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Taxation in your final return.
In the year of death, the deceased’s executor must submit a final tax return (also known as the terminal return) to the Canada Revenue Agency (CRA).
All income that dates from your last tax return to the day of your death must be reported, such as:
• Gains on Capital Property Where your property has increased in value above what you paid for it, that gain needs to be reported. In the year of death, one-half of the combined capital gains or losses from capital properties is a net taxable capital gain or a net capital loss. A net capital gain is taxed in the year of death. A net capital loss can be applied against the taxable capital gains of the three immediately preceding years. The balance of the net capital loss can then be applied to reduce any other income in the year of death and/or the immediately preceding year.
• RRSPs and RRIFs If you intended to pass all the remaining value in RRSP/RRIF holdings to your heirs, think again. The entire amount left in your RRSP or RRIF will be classified as fully taxable income. If your spouse or common-law partner survives you, the money will be rolled over to him/her and later taxed as it is withdrawn or after his or her death. Contributions made prior to death are deductible in the year of death. An executor can contribute to an RRSP of the surviving spouse within the allowable limits and within 60 days of the calendar year-end, and get a deduction against the income of the deceased in the terminal tax return.
• Registered Pension Plans (RPPs) A death benefit of an RPP is fully taxable as income of the recipient estate or beneficiary, subject to rollovers to plans for the deceased’s spouse, common-law partner, or dependent children under the age of 18.
• Regular Income All taxable income from employment, a business, or investments must be included in the terminal return. This will include any accrued income not received prior to death, such as holiday pay from an employer.
• Investment Income This will include interest on term deposits, interest due on money you have out on loan, interest on bonds, and the taxable portion of annuity income accrued to the date of death.
What tax advantage does life insurance offer to my estate?
There are certain life insurance policies offered with interesting tax-planning advantages. Legal tax exempt rights are allowed in our tax legislation in relation to life insurers, which allows the possibility to accomplish the following:
• Premiums over and above the associated costs of insurance, can be invested and accumulate tax-deferred within certain plans.
• Tax-deferral of the investments continues until such time that withdrawals are taken from the policy.
• Tax is avoided on both the face amount of the insurance, plus any ongoing cash accumulation in the policy, when paid out to the beneficiaries on the death of the insured. Thus, tax is permanently avoided.
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