One of the most common first questions I get from executors who are looking with help with taxes for an estate is:
How much tax will the estate have to pay?
Having to administer an Estate can be a long and sometimes frustrating process at the best of times, so the last thing anyone wants is a surprise tax bill. Luckily, even if you’re not ready to file the final taxes yet, we can usually estimate the tax bill that an estate is likely to face. But first, you need to make sure that you have the right information on hand.
Information that you’ll likely need to have:
A copy of the will
A copy of the deceased’s most recently filed tax return
A copy of the probated list of assets (if applicable)
RRSP / RIF account statements as of the date of death
Non-registered investment account statements
The market value of any real estate owned at the time of death
The ACB (adjusted cost base, or amount paid) for any real estate that was NOT the person’s principal residence
The year of acquisition of any real estate owned at the time of death
Details of any income received in the year of death, up to the date of passing
Details of any charitable donations made in the final year or to be made from the Estate
A list of any other assets as applicable, such as shares of private companies, collector items, etc
Sometimes, gathering all of the relevant information can be the hardest part. If the deceased had an accountant already, be sure to get in touch with them right away as they may already have some of the important information. If not, gather what you can and start the conversation so that you can begin to make a plan for taxes.
What’s taxable and what isn’t
The most common taxable items with sticker shock are RRSP and RIF accounts, but real estate and private company shares can add quite a bit to an estate’s tax bill as well.
RRSP and RIF accounts are fully taxable at their value on the date of death, which can often mean paying some tax at the highest tax rate for an estate with a lot in RRSP/RIF accounts (up to 48% in Alberta or 53.5% in BC). These accounts are taxable even if beneficiaries have been designated and received the funds directly, with limited exceptions that include spousal rollovers. A spousal rollover is when the person’s spouse is designated as the beneficiary; the spouse can usually receive the RRSP/RIF funds tax-free. Adult children cannot.
Life Insurance and TFSA accounts are generally not taxable, and those funds do not need to be reported on the estate’s tax filings.
Real estate that was not the person’s principal residence will usually be taxed as a capital gain, which means that 50% of the increase in value from the original purchase price will be taxable on the deceased’s final return. Non-registered investment accounts and private corporation shares will also usually be taxed as a capital gain on any increase in value from their original purchase price. If the deceased owned shares of a small business corporation, this can get tricky: not only do you have to determine a value for this shares which can be difficult to do, but they may or may not be taxed at 50% of their value depending on whether or not the business meets certain qualification criteria under the QSBC rules. This can get tricky to calculate, so be sure to get assistance from a tax professional if shares of a corporation are involved.
Calculating the tax
Not every asset is taxed in the same way, so once you’ve gathered all of the details about the deceased’s assets that is the point at which you can usually estimate a tax bill. From here, it’s usually a matter of applying the latest personal tax rates for your province. The easiest way is to ask your accountant to run a proforma tax calculation, which will give you the estimated total tax based on the assets involved at the appropriate tax rates. However, if you’re opting to try to calculate this yourself, it’s best to take it item by item and remember that the tax rates will vary based on the total taxable income of the deceased in that year.