Banka: Importance of having a will

People die—it is a fact of life—as are taxes. Even when you die, you need to pay taxes and you need to have someone wind up your final affairs.

People die—it is a fact of life—as are taxes.

Even when you die, you need to pay taxes and you need to have someone wind up your final affairs.

The easiest way for surviving family members to wind up your affairs is if you have a legal will in place.

The will should name the legal representative who would be the executor. If there is no will, then the court will appoint an administrator as the legal representative.

The legal representative can charge a fee to the estate to be compensated for the time taken to wind up the affairs of the deceased.

Probate is the process of getting the court to rule that a will is legally valid.

If the person dies with assets such as land, house or investments, the will is usually required to go through probate.

There are fees for the process depending on the value of the assets in the estate.

As a legal representative, your responsibilities under the Income Tax Act are to file all the required returns for the deceased, make sure that all taxes owing are paid and you need to inform the beneficiaries if any of the amounts that they will receive from the estate are taxable.

The first order of business is to let Canada Revenue Agency know that the person has deceased.

When this happens, the CRA will remove all representatives from the deceased’s account and will stop all automatic payments such as the GST or HST.

At this time, the representative needs to provide to CRA a copy of the death certificate, the social insurance number of the deceased, a copy of the will or other legal document such as grant of probate or letter of administration indicating who the legal representative is.

There are three kinds of returns that can be filed for a deceased person upon death which are the final return, the rights and things return and a business return.

In addition, you may be required to file a T3 return for the testamentary trust.

If you need an accountant to help you file these returns, a T1013 needs to be filed with CRA giving the accountant access to the deceased’s file.

Under the Income Tax Act, the deceased person is deemed to have disposed of all capital property at the time of death.

If the assets can’t be distributed on the day of death, they roll over into what is called a testamentary trust. When the assets are finally distributed,  then the testamentary trust is closed.

As an example, if a person dies with an investment portfolio that has a fair market value of $100,000 that was purchased back in 1995 for $20,000; that person will be deemed to have sold the investments at fair market value on the day of death and will need to pay taxes on $40,000 capital gains on the final return.

Because this matter needs to go to probate, there will be the need to file a T3 for the testamentary trust. The trust will receive all the assets at fair market value.

Then when the assets are finally distributed to the beneficiaries after the will has been probated.

Those assets will be distributed at fair market value on the date of distribution and the testamentary trust will pay any taxes on capital gains or on any income that the investments have earned up to the date of distribution.

As you can imagine, there are various vehicles that can be put in place to reduce taxes at the time of death.

Another interesting problem arises when the named beneficiary is a minor.

If the beneficiary is a minor and no trustee has been named for the minor, the assets are put into the custody of the public trustee’s office.

Then application needs to be made to the office to have the assets released into a trust set up for the minor with a family member as the trustee of the trust.

This is an additional step with additional legal costs that could have been avoided if some estate planning had been done.

In this case, the public trustee’s office will issue T-slips to the minor and the minor could end up paying considerable tax on the asset received.

This may happen in the case of an RRSP whereby you have the option to name a beneficiary, but not necessarily a trustee for a minor.

Finally, after all the returns have been filed and you have received the assessment notices from CRA, and before any property is distributed, the legal representative should request a Clearance Certificate from CRA.

You will need a clearance certificate for the personal returns filed and a separate certificate for any testamentary trust returns filed.

Gabriele Banka is a Certified General Accountant and the owner of Banka & Company Inc.



Kelowna Capital News