Upon death, a taxpayer is deemed under paragraph 70(5)(a) of the Income Tax Act to have disposed of all property for proceeds equal to their fair market value at the time of death. Any resulting capital gain must be reported in the taxpayer’s income tax return for the year of death (terminal return). Included in income at death is the net capital gain recognized under the deemed disposition rules.The deemed disposition rules treat capital property owned by the deceased as if it was sold immediately prior to death. Thus, all unrecognized capital gains and losses are triggered at that point with the net capital gain (gains less losses) included in income. The Income Tax Act does contain provisions to defer the tax owing under the deemed disposition rules if the asset is left to a surviving spouse or to a special trust for a spouse (spousal trust) created by the deceased’s Will. This provision allows the spouse or the spousal trust to take ownership of the asset at the deceased’s original cost. Hence, no tax is payable until either the spouse or the spousal trust sells the asset or until the surviving spouse dies. The tax is then payable based on the asset’s increase in value at that point in time.
What about the shares of your Medicine Professional Corporation?
In the case of shares of your corporation, this is covered under the deemed disposition rules. Corporations do not die when a business owner dies. Corporate bylaws or a shareholders’ agreement dictate what happens with a deceased shareholder’s shares. If there is no shareholder agreement, the shares pass according to your estate plan. Generally, when the owner of the corporation dies (you) and is survived by their spouse, the shares can be transferred to a spouse or spousal trust tax-free. When you and your spouse both pass, there are several areas of taxation that apply.
- Capital gain on the disposition of shares of the corporation. The corporation was setup with a share value of $1. The deemed value of the corporation at the time of death is at least the fair market value of these investments. This value will be taxed as a capital gain as the shares are deemed to have been disposed.
- Capital gains on the sale of investments owned by the corporation. This is where you are looking at the gains on the investments. This gain will be taxed only when the investments are sold. If the investments are not sold, there is no tax.
- Dividend tax on distribution of assets to the next generation. When the investments are sold and assets distributed, the distribution of these assets to the next generation will done so as a taxable dividend.
When we add life insurance privately held corporations, taxes may be significantly reduced and the benefit to your heirs is further enhanced due to the preferred treatment of life insurance and the capital dividend account in the income tax act.
Your will vs. articles of incorporation
Your will determines who gets the shares of your corporation on your death. If you are incorporated, your articles of incorporation establish the existence of the corporation, the shareholders’ class of shares (for example A, B, C), voting rights, share value and the different rights of each shareholder. It may be prudent to review your articles of incorporation and your corporate will with your legal council to make sure these are consistent with your wishes.
Don’t have a Will?
How an estate is distributed depends on whether or not the person who died left a valid will. An estate is someone’s property, possessions and other personal items. A will is a legal document that says who will inherit the estate after someone dies.When a person dies without a valid will, called “intestate”, Ontario’s Succession Law Reform Act sets out how the estate is distributed.
According to the Act as of 2018, unless someone who is financially dependent on the deceased person makes a claim, the first $200,000 is given to the deceased person’s spouse if he or she has decided to claim his/her entitlement. The other possibility is to claim half of the net family property. A lawyer can help determine which is the better choice.
Anything over $200,000 is shared between the spouse and the descendants (e.g. children, grandchildren) according to specific rules.
- If there is no spouse, the deceased person’s children will inherit the estate. If any of them have died, that child’s descendants (e.g. the deceased person’s grandchildren) will inherit their share.
- If there is no spouse or children or grandchildren, the deceased person’s parents inherit the estate equally.
- If there are no surviving parents, the deceased person’s brothers and sisters inherit the estate. If any of the brothers and sisters have died, their children (the deceased person’s nieces and nephews) inherit their share.
- If there are no surviving brothers and sisters, the deceased person’s nieces and nephews inherit the estate equally. However if a niece or nephew has died, their share does not pass to their children.
- When only more distant relatives survive (e.g. cousins, great nieces or nephews, great aunts and uncles), the rules are complex and you should speak to a lawyer.
- If any heir was alive when his or her relative died, but died before the estate was distributed, that person’s own heirs are entitled to their share.
- When a person dies without a will, only blood relatives, including children born outside of marriage, or legally adopted children can inherit. Half-blood relatives share equally with whole-blood relatives.
We always recommend having an up to date Will so that your estate is distributed as you wish.
The above is an overview for general purposes only and is not to be relied upon for definitive legal, tax or financial planning advice. Professionals interested in exploring these opportunities should consult with their legal or tax advisor to discuss their specific needs and circumstances. E&OE.
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