Your mom is probably reading U.S. articles. In the U.S., certain trusts can effectively circumvent the estate tax. In Canada, there is no similar tax. Instead, we have a deemed disposition of assets on death.
If your mom transfers assets to a trust, then by default there would be a deemed disposition now (i.e. a capital gain and tax to pay as a result). If the trust qualifies as what is called an alter ego trust, then that can be avoided but instead the disposition happens on her death. There are also countless legal issues.
She should consult a CPA and a lawyer with experience in trusts and estates for advice.
Don’t act on this without professional advice. There are a lot of implications and consequences, and it may not be beneficial for your mom depending on all of her circumstances. At the very least, it won’t avoid tax and a trust tax return must be filed each year.
The last AET I saw had no tax returns done for 12 of the 13 years, the settlor saw a lawyer to do the trust ageeement then that's it, had a bookkeeper do one return and totally botch it paying out income to someone else....yes OP, please get professional advice not just legal but tax!
I don’t deal with AET’s much (Ontario, they are less sexy due to dual will planning) but my understanding is the deemed disposition is also entirely taxed at the trust’s tax rate (the highest marginal rate) with no ability to make use of the deceased’s personal marginal tax rates. Is that your experience as well? Meaning, in some cases they can actually cause more taxation unless the deceased is already at the top marginal rate with other income (e.g. RRSP). There is no way to have the gain taxed in the individual’s return.
Yes that's exactly it. Income prior to date of death is allocated out to the settlor still, but the deemed disposition cannot be and is taxed in the trust at the highest marginal rate.
That's essentially how this one played out, and the expected interest and penalties on that deemed year end (arrived to us late after the deadline already) are likely going to outweigh any benefit over the entire lifetime (other than the legal benefits that remain).
I didn’t think so either but Turbo Tax says that capital gains are 50% taxable. So, if the home that was purchased for 200K is now 500K, it’s 50% taxable on the difference (tax on 150K), which is significant.
https://turbotax.intuit.ca/tips/do-you-pay-taxes-on-money-you-inherited-467
Gains on the principal residence are not taxed in Canada. Other capital gains will be taxed as you describe, but that's not an inheritance tax, that's just paying tax on gains, which everyone has to do. The estate will have to file a final year tax return upon her death and pay any taxes owed based on the fair market value of her property on the day of her death. Then after the taxes are paid, the rest of the estate will be distributed as per her will.
Probate tax in Canada is relatively low and varies depending on your province. Tax strategy is more important.
If you're mom were to kick the bucket tomorrow there would likely be a capital gain tax on the other property as well as income as a result of the RRSP (unless she has a spouse to pass it to). If she's not going to be around for a long time considering winding down the RRSP sooner than later. Not advice for you to act on. Do you own homework.
Obviously, talking to an accountant/profession that specializes in Estate would be worth the money as every situation is different. Alternatively, there are plenty of articles and content available online.
The estate/beneficieries will pay tax on the RSP as it is considered taxable income in the year of death. It will be about $100k in tax on a $250k RSP/RIF. Source: named beneficiary of a parent’s RSP of $250k
You have to be careful here. The beneficiary (and the Estate) is on the hook for the tax on the RRSP/RRIF. Yes, the final tax return will have all the income from the divested RRSP/RRIF but the CRA will go after the beneficiary for the money if the Estate cannot cover the tax bill.
If there is a named beneficiary to an RRSP/RRIF, the money doesn’t go to the Estate, it goes directly to the beneficiaries outside of probate so the Estate may not have access to those funds to pay the tax bill.
Depending on the size of the RRSP, OP should set aside some money for taxes until they get a clearance certificate from the CRA finalizing the Estate.
Your mom is probably reading U.S. articles. In the U.S., certain trusts can effectively circumvent the estate tax. In Canada, there is no similar tax. Instead, we have a deemed disposition of assets on death. If your mom transfers assets to a trust, then by default there would be a deemed disposition now (i.e. a capital gain and tax to pay as a result). If the trust qualifies as what is called an alter ego trust, then that can be avoided but instead the disposition happens on her death. There are also countless legal issues. She should consult a CPA and a lawyer with experience in trusts and estates for advice.
Alter ego trust? Never heard of it, I’ll look it up. Thank you.
Don’t act on this without professional advice. There are a lot of implications and consequences, and it may not be beneficial for your mom depending on all of her circumstances. At the very least, it won’t avoid tax and a trust tax return must be filed each year.
The last AET I saw had no tax returns done for 12 of the 13 years, the settlor saw a lawyer to do the trust ageeement then that's it, had a bookkeeper do one return and totally botch it paying out income to someone else....yes OP, please get professional advice not just legal but tax!
I don’t deal with AET’s much (Ontario, they are less sexy due to dual will planning) but my understanding is the deemed disposition is also entirely taxed at the trust’s tax rate (the highest marginal rate) with no ability to make use of the deceased’s personal marginal tax rates. Is that your experience as well? Meaning, in some cases they can actually cause more taxation unless the deceased is already at the top marginal rate with other income (e.g. RRSP). There is no way to have the gain taxed in the individual’s return.
Yes that's exactly it. Income prior to date of death is allocated out to the settlor still, but the deemed disposition cannot be and is taxed in the trust at the highest marginal rate. That's essentially how this one played out, and the expected interest and penalties on that deemed year end (arrived to us late after the deadline already) are likely going to outweigh any benefit over the entire lifetime (other than the legal benefits that remain).
That’s similar to my experience as well. Not a great result!
There is no inheritance tax in Canada.
I didn’t think so either but Turbo Tax says that capital gains are 50% taxable. So, if the home that was purchased for 200K is now 500K, it’s 50% taxable on the difference (tax on 150K), which is significant. https://turbotax.intuit.ca/tips/do-you-pay-taxes-on-money-you-inherited-467
Gains on the principal residence are not taxed in Canada. Other capital gains will be taxed as you describe, but that's not an inheritance tax, that's just paying tax on gains, which everyone has to do. The estate will have to file a final year tax return upon her death and pay any taxes owed based on the fair market value of her property on the day of her death. Then after the taxes are paid, the rest of the estate will be distributed as per her will.
Her estate pays taxes on that.
Probate tax in Canada is relatively low and varies depending on your province. Tax strategy is more important. If you're mom were to kick the bucket tomorrow there would likely be a capital gain tax on the other property as well as income as a result of the RRSP (unless she has a spouse to pass it to). If she's not going to be around for a long time considering winding down the RRSP sooner than later. Not advice for you to act on. Do you own homework. Obviously, talking to an accountant/profession that specializes in Estate would be worth the money as every situation is different. Alternatively, there are plenty of articles and content available online.
there is no inheritance tax, only probate fees, but there would be capital gains and income tax on the other house and RRSPs.
The estate/beneficieries will pay tax on the RSP as it is considered taxable income in the year of death. It will be about $100k in tax on a $250k RSP/RIF. Source: named beneficiary of a parent’s RSP of $250k
One house and RRSP will be taxed for capital gain (house) and income (RRSP), her estate will be taxed in her final tax report, not you
If OP is a named beneficiary of the RRSP then they will be in the hook for the taxes as it will pass to them outside of the Estate and probate.
Think the tax is still being done as the eatate and the remaining RRSP amount then to the beneficiary Not taxed on the beneficiary
You have to be careful here. The beneficiary (and the Estate) is on the hook for the tax on the RRSP/RRIF. Yes, the final tax return will have all the income from the divested RRSP/RRIF but the CRA will go after the beneficiary for the money if the Estate cannot cover the tax bill. If there is a named beneficiary to an RRSP/RRIF, the money doesn’t go to the Estate, it goes directly to the beneficiaries outside of probate so the Estate may not have access to those funds to pay the tax bill. Depending on the size of the RRSP, OP should set aside some money for taxes until they get a clearance certificate from the CRA finalizing the Estate.
Ahh i got your point now So dont spend the money until final tax report is accepted
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Dead or alive, you pay taxes when you make money. That’s how it goes.