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Estates - Capital Gains



Disclaimer

The following is no substitute for advice provided by a lawyer specifically for you. It is intended only to help you understand that advice. No responsibility is taken for any problems arising except due to paid legal advice.

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Lawyers are not accountants. Tax advice should be obtained from accountants. Where an accountant has a dispute with Revenue Canada, they should retain a lawyer for handling the dispute. Lawyers' work often requires an awareness of the issues, so that referrals to an accountant can be made.

What is a Capital Gain

A capital gain is the increase in value from how much something cost to how much it is disposed for. 'Disposed' is essentially when the ownership changes, by sale, or gift, or whatever. Such a gain was not taxed before 'valuation day' (V-Day) in 1971, so a gain to that point is not taxable.

'Deemed Disposition'

Capital gains must be considered in estates, because the Income Tax Act (Canada) imposes taxes as though there had been a 'sale' to the beneficiaries at fair market value at the date of death. That ensures that all the taxes that the deceased has been postponing get collected.

Roll-Overs

But, Revenue Canada permits certain exceptions. Under an exception, which is a 'roll-over', the recipients can take the property at the 'adjusted cost base' ('book value', "A.C.B.") of the asset instead of fair market value which is usually higher. That enables them to postpone paying any capital gains tax, but not avoid it. When they finally dispose of it, there will be a 'gain' measured from the lower A.C.B., so the gain will be bigger.

Some available rollovers include:

See your lawyer or accountant for advice on what may be available and the requirements to qualify. The gift must have been properly drafted to qualify.

Whether to Rollover

Sophistication of Beneficiaries

It is not always desirable to use an available rollover. If the recipient is unsophisticated, the eventual payment of the unreduced tax may come as a disastrous surprise. Further, an early taxation may be desirable to take advantage of special tax opportunities available to the disposer (deceased).

Using Up Deceased's Exemptions

Until February of 1994, there was a life-time exemption of capital gains which would gradually get used up. There were two amounts, depending on what type of asset and taxpayer. Most of the exemptions were eliminated after February of 1994, but as of the time of writing (1995) there was still an exemption available for farm land and the principal residence.

Recaptured Depreciation

If any exemption is still available to the deceased, it is better to have the gain taxed as a gain to the deceased (no rollover). However, if the deceased claimed depreciation on the asset, then the gain is first applied to 'recapture' all that depreciation as 'income' (i.e., no exemption on that portion of the gain), so, depending on the amount of the depreciation, a rollover may be undesirable.

Valuation

If the value is expected to drop, or even to rise slowly, a roll-over becomes more desirable. If the value is unexpectedly low, declaring the gain may be more desirable.

If in fact it was a capital loss, it may be applied against the deceased's capital gains or other income in the year of death or the immediately preceding 3 years. Losses by the estate in its first year may be carried back and applied to capital gains in the year of death.

The Return must declare the original value (or the V-Day value) and the value at the date of disposition. However, Revenue Canada must accept those values.

The best way to justify such a value to Revenue Canada is by comparing it to a similar (recent and equivalent) transaction of your own with someone with whom you have no close ties (a person "at arm's length", as Revenue Canada says). If that is not available or truly comparable, then comparable sales by other people must be used.

Appraisals, while costly, may be desirable.

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