Taxation Upon Death
Ontario Real Estate Source
By Brian Madigan LL.B.
No one wants to pay taxes!
But, many estate plans go awry because people try to avoid paying any tax. The primary goal is to maximize the after tax net return to the beneficiaries. Sometimes, avoidance arrangements simply result in the wrong beneficiary getting the money.
The main tax that testators wish to avoid is probate fees. Basically, they are on a sliding scale and work out to about $15,000 on a $1 million estate.
The consequences of placing all the assets so that they go "outside the Will", can often result in disparity among the beneficiaries.
For real estate agents, some basic understanding of the taxation system is necessary.
Income is subject to tax. If depreciation is claimed on a building, then upon sale, it may be subject to recapture.
Since 31 December 1971, all capital property is subject to capital gains tax based upon the increase in value from the later of 31 December 1971, or the date of acquisition until the date of disposition.
A principal residence is exempt from capital gains taxation. Spouses may only have one principal residence between them, however, from a technical perspective they may have two in one year provided they are moving.
So, ultimately there is a day of realization, and that is the day before you die. Now, no one knows what day that is, so it's very difficult to plan.
Under the Income Tax Act, all capital property owned by a deceased is deemed to be disposed of at its fair market value the day before death. The effect of that is to ensure that the value is added to the present year's income.
The Income Tax Act provides for graduated rates of tax. The highest marginal rate usually about 50%, comes into play at about $30,000 in net income. Effectively, that means for an additional $10,000 in income, that taxpayer will pay $5,000 in additional tax.
Capital gains taxes can be avoided continuously throughout one's lifetime by holding onto one's capital assets. Just don't sell anything!
However, the deemed disposition rule can be quite expensive. A cottage in Muskoka which rose in value by $500,000 will show a $500,000 capital gain. Under the Income Tax Act, one half of that gain is the "taxable capital gain", and it doesn't take much to place anyone in the highest marginal rate. That means the tax would be $125,000.
Brian Madigan LL.B., Broker is an author and commentator on real estate matters, if you are interested in residential or commercial properties in Mississauga, Toronto or the GTA, you may contact him through Royal LePage Innovators Realty, Brokerage 905-796-8888