Author Segal LLP

Death of a Loved One: Filing the Final Tax Return

020317_Thinkstock_491359394_lores_KWDealing with the death of loved ones is difficult, and that may be compounded by having to figure out how to handle their taxes after they’re gone.

Canada doesn’t have an inheritance tax. Instead, Canada Revenue Agency (CRA) treats the estate as a sale, unless the estate is inherited by the surviving spouse or common-law partner, where certain exceptions are possible. This means that the estate pays the taxes owed to the government, rather than the beneficiaries paying. By the time the estate is settled, the beneficiaries shouldn’t have to worry about taxes.

Legal Representation

When someone passes away, that person’s legal representative (executor or estate administrator) has to file a final income tax return and take care of many other tasks. This article can help you understand what to expect during the process.

The representative:

1. Advises the CRA, Revenu Québec (if appropriate) and Service Canada of the date of death.

2. Arranges transfers to a survivor, if applicable, of any of the following benefit and credit payments:

  • Goods and services tax/harmonized sales tax (GST/HST) credit,
  • Working income tax benefit advance payments, or
  • Canada child benefit

If the death occurred between January 1 and October 3, 2016, the deadline for filing the final return and paying any tax owing is May 1 this year, as the usual April 30 falls on a Sunday. If the death occurred between November 1 and December 31, 2016, the deadline is six months after the date of the death.

Determining Total Income

The representative must determine the deceased person’s income from all sources from January 1 of the year of death up to, and including, the date of death. The representative will probably need previous tax returns and may have to contact employers, banks, trust companies, stock brokers and pension plan managers. The final return can’t be submitted through NETFILE.

Tax returns must be filed for any years that the person didn’t file before the year of death. If an individual who pays tax by installments dies during the year, payments due on or after the date of death don’t have to be paid.

In some cases, cheques may arrive for the deceased person. You may have to return certain cheques, but payment will definitely have to be stopped for the Canada Child Benefit, the GST/HST/QST credit and other benefit cheques if applicable. Employee vacation pay is considered income for the deceased and unused sick leave is considered income for the estate or the beneficiary.

Taxes and Debts First

Like all other debts, income tax has to be paid by the estate first before beneficiaries can inherit. This is part of settling the estate. The notice of assessment for the deceased individual’s tax return is one of the documents the legal representative needs in order to get a clearance certificate and distribute property from the estate.

A clearance certificate officially states that all amounts for which the deceased is liable to the CRA have been paid — or that the CRA accepted security for the payment. If the representative doesn’t get a clearance certificate, he or she can be liable for any amount owed.

The certificate covers all tax years to the date of death. It isn’t a clearance for any amounts a trust owes. If there’s a trust, a separate clearance certificate is needed.

Account and Asset Transfers

In terms of transfers, any non-registered capital property may be transferred to the deceased taxpayer’s spouse or common-law partner.

If there are registered assets such as Registered Retirement Savings Plans (RRSP) or Registered Retirement Income Funds (RRIF), the deceased person is deemed to have received the fair market value of the plan’s assets immediately prior to death. This amount must be included in the income of the deceased unless the spouse or common-law partner or a dependent child or grandchild is entitled to the funds.

If an individual or individuals are designated as beneficiaries, the proceeds from the plan will be taxable in their hands in the year they receive the money unless it’s transferred into their own tax-deferred plans. If no one is a designated beneficiary, the plan’s value may still be taxable in the hands of family members or others if they’re beneficiaries of the estate. In addition, proceeds in the RRSP may also be able to be rolled over to a Registered Disability Savings Plans for the benefit of a financially dependent infirm child or grandchild.

Other rules apply if death occurred after the plans matured and began paying out annuities.

If the value of investments in a registered plan declines between the date of death and the time of final distribution to the beneficiaries, that decrease may be carried back and deducted against any income from the registered plans that was included on the final return. For this to happen, the plan:

1. Must be wound up by the end of the year following the year of death, and

2. Must have held no investments other than qualifying investments during the post-death period.

If the deceased individual had a Tax-Free Savings Account (TFSA), tax implications may vary. The account holder can name a spouse or common-law partner as the successor holder. In that case, the spouse or partner becomes the new holder, keeping the account’s tax-exempt status. This won’t affect the TFSA contribution room of the spouse.

If some other person is named as beneficiary, the account will no longer be a TFSA. Whether or not a beneficiary can be named in a TFSA contract depends on provincial legislation. The legal representative will determine what applies in your case.

Assets with named beneficiaries such as life insurance policies or RRSPs are usually excluded in determining the value of an estate for purposes of probate. It’s likely that a TFSA with a named beneficiary would also be excluded from probate. Again, this depends on provincial legislation.

If no successor holder is named for the TFSA, the proceeds of the account become part of the estate. Any proceeds from the account that a surviving spouse or common-law partner receives can be used to make an exempt contribution to the survivor’s TFSA without affecting the contribution room of the survivor, provided:

  • It’s done before the end of the first calendar year after death, and
  • It’s designated as an exempt contribution in the survivor’s income tax return for the year of the contribution.

If there’s no spouse or common-law partner named as successor holder, the TFSA won’t lose its tax-exempt status until the earlier of:

1. The time it’s completely paid out to beneficiaries and no longer exists, or

2. The end of the first calendar year after death.

Any payments to beneficiaries, including during this exempt period, will be taxable to them to the extent that the payments include income or capital gains earned after the death of the holder.

Final Word

Representatives may also use optional tax returns to declare certain types of income. Also, by claiming certain amounts more than once, splitting them between returns or claiming them against certain kinds of income, representatives may be able to reduce or eliminate the deceased’s tax payable. Contact your tax advisor for more information in your situation.

A Tax-Saving Strategy for Seniors

If you earn income eligible for the Pension Income Tax Credit, you or your spouse or common-law partner may cut your total tax bill by using an income splitting strategy.

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Tax Planning Points

Increasing your spouse’s income above a certain level or reducing your income below a certain level will result in a claw-back of OAS.

Increasing your spouse’s income to more than a certain government set level will trim the old age amount tax credit. Talk to your financial advisor

If your spouse is under 65, income from RRIFs, RRSP annuities, and other annuities do not qualify for the pension amount tax credit, while payments from pension plans do.

Under pension splitting guidelines, you may transfer as much as 50 per cent of the qualifying income to the tax return of a lower-income spouse or common-law partner. This allows a greater portion of family income to be taxed at a lower rate and generates a higher level of after-tax income.

Pension splitting sidesteps attribution rules, where transferred assets are generally attributed back to, and taxed in the hands of, the person making the transfer.

Who Is Eligible

Ottawa allows spouses or common-law partners to shift as much as 50 per cent of eligible pension income to the other as long as they:

  • Are married or in a common-law relationship in the year they choose to split the income;
  • Reside in Canada on December 31 or at the time of death; or
  • In the case of bankruptcy, reside in Canada on December 31 of the calendar year in which the tax year (pre- or post-bankruptcy) ends.

In addition, they cannot be living apart at the end of the year and cannot have been living separately for more than 90 days during the year because their relationship broke down. You may split income if you are living apart for medical, educational or business reasons.

The Effects of Pension Income Splitting

1. Spouses or partners who qualify for the pension income tax credit may claim the first $2,000 of qualifying income. Tax withheld from the pension, remitted to Canada Revenue Agency (CRA), and reported on the T4A slip, is also transferred to your spouse, in proportion to the amount of pension you transfer.

2. If the transferred income is taxable income from pension plans and superannuation plans, your spouse will be able to claim the pension income amount. If the income is the taxable portion of annuities, RRSP annuities and RRIF payments, your spouse must be older than 65 to claim the pension income amount of $2,000.

3. Pension income splitting will not affect tax credits such as the child tax benefit, the GST/HST credit, Canada Child Tax Benefit and related provincial or territorial benefits. However, the new tax benefit may affect individual tax credits, such as the age amount credit and the OAS claw-back.

4. If your spouse or partner is in a lower tax bracket than you, transferring pension income to your spouse will result in a lower combined tax bill, and may also result in a lower OAS claw-back. For low income seniors, it may boost your tax credit due to the age amount.

What Is Eligible

If you are age 65 years or older, the income that qualifies is the same as the income that is eligible for the Pension Income Tax Credit, which is available on as much as $2,000 of certain forms of pension income. This includes the total of:

1. Income from a Registered Pension Plan (RPP);

2. Annuities from a Registered Retirement Savings Plan (RRSP);

3. Payments from a Registered Retirement Income Fund (RRIF); and

4. The taxable portion of annuities from a superannuation or pension fund or plan.

For individuals under the age of 65, qualifying income comprises money from pension plans and superannuation plans, including foreign pensions.

Payments from RRSPs do not qualify, so if you are older than 65 and plan to withdraw money from your plan, talk to your tax accountant about the possibility of converting the RRSP to either an RRIF or an RRSP annuity. (There is no age restriction for the spouse or common -law partner who receives the income allocation.)

Other income that does not qualify includes payments from the Canada or Quebec Pension Plan, Old Age Security (OAS) payments, and Guaranteed Income Supplements (GIS).

The allocated pension income is treated as income of the lower-income spouse for all purposes under federal income tax rules. In effect, some couples may now receive a second pension tax credit where previously only one was available. In addition, splitting pension income could mean higher Old Age Security entitlements for some couples.

For those individuals eligible to split their pension with their spouse or partner, the degree of benefit will likely vary noticeably, so talk to your tax accountant to ensure that you are making the right decision and that you take the maximum benefits allowable.

Guarding Against Age Bias

With some rare exceptions, actions in the workplace based solely on an employee’s age are discriminatory and violate portions of these human rights laws in Canada: the Charter of Rights and Freedoms, the Human Rights Act and provincial and territorial statutes.

The Supreme Court of Canada has defined discrimination as: “A distinction whether intentional or not but based

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Testing for Undue Hardship

   There is an exception that allows some discriminatory actions if the cost of accommodating an employee would present an undue hardship for the company.

When making a determination of undue hardship, businesses should consider three primary factors: health, safety and cost. A company has to provide hard evidence that accommodation would cost too much or impose health and safety concerns.

The Supreme Court of Canada has listed other factors that may be considered, including:

  • The type of work performed.
  • Size of the workforce.
  • Interchangeability of job duties.
  • A financial ability to accommodate.
  • The impact on a collective agreement.
  • The influence on employee morale.

These factors and their importance vary from case to case. For example, a large corporation or a federal agency would likely find it hard to prove undue hardship on the basis of cost alone. Such organizations usually have the budget, size and flexibility to accommodate special needs at a lower cost. Among the factors considered when determining financial costs are:

  • The employer’s size and financial situation.
  • An ability to amortize costs or mitigate the hardship in some other way.
  • The number of people the accommodation would benefit.
  • The possibility of phasing-in major accommodations.
  • The availability of special budgets, reserve funds or external sources of funding, such as government funding or tax incentives.

Factors Not to Consider Include:

  • Customer or public preference based on prejudice or stereotyping.
  • Discriminatory objections, such as other employees’ objections to accommodations based on prejudice or attitudes inconsistent with human rights values.
  • Threatened grievances by other employees.

on grounds relating to personal characteristics . . . which has the effect of imposing burdens, obligations or disadvantages on [an] individual or group not imposed upon others or which withholds or limits access to opportunities, benefits and advantages available to other members of society.” (Andrews v. Law Society of British Columbia)

To help avoid charges of age bias, a company must keep the workplace free from discrimination and support the needs of older employees. To help protect your business from potential legal liability, get professional legal help setting up a policy.

According to the Ontario Human Rights Commission, here are some of the actions that could generally be considered to involve age discrimination:

  • Limiting or withholding transfers, promotions and training based on an employee’s age.
  • Using subjective criteria that could indicate ageism in determining whether to retain or terminate an employee.
  • Refusing to assign an older employee to certain jobs or requiring an undesired transfer.
  • Linking performance evaluations to age by either subjecting older employees to more scrutiny or evaluating based on a perception that a person will soon retire.
  • Failing to recall someone from a layoff because of age.
  • Targeting older workers during a downsizing, reorganization or amalgamation.
  • Letting an employee go because the person is eligible for pensions.
  • Retaliating or threatening retaliation against any individual who is the alleged victim of age discrimination, files a complaint or testifies in a discrimination complaint.
  • Failing to accommodate older workers unless that would create undue hardship for your company. (See right-hand box for how to gauge undue hardship).

Age discrimination can also be found in the recruitment and hiring process, so it’s prudent to take the side of caution and avoid:

  • Direct or indirect statements relating to age in job advertisements.
  • Age-related questions in job applications other than to determine that a candidate is old enough to hold a full-time position.
  • Interview questions relating to age unless: the job is aimed specifically at persons 65 years of age or older; the hiring organization is a special interest group serving a particular age group; age is a bona fide occupational requirement of the job; or the question is necessary to determine eligibility for a special program to promote age equality.
  • Statements about your company’s need to “rejuvenate” its work force.
  • Comments while evaluating candidates that refer to the applicant’s appearance, adaptability, or ability to be trained based on age, or concerns that the applicant will be too costly to hire because of age.
  • Evidence that there is a pattern of preference for hiring younger workers. For example, if a significantly younger candidate is hired whose qualifications are no better than an older candidate for the same job, or a candidate is turned away due to a perceived “lack of career potential” or experience that was too “diversified” or “specialized.”

Certain types of differential acts are not generally considered discriminatory when based on age, such as:

  • Legal restrictions on child employment.
  • Affirmative action programs for older workers.
  • Retirement plans based on minimum age plus years of service.
  • Policies aimed at easing the transition into retirement.

(In a future article we will look at whether mandatory retirement is discriminatory.)

Keep an Eye Out for Abusive Entitled Employees

thmb_office_staff_silhouette_black_white_gold_bzWhen Communication Can Backfire

If you think there’s been an increase in employees with an entitlement mentality at your company, you may be right. It’s a trait that seems to be more prevalent as increasing numbers of Millennials (also called Generation Y) enter the workforce.

Up and Coming

Management Generation

Just ahead of Gen Y is Gen X, the group that will succeed Baby Boomers as managers over the next several years.

So how does that generation compare to current management? Research shows that Baby Boomers outrank them in business knowledge, are more likely to apply functional and technical expertise on the job, and are better at coaching, assisting personnel development and managing project execution.

But the Xers have the upper hand when it comes to analysis, strong work commitment and the inclination to strive to self-improvement. Some predict that Generation X managers will complete a shift to a more collaborate style of management that tries to generate a collective buy-in to achieve goals.

Baby Boomers are still mostly in charge, but in many ways, they feel disillusioned by the changes they see in younger workers. They see younger workers treating jobs as though they were both an entitlement and disposable.

Those same younger workers see older managers and supervisors as rigid and wonder why, in this increasingly mobile world, they remain in jobs that are no longer satisfying.

And this can create friction on the job. Research shows that employees with a sense of entitlement have overblown views of their abilities and the recognition they should receive. These “entitlement-minded” individuals can create numerous problems for co-workers and supervisors. They are also likely to abuse their colleagues and suffer from job frustration.

These psychologically entitled employees tend toward:

  • Unethical behavior and conflict with supervisors;
  • High pay expectations;
  • Low job satisfaction, agreeableness, agreeableness, emotional stability and empathy;
  • High levels of turnover intent; and
  • Self-centered behavior.

Exacerbating the problem: Trying to communicate more with these employees is the wrong approach. In fact, it can backfire. Trying to improve the entitlement-minded employees’ behaviour by increased communication and feedback may aggravate their frustration and abusiveness.

On the face of it you would think the most effective approach would be to boost the frequency of evaluations and amount of job-related information. But this can have the opposite effect and increase the job-related frustrations reported by these employees.

Why? Because evidence suggests that psychological entitlement is a perception that can distort the messages conveyed in supervisor communication. Thus, these employees can perceive evaluation as criticism, reject any information that doesn’t match their entitled worldview and perceive high levels of supervisor attention as a reaffirmation of their value.

How do you spot psychologically entitled individuals among your employees and potential hires? Look for people who:

  • Exhibit a tendency to take credit for good outcomes and blame others when things go wrong.
  • Act as if they are generally superior to their coworkers.
  • Perform a variety of jobs with different challenges and skills and vocally affirm that they were valuable contributors to each, even if actual performance doesn’t support the claims.
  • React negatively when they do not receive the praise and annual raises they think they deserve.
  • Feel unappreciated and ultimately unmotivated when they receive rewards commensurate with their actual efforts and abilities.

And how do you deal with them? Here are six practical suggestions and insights:

1. Remove as much ambiguity as possible. Document who performs specific tasks so credit and blame are accurately placed;

2. Ensure clarity about who is responsible for what;

3. Guard against behaviours that smack of “office politics” by entitlement-minded employees;

4. Keep an eye out for abusive behaviour and take steps to prevent it;

5. Consider if it would be cost-effective and successful to send entitled employees for professional counseling and coaching; and

6. Fire the errant employees if you determine that there is no solution to the problem that is not too costly in terms of time and money.

Segal LLP invites you to the 2017 Tax Series for Accountants and Finance Professionals

Wednesday February 8, 2017
Wednesday March 8, 2017

Novotel Toronto North York

Presented by:
Howard Wasserman, CPA, CA, CFP, TEP
Vern Vipul, LLB, MTax

Agenda

Wednesday, February 8, 2017

  1. Income tax and HST: Common Risk Areas and Issues Accountants Need to Know.
  2. Use of Losses: Everything You Want to Know
  3. Trusts: New focus by CRA: Planning consideration. What you need to be aware of plus

Wednesday, March 8, 2017

  1. Small Business Deduction: How is it allocated now? Special focus on PC’s.
  2. Goodwill and ECE: What Happens Now?
  3. Partnerships: What do we do now? How to wind up if necessary

Speakers

Howard Wasserman, CPA, CA, CFP, TEP

Howard Wasserman has consulted on Canadian and International tax matters for over 20 years and joined Segal’s rapidly growing Tax Group in 2016. He brings a broad base of expertise and experience with owner managed businesses including estate planning, international tax strategies, post mortem planning, corporate reorganizations, mergers, acquisitions, and business purchase and sale. Howard has a successful track record presenting appeals, managing tax negotiations, and presenting voluntary disclosures to CRA. He is a member of CPA Ontario, CTF, CFP, STEP and is a regular participant at the Canadian Tax Conference.

Vern Vipul, LLB, MTax

Vern is exclusively involved in providing commodity tax services to Segal’s clients, including GST/HST, PST, QST and a number of other indirect taxes. Vern has written extensively in the area of indirect taxation and has published articles in various publications, such as the Canadian Tax Foundation’s Canadian Tax Highlights and the Ontario Bar Association’s OBA Taxation Law Newsletter. Vern has spoken extensively on indirect taxation topics and represents clients in tax audits and appeals before the Canada Revenue Agency, and has represented clients at the Tax Court of Canada.

Venue and Registration

$90 includes two sessions (CPD eligible), full breakfast and underground parking. (HST included)

Novotel Toronto North York Johnson Room (2nd Floor)
3 Park Home Avenue North York,
Ontario M2N 6L3

BY TTC: Yonge Subway, North York Centre
BY CAR: Novotel North York

7:45 am Registration, Networking and Buffet Breakfast
8:30 am – 10:00 am Seminar and Q&A

Please RSVP no later than January 29th 2017 – Seating is Limited
To Donna Aydinli: daydinli@segalllp.com
Phone: 416-774-2413