to dispose of all your capital property (for example, real estate, stocks or jewelry) at fair market value of that time. This is what the government calls a deemed disposition.

Deemed disposition – at death you are deemed to have received fair market value (FMV) proceeds for all capital property. It is deemed sold even though your estate gets no actual sale proceeds. An income tax liability, however, may arise as a result of the deemed disposition. Examples of capital property include real estate, jewelry, art and investments, but not cash.

Ottawa taxes a portion of the increase in value of capital assets (appreciation) as if you sold them for cash. This happens for all capital properties owned at death.

This is also the case while you are still living. Even if you give away capital assets during your lifetime and get nothing back, you still get a tax bill.

The deemed disposition rules require your estate representative to report the capital gain on your last tax return.

Tricky or not, it’s the way the government collects income tax.

You need a professional estimate of your income tax liability that will arise at your death. A lawyer may do this for you when you prepare your will. This will help you determine, for example, whether you have sufficient life insurance coverage to pay taxes.

Review your estimated income tax liability periodically. This will help you ensure that your loved ones will not be forced into an estate sale to pay your taxes.

To understand how income tax affects your estate planning, you need to estimate the tax obligations that must be paid by your estate’s executor. You may require expert tax advice to obtain an income tax estimate.

Capital gains – the difference between an asset’s fair market value (FMV) and an asset’s adjusted cost base may result in a capital gain or capital loss. Capital gains are included in income on your final income tax return.

Do you need help understanding income taxes? Want to make your will but not sure what’s involved? I can help you. Contact me for a meeting.

I am a Certified Specialist in Estates and Trusts Law.