Death of a taxpayer has important tax consequences
When a taxpayer dies, important tax consequences should be discussed immediately with your tax advisor.
For example, you may wonder whether it’s possible to make an RRSP contribution, based on the deceased’s remaining RRSP contribution room available, and take the resulting deduction on the final return of the deceased.
To find the correct answer, determine whether the deceased made any RRSP contributions to either his or his spouse’s RRSP prior to his death. Such RRSP contributions may be deducted by the deceased, and should be transferred to the survivor. After a person dies however, no one can contribute into his/her RRSP on his/her behalf.
However, the executor may make a contribution to the surviving spouse’s RRSP on behalf of the deceased in either the balance of the year of death, or within the first 60 days of the year following. You can contribute any amount up to the deceased’s RRSP contribution limit for the year of death, and take the tax deduction on the deceased’s final return. However, always check the Notice of Assessment from the latest year in which a tax return was filed to be sure that unused RRSP deduction room stemming from the yearwhen s/he was still working, exists.
The amount of the contribution should be carefully matched with the requirement for an RRSP deduction on the final return. This can depend on other provisions on the return, like the availability of capital or non-capital loss carry forwards, medical expenses, charitable donations, etc.
In the case of capital losses, for example, one can normally only deduct net capital losses against income reported from taxable capital gains. If there are no such gains, then the losses can be either carried back three years and applied in a tax year in which there were taxable capital gains (and no capital gains deduction available), or failing that, carried forward indefinitely.
In the year of death, the rules are slightly different. If a net capital loss occurs in the year of death (either due to a transaction before date of death, or as a result of deemed disposition of capital property on death) and the loss(es) exceed any capital gains from that year, then you might be able to claim the loss against all other income for they year. There are two options as to how one might apply net capital losses in the year of death:
Method A – Carry back a net capital loss to reduce any capital gains incurred in the three years before the year of death. If after applying this carry-back, there is still an excess loss remaining, then this remaining loss can be used to reduce all other income on the final return (year of death) or the prior year, or both. Before doing so however, you must reduce this remaining loss by any capital gains deductions claimed by the deceased in prior years.
Method B – You may not wish to carry back any capital losses from the year of death. You may wish to use all of the loss to reduce taxable income on the final return. However, before you can do this you must reduce the net loss by any capital gains deductions previously claimed. After this has been done, you can use whatever’s left to reduce all other income.
You can also use unapplied capital losses incurred before the year of death as well. There are couple of adjustments that might need to be made if the losses were incurred prior to 1990, and again they will need to be reduced by any previously claimed capital gains deductions.
It would be best to use up those losses on the final return; then look at other available special provisions.
For example, medical expenses can be claimed based on the best 24 month period ending in the year of death (this is normally a 12-month period for all others). In the case of charitable donations, you can claim amounts up to 100% of net income in the year of death (this is normally 75%).
Often these items, together with a claim for a Disability Tax Credit (where certified by the doctor on Form T2201) will reduce or eliminate the deceased’s income completely. The survivor can then make a claim for the Spousal amount, and save excess cash to shore up his/her own RRSP contributions.
Preparing returns for a deceased person can be a very complex exercise, even in cases where the income profile appears relatively straightforward. Depending on the deceased’s assets at the time of death, there may be additional optional returns to be filed, with a view to reducing taxes. An astute tax advisor will plan the computation of those final returns wisely.
Remember, the survivor will be taxed as a single person. This can make a large difference to the after-tax results, and the requirement to make quarterly instalment payments.
Excerpted from The Jacks on Tax Online Update Newsletter.