Canada’s tax policy does not require the periodic reporting of gains or losses on property throughout the continuous ownership. It is not until the property is sold or the owner passes away, that the gain or loss is reported for tax purposes.
To be clear, this discussion does not concern a principal residence. The disposition of a principal residence does not trigger any tax consequence as a matter of tax policy for a living or deceased person.
Upon death, particular tax rules apply to the estate of the deceased regarding property that are not applicable to a property owner who sells.
The property of a deceased taxpayer is deemed to have been disposed the day before a person’s passing for an amount equivalent to the fair market value (FMV), triggering a capital gain or loss, one half of which is included in the estate’s tax return.
A simplified calculation of a capital gain or loss involves subtracting the original cost of the property from the FMV. Having said this, sometimes events occur over time that add or subtract value to or from the original cost. This is referred to as the adjusted cost base (ACB). If this is the case, then the ACB is deducted from the FMV to determine the capital gain or loss.
Take note of the 50% inclusion rule for capital gains. In the world of taxation, this is good news since other types of income are included at 100%. Canada’s tax policy requiring only 50% of the gain to be included is arguably incentive for people to invest. At the same time, a capital loss also has an inclusion rate of 50%.
So once the estate is settled, the new “cost” of a property or its funds are transferred to a beneficiary at the prescribed FMV amount. This amount is now referred to as the original cost for that beneficiary.
However there is an exception to this when a deceased spouse directly transfers or “rolls over” a property to the surviving spouse. In this case, there is no capital gain or loss reported by the estate, and the original cost remains the historical amount paid at the time of the original acquisition of the property – in essence a deferral of reporting the capital gain or loss.
Having said this, an executor is allowed to exempt property from a rollover. This can be advantageous. For example if the property has a capital loss, this loss could be used immediately to reduce current taxes. Conversely if the estate itself already has a capital loss carry forward, then triggering a capital gain will use this available loss. Or there may be the availability of the lifetime capital gains exemption.
As final comment, generously Canada’s tax policy allows capital losses from the year of death plus any carry forward capital losses to be netted against not only capital gains but against any form of income in the year of death, and also for the year immediately preceding death – important tax planning tools for an executor.
Death and taxes, as they say.
Ron Clarke has his MBA and is a business owner in Trail, providing accounting and tax services. Email him at ron.clarke@JBSbiz.ca. To read previous Tax Tips & Pits columns visit www.JBSbiz.net.