Sun
Q: Upon death, what is the maximum amount of residential property that will not have any tax implications? And will one pay probate fees for one’s RRSP balance?
— Regino Romero,
Coquitlam
Chartered accountant Arthur Azana, partner with D&H Group LLP in Vancouver, answers:
When a person passes away, Canada’s tax laws dictate a deemed disposition of all property at fair market value, other than property bequeathed to a spouse or to a spousal trust. This deemed disposition may result in capital gains taxes, unless an exemption is available.
The most significant exemption available to the average taxpayer is the principal residence exemption. Fortunately, there is no maximum gain or house value which may be sheltered by the principal residence exemption. If you’re lucky enough to have both a primary residence and a vacation property, there is even some flexibility in deciding which property you wish to shelter to maximize the tax savings.
Having said that, the principal residence exemption rules are quite complex. So if you have multiple properties, or even just a single property with multiple uses, you should work with someone you trust to see how best to maximize your claim.
Although there are reduced rates for small estates, generally the probate fees in B.C. are 1.4 per cent of the gross value of the assets passing to beneficiaries by operation of a will. This includes an RRSP that collapses on death into an estate for distribution to beneficiaries.
One way to avoid probate is to designate within an RRSP a specified beneficiary who can be your spouse or a dependant child or grandchild. This way the RRSP passes outside of the will.
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Q: Re: the article on being an executor (Smart Money, Dec. 16), a tax clearance certificate states that all taxes have been paid which gives the executor the go-ahead to distribute the assets. But what happens if the estate continues to earn income while you are waiting for the certificate? Now you have further tax to pay on that income. This seems to be a Catch-22 situation, so how do you get around it?
— Doug Allen,
Vancouver
Hugh McLellan, of the Vancouver law firm McLellan Herbert, answers:
This is a common problem. In many cases the executor plans on a distribution date following the last trust year-end in which a tax return is filed and then places the funds into a non-interest-bearing account, pending receipt of the clearance certificate. Another solution can be to elect to allocate the income earned after the last trust year-end in which a tax return is filed to the beneficiaries personally (but this does not work in all cases). Some executors just file another return and pay the tax after the tax clearance has been received. In this case they take the risk that the last tax return and amount paid was correct.
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Q: The article on being an executor stated a tax certificate must be obtained from the Canada Revenue Agency before the distribution of an estate. Could that be misleading? From my experience this year with an estate, both the CRA and a tax specialist said a tax clearance certificate is not mandatory.
— William Murdock,
Burnaby
Hugh McLellan answers:
The Income Tax Act (section 159) provides that obtaining a tax clearance is mandatory before a distribution occurs. I do not hold myself out to be a tax expert, but I am aware of a number of situations where a clearance certificate has deliberately not been sought before a distribution was made. In all such cases the executor is still taking a risk, but often the tax advisers will recommend the executor accept the risk, given the particular circumstances of that case. Sometimes in such cases, executors will seek an indemnity from the beneficiaries to reduce their exposure to liability.
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We welcome brief money questions to Michael Kane at [email protected], fax 604-605-2320, or c/o The Vancouver Sun, Suite 1, 200 Granville St., Vancouver, B.C., V6C 3N3
© The Vancouver Sun 2005