Tax Strategies for Financial Advisors: Excerpt

As a new FPSC-approved program, here is an excerpt from Tax Strategies for Financial Advisors.

Excerpt:
Chapter 12: Risk Management – Tax Consequences of Disability and Death

What You Will Learn:

• During Life and at Death
  • RRSPs
  • TFSAs
  • Stocks
  • Principal Residences
  • Other assets

New Skills to Be Mastered:

You will learn how to determine the income tax consequences of transfers of capital between individuals (including donations to charity) during life and at death.

Key Questions to Be Answered:

• Is it better to transfer RRSP assets to family members during the taxpayer’s lifetime or at death?
• Is it better to donate funds currently in an RRSP during the taxpayer’s lifetime or in the will?
• What are the income tax consequences of transferring capital assets to adult children during the taxpayer’s lifetime?
• What are the income tax consequences of transferring capital assets to adult children at death?
• What options are available at death for the transfer of RRSP assets?
• What options are available for the transfer of assets held in a taxpayer’s TFSA to family members?
• If the taxpayer owns assets which are eligible for the capital gains deduction, how can these assets be transferred in the most tax-efficient manner?
• Which assets can be donated to a charity in the most tax-efficient manner?
• What options are available at death for transfer of assets to a surviving spouse in a tax-efficient manner?
• What is T664 and why should it be filed with the will?

Excerpted Example:

Stocks at Death

Although Canada does not have a “death tax”, taxpayers are deemed to have disposed of all capital assets at death and thus all accrued capital gains are taxed at death. Stock, like all other capital assets are deemed disposed of at their fair market value unless they are transferred to the taxpayer’s spouse. Transfers of stocks (and other capital assets) at death to the surviving spouse are deemed to be at the taxpayer’s cost and therefore no capital gains are triggered. However, the surviving spouse may elect, instead, that the transfer occur at the fair market value of the asset. This election may be done on an asset by asset basis in order to use up any capital losses that the deceased may have, or to use the deceased capital gains deduction if the transferred assets qualify. Bequests of the deceased are treated as if they were donations made immediately before death. Thus bequests of publicly traded securities result in a zero tax rate on capital gains of the transferred securities.

Example – Bequest of Publicly Traded Securities

When Irene died, she owned shares in LMN Ltd. which are traded on the TSX. The ACB of the shares is $10,000 and the shares are now worth $24,000. She also had a RRIF with a balance of $100,000. Irene lived in Manitoba.

Irene wishes to leave $100,000 to her son and the remainder to charity.

If she leaves the stock to charity, on her final return, she will add $100,000 of RRSP income to her other income for the year. She will also receive a donation tax credit for $24,000. The taxes on the $100,000 could be up $46,000. The donation credit would be $11,136.

If Irene just left $24,000 to charity and the remaining cash and stock to her son, she would add $100,000 + ($24,000 - $10,000) x 50% = $107,000 to her taxable income. The donation credit would remain at $11,136. The result is an increase in taxes of $3,248.

Excerpted from Tax Strategies for Financial Advisors. ©Knowledge Bureau. All rights reserved.