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Tag: Estate taxes

  • Taxes halved their inheritance. Could anything be done? – MoneySense

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    It is a story about two young adults outraged by the amount of wealth lost to taxes—$659,000—when their parents, in their early 60s, both passed away within a year of each other. 

    I can sympathize with the children, thinking they were going to get this much money only to find they were getting substantially less. Without understanding why, I’m sure it was confusing and hurtful. Let’s walk through why the tax was so high and what if anything could have been done.

    Their father died, after their mother, in December, so he had a full year of income, which I’m assuming was $175,000. There was an RRSP worth $715,000, and I will assume capital gains on the cottage of $850,000. This combination resulted in taxes of about $659,000.  

    Hard to fix after the fact

    What could they have done to lower the amount of tax? In this case, when death is sudden, there is not much you can do. The father’s salary is taxable and there is no getting around that.  

    The same goes for the RRSPs; there is no getting around the tax. The children were named as beneficiaries of the RRSPs, which saved probate fees, but you can’t transfer an RRSP to an adult child like you can a spouse. The funds are withdrawn and the full value goes to the children, but the estate must pay the tax on the value of the RRSP. Regardless, the children end up paying the tax. 

    It is possible to reduce the amount of capital gains paid by designating either the house or cottage as the primary residence and naming the property that has appreciated the least as the secondary property. If there is a bright side to capital gains tax, it is that 50% of your gain is tax-free, so on a $850,000 gain you only pay tax on $425,000.

    When you add it all up—salary $175,000, plus $715,000, plus $425,000 taxable capital gain—that is taxable income of $1,315,000 and tax of $659,000 or 50% of the total income.

    This is why it looks like the government took all their parents’ money. The children inherited the house and cottage and the only cash money they had to pay the taxes was the money from the RRSP. Out of $715,000, they were only left with about $56,000 between the two of them to cover the funeral, accounting, and legal fees, and to maintain the properties until one or both could be sold. 

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    The takeaway: plan for many outcomes

    I’m sure when their parents did their planning, if they did, they assumed they might live to age 90, drawing down on their RRSP/RRIF over time to minimize the tax. They may have sold their principal residence and moved to the cottage, designating it as the principal residence. This would have deferred—and, with inflation, shrunk—the capital gain. They may never have considered what the situation would look like if the unexpected happened.

    If they had, they may have considered purchasing life insurance. Life insurance is for “just in case” the unexpected happens. They could have purchased some term insurance with an option to convert to permanent insurance if taxes continued to be an estate issue. The insurance doesn’t minimize the tax, but it provides the children with tax-free money right away—money that gives them time to pause and think rather than feel under pressure to sell properties at a time that may not be opportune.

    This story serves as a good reminder that when doing your planning, consider what the picture may look like if the unexpected happens and then decide if you want to do anything about it. In this case the parents may have been aware, and understood the tax implications, if they both passed away early. Maybe they felt the children would just sell one or both properties and everything would be good. For the adult children this was unfamiliar territory with a big learning curve.  

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    About Allan Norman, MSc, CFP, CIM


    About Allan Norman, MSc, CFP, CIM

    With over 30 years as a financial planner, Allan is an associate portfolio manager at Aligned Capital Partners Inc., where he helps Canadians maintain their lifestyles, without fear of running out of money.

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    Allan Norman, MSc, CFP, CIM

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  • You have to sell a cemetery plot—will you owe capital gains tax? – MoneySense

    You have to sell a cemetery plot—will you owe capital gains tax? – MoneySense

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    Many non-financial assets depreciate in value. Cars, furniture and other such assets tend to be worth less over time, and they are generally not subject to capital gains tax. However, there may be exceptions, such as collector cars, jewellery, artwork or antiques. You may have to report a capital gain on the sale of personal-use property that has increased in value.

    To calculate the capital gain—or loss, as the case may be—there are three rules:

    1. If the adjusted cost base (ACB) is less than $1,000, the ACB is considered to be $1,000.
    2. If the sale proceeds are less than $1,000, the proceeds are considered to be $1,000.
    3. If both are less than $1,000, there is nothing to report.

    Capital gains on personal-use property

    As a result of these three rules, personal-use assets are usually a non-issue for taxes. In rare instances where a taxpayer profits, the numbers need to be into the thousands to matter.

    Interestingly, when someone buys a burial plot, they actually buy the right to bury, or inter, someone in the plot. That is, the buyer becomes an “interment rights holder,” but they do not own the land itself. Despite this, the empty cemetery plot has value for someone else who will inherit it or buy it.

    When the deceased passed away, they were deemed to sell all of their assets, Brian. This includes the cemetery plot. So, capital gains tax would be payable on their death for any appreciation in value.

    If you, as executor, sell the plot shortly thereafter, the value will likely be similar. If there’s a profit between the time of their death and the sale of the plot, this could give rise to a capital gain for the estate.

    Selling a cemetery plot as part of an estate

    It bears mentioning, Brian, the cemetery plot may have some restrictions related to its sale. Keep in mind the land is not owned. The owner holds the right to be buried there. And the cemetery may or may not permit the private sale of interment rights.

    Since the plot has a value, it may also be subject to probate or estate administration tax, just like any other asset passing through the estate of the deceased. You should speak to the cemetery, Brian, about the rules around selling the rights to the plot. And consider the tax and probate implications of the individual’s death and the subsequent sale of their vacant cemetery plot.

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    Jason Heath, CFP

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  • How executors get paid in Canada – MoneySense

    How executors get paid in Canada – MoneySense

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    What is an executor?

    An executor is a person named in your will who will be responsible, after you die, for making sure that your assets are distributed according to your wishes and that your estate is settled properly. This includes a wide range of activities, from filing a final tax return and cancelling your credit cards to giving away your jewellery or collectibles, and selling your home and investments.

    Read the full definition of executor in the MoneySense Glossary.

    How much are executors paid?

    Executor compensation in Canada is not standardized, and the regulations governing it are determined by each province. As a result, there can be considerable differences in the amount and rules for compensation from one province to another. Here is an overview of some key variations: 

    • Ontario employs a system where the executor’s compensation is determined as a percentage of the estate’s total value. The percentage is outlined as 2.5% on capital receipts, 2.5% on capital disbursements, 2.5% on revenue receipts and 2.5% on revenue disbursements. In the end, it works out to be essentially 5% of the estate’s total value.
    • Alberta follows a tiered percentage structure. Executors are entitled to between 3% and 5% on the first $250,000 of the estate’s value; and 2% to 4% on the next $250,000; and then between 0.5% and 3% on the balance.
    • In contrast, Quebec has executor compensation billed by the hour which is typically set at $45 to $65 per hour of work completed during the estate’s administration process.

    The pros and cons of allowing for executor compensation

    As with everything in life, there are good and bad to certain decisions. When contemplating whether or not to take executor compensation, consider the following benefits and pitfalls:

    Pros

    • Incentive to Act: Executor compensation can serve as an incentive for individuals to take on the role of an executor. Settling an estate is a time-consuming and often emotionally challenging task, and compensation can make it more attractive.
    • Financial Recognition: Serving as an executor often entails expenses and a time commitment. Compensation helps recognize and alleviate some of the financial burdens involved, especially if time off work is required of the individual.
    • Fairness: Compensation ensures that executors are fairly rewarded for their efforts, irrespective of the estate’s value. This encourages people to take on the role, regardless of the estate’s size.

    Cons

    • Conflict of interest: Executor compensation can create conflicts of interest. The executor may be motivated to prioritize their own financial gain over the beneficiaries’ interests. This can lead to disputes and litigation.
    • Complexity: The varying rules and regulations across provinces can make executor compensation complex to navigate. Executors may require legal or financial advice to ensure they are adhering to the correct guidelines and calculations.
    • Emotional toll: The focus on compensation may overshadow the emotional toll and responsibilities that come with the role of an executor. It may lead individuals to take on the role primarily for financial gain, rather than out of a sense of duty.

    Does an executor pay tax on the income they earn?

    In Canada, executor’s compensation is generally considered taxable income. This means that the amount received as compensation is subject to income tax. Executors are required to report this income on their personal tax return for the year in which they receive the compensation.

    The income tax rate applied to executor compensation depends on the province or territory in which the executor resides. Different provinces have different tax rates, which can significantly impact the final amount an executor retains after taxes. Additionally, executors who receive compensation must ensure they receive a T4A slip from the estate, indicating the total compensation they’ve received. Think of the estate becoming the employer of the executor, and the payment made to the executor is like a salary for the work they have done.

    Requirements and compliance for executors

    Executors must maintain accurate records of all financial transactions related to the estate, including the compensation they receive. These records should be kept for a specific period, as beneficiaries and even tax authorities may request them for verification. Estate accounting statements are the financial story of the estate’s administration and the most powerful tool in the executor’s arsenal when making a claim for compensation. While there’s not a mandatory requirement to formally pass accounts through the court, it is still a legal duty of the executor to maintain and record the financial transactions of the estate and provide them to the beneficiaries of the estate.

    What do professional executors do?

    When we consider that most executors do not have previous experience in administering an estate, the pains and troubles could be quite severe for someone in the role for the first time. In a poll conducted by Bank of Montreal in 2011, executors reported difficulties with the following categories:

    1. Administrative issues/complications (47%)
    2. Emotional issues/complications (31%)
    3. Legal issues/complications (26%)

    It’s reasonable to think that these categories and issues have not changed much over the course of the last 13 years, bringing the importance of working with professionals even more to the forefront. Whether it’s deciphering the varying provincial rules, navigating the complexities of taxation or ensuring compliance with legal requirements, professional guidance can provide clarity and peace of mind.

    Executors who seek the assistance of legal, financial or tax professionals can make informed decisions, reduce the risk of errors and ensure that they fulfill their duties with precision and integrity. By doing so, they not only protect their interests but also safeguard the interests of the estate beneficiaries, ultimately upholding the deceased’s wishes with diligence and transparency.

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    Debbie Stanley, TEP, MTI

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  • Rent or buy? Here’s how to make that decision in the current real estate market

    Rent or buy? Here’s how to make that decision in the current real estate market

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    Choosing whether to rent or buy has never been a simple decision — and this ever-changing housing market isn’t making it any easier. With surging mortgage rates, record rents and home prices, a potential economic downturn and other lifestyle considerations, there’s so much to factor in.

    “This is an extraordinarily unique market because of the pandemic and because there was such a run on housing so you have home prices very high, you also have rent prices very high,” said Diana Olick, senior climate and real estate correspondent for CNBC.

    By the numbers, renting is often cheaper. On average across the 50 largest metro areas in the U.S., a typical renter pays about 40% less per month than a first-time homeowner, based on asking rents and monthly mortgage payments, according to Realtor.com.

    In December 2022, it was more cost-effective to rent than buy in 45 of those metros, the real estate site found. That’s up from 30 markets the prior year.

    How does that work out in terms of monthly costs? In the top 10 metro regions that favored renting, monthly starter homeownership costs were an average of $1,920 higher than rents.

    But that has not proven to be the case for everyone.

    Leland and Stephanie Jernigan recently purchased their first home in Cleveland for $285,000 — or about $100 per square foot. The family of seven will also have Leland’s mother, who has been fighting breast cancer, moving in with them.

    By their calculations, this move — which expands their space threefold and allowing them to take care of Leland’s mother — will be saving them more than $700 per month.

    ‘You don’t buy a house based on the price of the house’

    “You don’t buy a house based on the price of the house,” Olick said. “You buy it based on the monthly payment that’s going to be principal and interest and insurance and property taxes. If that calculation works for you and it’s not that much of your income, perhaps a third of your income, then it’s probably a good bet for you, especially if you expect to stay in that home for more than 10 years. You will build equity in the home over the long term, and renting a house is really just throwing money out.”

    Mortgage rates dropped slightly in early March, due to the stress on the banking system from the recent bank failures. They are moving up again, although they are currently not as high as they were last fall. The average rate on a 30-year fixed-rate mortgage is 6.59% as of April — up from 3.3% around the same time in 2021.

    But that hasn’t significantly dampened demand.

    “As the markets kind of bubbled in certain parts of the country and other parts of the country priced out, we’ve seen a lot of investors coming in looking for affordable homes that they can buy and rent,” said Michael Azzam, a real estate agent and founder of The Azzam Group in Cleveland.

    “We’re still seeing relatively high demand” he added. “Prices have still continued to appreciate even with interest rates where they’re at. And so we’re still seeing a pretty active market here.”

    Buying a home is part of the American Dream

    The Jernigans are achieving a big part of the American Dream. Buying a home is a life event that 74% of respondents in a 2022 Bankrate survey ranked as the highest gauge of prosperity — eclipsing even having a career, children or a college degree.

    The purchase is also a full-circle moment for Leland, who grew up in East Cleveland, where his family was on government assistance.

    “I came from a single-mother home who struggled to put food on the table and always wanted better for her children … it was more criminals than there were police … It is not the type of neighborhood that I wanted my children to grow up in,” said Jernigan.

    The new homeowner also has his eye on building a brighter future for more children than just his own. Jernigan plans to purchase homes in his old neighborhood, renovate them and create a safe space for those growing up like he did.

    “I’m here because someone saw me and saw the potential in me and gave me advice that helped me. … and I just want to pay it forward to someone else” Jernigan said.

    Watch the video above to learn more.

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