When an individual in Ontario passes on, that person’s estate may be require to pay certain taxes. At the time of death, the executor of an estate is required to file a terminal tax return on that person’s behalf. Any capital property that is owned by an individual will be considered sold just before the person’s death. Therefore, there may be capital gains or capital losses that affect how much tax an estate owes.
Under the terms of the Income Tax Act, some estate tax may be deferred. Taxes may be deferred on property that passes on to a spouse or to a spousal trust. The spouse or the trust retains the asset at its cost basis when purchased. Capital gains taxes on that property will not need to be paid until the asset is sold or the surviving spouse passes on.
In addition to Canadian estate taxes, it may be necessary to pay United States estate taxes. This applies to those who own real estate in America or who own stock in American companies. To overcome this tax liability, it may be worthwhile to form a Canadian holding company. Doing so would put the assets under control of a Canadian corporation, and they would be exempt from taxation in the U.S. Another option is to sell the holdings to minimize additional estate taxes in America.
Thorough estate planning may enable an estate to minimize its tax burden and pass more of its assets on to future generations. Talking to an estate planning attorney may help an individual prepare for as many scenarios as possible. Those who own property in both Canada and the U.S. may consult with an attorney to review legal estate tax mitigation strategies.
Source: RBC Wealth Management Canada, “Taxes at Death“, September 16, 2014