William Khalilieh, CPA, CA
Providing Accounting and Tax Solutions to Small Businesses in the GTA

Tax minimization

Federal Budget 2016 Analysis

On March 22, 2016, Finance Minister Bill Morneau delivered his first budget.  Below are the key items that will impact your Toronto personal taxes and your small business.

Items Regarding Toronto Personal Taxes

New Canada Child Benefit

Starting July 2016, the Current Canada Child Tax Benefit and Universal Child Care Benefit is being replaced with a new Canada Child Benefit (CCB).  The CCB is non-taxable and the amount received will depend on the number of children you have and your family income. Families will receive $6,400 per child under age of 6 and $5,400 per child aged 6 to 17. An additional amount of $2,730 per child will be available if your child is eligible for the disability tax credit. However, these amounts will be phased out for family incomes over $30,000. 

Phase-Out Rate (%)

Number of children

$30,000 – $65,000

Over $65,000

1

7%

3.2%

2

13.5%

5.7%

3

19.0%

8.0%

4 or more

23.0%

9.5%

Elimination of Income Splitting Credit

Previously, a maximum $2,000 non-refundable tax credit was available that allowed one spouse to notionally transfer up to $50,000 of taxable income to the other spouse. This credit is eliminated in 2016 and future years.

Teacher and Early Childhood Educator School Supply Tax Credit

If you are a teacher that pays for supplies in the course of your job, a $150 tax credit ($1,000 of supplies x 15% tax rate) will be available for supplies bought on January 1, 2016 or later. Your employer will have to certify this credit.

Elimination of Education and Textbook Tax Credits

The federal government will eliminate the current credits of $70 per month for full-time students ($465 per month x 15%). Unlike the Ontario budget, federal tuition credits for actual tuition paid will remain intact.

Elimination of Children’s Fitness and Arts Tax Credits

These $150 and $75 credits ($1,000 and $500 respectively) will be cut in half in 2016 and then eliminated in 2017. This elimination mirrors the recent Ontario elimination of their equivalent that was dependent on this amount.

Use of Mutual Fund Corporations to defer sales for Toronto personal taxes eliminated

Mutual funds are either setup as corporations or setup as trusts. Currently, if you exchange one mutual fund trust for another mutual fund trust, this exchange is taxable. While if you exchanged one class of a mutual fund corporation for another class in the same corporation, it was not a sale for tax purposes. The budget proposes that if you do an exchange after September 2016, the exchange will be taxable. For more information about mutual fund investing, please see my previous article about mutual funds that can be accessed here.

Sales of Linked Notes

Financial institutions sell debt products that are linked to the performance of an asset, typically a stock market index. Currently, the sale of these products before maturity would be treated as a capital gain which is taxed lower than interest income. The budget proposes to tax any gains on the sale of these products after September 2016 as interest income.

Business Tax Items

The good news here is that most of the feared changes implied in Mr. Trudeau’s comments in previous election were not implemented. This consisted of making the small business deduction harder to claim for business owners, similar to what the Quebec government has done. Fortunately, the government has only targeted amendments for structures designed to get multiple small business deductions. As well, structures used to split income with family members were also spared in this budget.

Small Business Tax Rate Reductions Cancelled

The small business tax rate will remain at 10.5% instead of going down to 9% by 2019, combined with the Ontario government keeping its rate constant. The current Ontario small business tax rate will be at 15% for the foreseeable future.

New Eligible Capital Property Regime

Currently, 75% of the cost of eligible capital property (goodwill on buying a business, incorporation costs, other unlimited life assets) are deprecated for tax purposes at a rate of 7% per year on a declining balance basis. Also, 75% of any sales of this type of property (a) reduce the cost to zero, (b) “recapture” any previous deductions and then the difference is considered to be business income that is included as income at a rate of 50% similar to capital gains.

This budget proposes to eliminate this system and have a new CCA class where 100% of the amount is deductible and depreciated at 5% on a declining balance basis. There will be transition rules to this new system and special rules for goodwill. To help the majority of taxpayers who have small balances, the greater of $500 and the amount otherwise allowed will be able to be claimed for expenses incurred before 2017. As well, up to $3,000 of incorporation costs can be written off immediately rather than enter this new regime.

Life Insurance Planning Curtailed

The government has closed two “loopholes” using this type of planning. First, if a person transfers a policy to their corporation, the person would only pay tax on the cash surrender value over their cost base but could get the fair value of the policy out tax-free. The government has now said that all transfers will be done at fair value for sales done after today.

The other type of planning being curtailed is to prevent “abuses” undertaken with split dollar policies. Life insurance proceeds are tax-free when received by individuals. When received in a corporation, the use of the “capital dividend account” ensures that life insurance remains tax-free. However, the tax-free amount has to be reduced by the tax cost of the policy. Since the cost of the policy in a split dollar situation is with another entity, the reduction to the capital dividend account would not occur. This budget proposes to eliminate such plans.

HST Items

Medical Devices

Insulin pens and insulin pen needles, are now zero-rated for HST purposes, in other words, businesses that supply them can claim HST refunds but customers do not have to pay HST, similar to food.

Follow-up from 2015 Budget

The government is going to implement the following items:

  • Rules converting tax-free intercorporate dividends into capital gains
  • Repeated failure to report income penalty
  • Relief of HST for feminine hygiene products

The government will not be implementing:

  • Any changes for businesses who run campgrounds or self-storage units
  • Changes to provide relief from capital gains for individuals who donated the cash from the sale of their business or real estate to a charity within 30 days of sale

This analysis is intended as a brief overview and does not include all of the details to ensure you can take advantage of these rules as applicable.   Please contact me to see how these changes can impact your Toronto personal taxes and your business. 

William Khalilieh is a Chartered Professional Accountant, based in Oakville, Ontario, who provides practical tax and accounting solutions to individuals and their businesses in the Greater Toronto Area.


Are you selling your company’s shares to claim the capital gain exemption? Don’t forget to save money for taxes

You have worked hard to build a successful Toronto small business and you have found a buyer who is willing to buy the shares of your company.

You have the cheque in your hand and you are deciding what you should do next.   Before you start spending your hard-earned money, you better save some money to pay off your tax bill that’s due next April.

Now you may be thinking: “Wait, what tax bill?!?  I thought selling my company was supposed to be tax free.  That’s what I keep hearing on TV.”

While the first $813, 600* of selling your Toronto small business shares are tax free, you will be subject to the Alternative Minimum Tax.

You may be asking: “What is this Alternative Minimum Tax? And why have I never heard of it before?”

The Alternative Minimum Tax is basically the government’s way of ensuring Canadians pay tax even though many can take advantage of various tax deductions and credits.  Many Toronto small business owners have never heard of it before because it only applies in relatively rare and unique circumstances.  Below I will offer an example of a case in which the Alternative Minimum Tax may apply.

In order to estimate your potential tax bill, do the following:

1. Take your gain (up to $813,600) x 30%

2. Take the result from 1 and subtract $40,000.

3. Take the result from 2 and multiply by 15%

4. Take the result from 3 and multiply by 1.35 (to add provincial taxes)

As example, say you have an $800,000 gain on the sale of your company shares.  Your conservative tax estimated bill would be calculated as follows:

($800,000 X 30% – 40,000) x 15% x 1.35 = $40,500

Therefore, you will need to have to keep this cash available to pay off CRA on April 30th, the year after you sell your business.

If you have continued income over the next 7 years, the $40,500 will be used as a reduction for future tax bills. However, you can only claim the reduction if your regular tax bill is in excess of your AMT bill each year.  To demonstrate this, I will continue from the example given above. Say you got a consulting contract from the purchaser of your business for $200,000 for 2016, which generates a $60,000 tax bill.  You would only owe $19,500 in 2016 as the $40,500 is used as a “credit” against the $60,000 worth of tax that you owe in 2016.  In other words, under the “regular” tax system you would have paid $0 in 2015 and $60,000 in year 2 for total taxes of $60,000.   Under the AMT system, you paid $40,500 in 2015 and $19,500 in 2016 for total taxes of $60,000.  While this example oversimplifies what can be an extremely complex process, it illustrates that the AMT is generally a prepayment of tax.

If you have no income over the 7 years following the sale of shares, the $40,500 becomes your tax bill on the sale of your company and will not be credited to you.

Therefore, it is very important to factor in this tax bill when selling your Toronto small business.  Please contact me to discuss options on how to manage this tax cost. 

William Khalilieh is a Chartered Professional Accountant, based in Oakville, Ontario, who provides practical tax and accounting solutions to individuals and their businesses in the Greater Toronto Area.

* Yes, the $813,600 is an odd number.  Here is how it arises: The 2014 Budget raised the capital gain exemption for Toronto small business shares from $750,000 to $800,000 and the $800,000 is now indexed for inflation.  The 2015 figure is $813,600 ($800,000 x 1.7% inflation factor prescribed by tax law).

 

 

 

Ontario’s Retirement Pension Plan: Job-killing Tax or Opportunity?

On August 11, 2015, the Ontario government released more details regarding the Ontario Retirement Pension Plan (“ORPP”). As it is my job as an Oakville Chartered Professional Accountant to understand the ways that the ORPP and other government initiatives can affect my clients, I have been asked to clarify the consequences and details of the ORPP. Some of the details that were released to the public include:

  • Self-employed individuals will not be covered under the ORPP; the government looking for options to allow self-employed individuals to participate
  • For businesses to be exempt from the ORPP they will either need to:
    • Provide a Defined Benefit (DB) plan with a minimum benefit accrual rate of 0.5% (for instance, OMERS’ rate is 1.85%)
    • Provide a Defined Contribution (DC) plan with minimum contribution of 8% with at least 4% coming from employers
    • Provide a pension plan that meets the ORPP’s comparable threshold tests
  • Companies with 50-499 employees that currently do not have a plan and who are not exempt will start making contributions on January 1, 2018:
    • 1.6% (50% from employer, 50% from employee) in 2018
    • 3.2%(50% from employer, 50% from employee) in 2019
    • 3.8%(50% from employer, 50% from employee) in 2020
  • Companies with 50 or fewer employees that currently do not have a plan and who are not exempt will start making contributions on January 1, 2019:
    • 1.6% (50% from employer, 50% from employee) in 2019
    • 3.2%(50% from employer, 50% from employee) in 2020
    • 3.8%(50% from employer, 50% from employee) in 2021

Some have viewed this as a “job-killing” tax, similar to the Canada Pension Plan (CPP) and Employment Insurance (EI). Like the CPP and EI, the cost increases as the number of employees increase (discouraging new hires) and as salaries increase (discouraging raises). There is also time and/or monetary costs in dealing with the administrative burden of the ORPP or the equivalent setup by the company. 

However, as an Oakville Chartered Professional Accountant, I can help you find the benefits of the ORPP for your company. Companies can use the introduction of the ORPP to:

  • Introduce/amend pension plans to attract/retain employees to remain with their organization
  • For companies with multiple owners, allow owners to have their own pension plan as part of their overall savings strategy

Given these new requirements, it is important you think of your pension strategy in the coming months in order to be ready for when the changes take effect in either 2018 or 2019.  Please contact me to discuss your situation with an Oakville Chartered Professional Accountant. 

William Khalilieh is an Oakville Chartered Professional Accountant, based in Oakville, Ontario, who provides practical tax and accounting solutions to individuals and their businesses in the Greater Toronto Area.

Don’t spend your UCCB: You’re going to need it

On July 20, 2015, every Canadian with children will receive $60 a month per child, or have their benefit increased to $160 a month per child as a result of changes to the Universal Child Care Benefit program. Depending on whether or not you signed up for direct deposit with your Oakville personal taxes, you’ll receive a cheque in the mail or a deposit into your bank account. This refund covers January 2015 to July 2015.

You may be thinking:  This is great! Extra money in my pocket! However, there are a few things you’ll want to remember:

a) The UCCB refunds are taxable as ordinary income for dual parents. For single parents, the refunds reduce the “Amount for eligible dependent” credit. In Ontario, these payments are taxed at a rate between 20.05% to 49.53% depending on your income level.

b) As part of the increased UCCB, the”Child Tax Credit” has been eliminated. This credit elimination will increase your Oakville personal taxes by $338.25 per child per year.

For an average working dual parent family, the impact will be as follows per child as follows in Ontario:

a) Increase to UCCB:                                 $720.00  –  $60.00 per month for 12 months

b) Taxes on UCCB:                                     ($216.00) – Assume 30% tax rate

c)Loss of Child Tax Credit:                       ($338.25) – per year

Net impact per child each year:      $165.25 

In this example, you would benefit an extra $300.00 if you benefit from the $1,000 increase to the child care expense limit.

This example illustrates that Canadians will not fully benefit from the increased UCCB and will need to ensure they can cover the changes in their Oakville personal taxes as laid out above.   Please contact me to determine the impact on your family and how I can assist you to ensure you do not receive a larger than expected tax bill for 2015. 

William Khalilieh is a Chartered Professional Accountant, based in Oakville, Ontario, who provides practical tax and accounting solutions to individuals and their businesses in the Greater Toronto Area.

Gain Tax Deferrals with an Active Income Model

Generally speaking as a Toronto business advisor, incorporating your business offers numerous advantages. Most importantly you will be able to defer income from personal taxation. For example, in Ontario you can defer 34% in taxes if you are in the top Ontario income tax bracket by earning income through a corporation you own. Of course, the CRA is not always fond of this loophole, but the Canadian government wants small businesses to expand successfully. To this end, tax law is quite generous in which corporations are offered this 34% deferral. As I outline below, it is fairly easy to qualify.

There are a few qualifications:

(a) The corporation must not be a public company that is owned > 50% by Canadians

and

(b) The corporation cannot be an “incorporated employee,” i.e. a person who provides services to their employer via a corporation rather than directly (more about that in a future blog) or a corporation that derives more than 50% of their income from “passive” income dividends, such as rent, unless the corporation has more than 5 full time employees through the year

Of course, many people are not aware of the second requirement but, as a Toronto business advisor, I can assure you that CRA is. In the past few months, I have seen at least 4 form letters from CRA that, in more complex terms, state, “We think your corporation looks like a passive income corporation and we will tax your corporation at the highest tax rate possible unless you prove otherwise.  You have 30 days to provide us with your proof.”

Given the relative simplicity of the law, if your corporation earns the majority of its income from rent or passive sources and the corporation does not have more than 5 full-time employees (they must be on the payroll), the company will have to pay the higher rate of tax. While a significant portion of this tax is refundable, your 34% deferral becomes about a 3% deferral.

If you are in this situation, please contact me to discuss how, as a Toronto business advisor, I can help you navigate the tax laws effectively.   

William Khalilieh is a Chartered Professional Accountant, based in Oakville, Ontario, who provides practical tax and accounting solutions to individuals and their businesses in the Greater Toronto Area.

 

 

 

 

Mutual Fund Corporations: A less taxing investment?

In one of my previous posts, I discuss how mutual fund corporations are becoming more popular because they offer tax-deferred investing. I explain how calculating the ACB of these investments can be challenging. As a Toronto chartered professional accountant, I’m often asked how mutual fund corporations can offer investors the ability to switch funds on a tax-deferred basis but mutual fund trusts cannot?

The answer is that corporations are allowed to do tax-free transactions with their shareholders that mutual fund trust holders cannot do with their unitholders.  In particular, if you hold shares in a mutual fund corporation, you can move between the various classes of the corporation on a tax-deferred basis. Tax law does not recognize the trade of shares between classes of a single mutual fund corporation as a “sale” of the shares. Therefore, these trades are non-taxable.

The one advantage that mutual fund trusts have over mutual fund corporations is that trusts can allocate all of their income to investors, while mutual fund corporations can allocate only Canadian dividends and capital gains. For that reason, mutual fund corporations generally have equity investments. However, sellers of these investment products have come up with exotic variations of mutual fund corporations to attract investors, including classes to allow for investing in money market funds and offer so-called tax efficient classes (“T class”) by returning capital to investors.

Another consideration is cost. Typically, the mutual fund corporation will cost more in management fees than the equivalent mutual fund trust investment because the cost of the corporate structure is higher. However, this cost may be worth if if you want to switch to another fund on a tax-deferred basis.

Taxes are an important part in making any investment decision as after-tax return is what counts. This is where a Toronto chartered professional accountant becomes useful. Please contact me if you would like me to review your investment portfolio or any possible investment from a tax perspective. 

William Khalilieh is a Toronto Chartered Professional Accountant based in Oakville, Ontario, who provides practical tax and accounting solutions to individuals and their businesses in the Greater Toronto Area.

2015 ON Budget Summary & Analysis

The Ontario government delivered the 2015 Budget today. Here are the highlights that will have an impact on you and your Oakville small business:

Personal Tax Changes

No changes were announced to personal tax rates. However, with the change to the federal dividend tax credit (see my 2015 Federal Budget Summary and Analysis here), the top marginal tax rate on non-eligible dividends (basically dividends from companies that get the Oakville small business deduction or have investment income) will increase as follows:

  • 2015: 40.1%
  • 2016: 40.4%
  • 2017: 41.0%
  • 2018: 41.2%
  • 2019: 41.4%

If you have income from one of these types of corporations, especially from those that generate investment income, you may want to think about taking dividends out sooner rather than later.

Ontario is also moving to parallel the federal rules when it comes to trusts and estates that were announced in the 2014 Federal budget. The most significant change is that estates have 3 years during which it can benefit from marginal tax rates. Afterwords, estates are taxed at the highest tax rates. Those with a person with a disability as a beneficiary are exempt from this change.

While technically not a tax increase, be aware of increases in user fees, such as those for drivers and vehicles, hazardous waste, and family courts.

Of course, I can’t forget the beer tax. It was announced last week that the cost of a 24-case will increase by 25 cents per year until 2018.

Business Tax Changes

No changes were announced to corporate tax rates.

Other issues of note:

  • Ontario continues to develop its version of the CPP, known as the Ontario Retirement Pension Plan
  • Ontario is restricting or eliminating some of their specialized tax credits, including two of the more mainstream credits: The Apprenticeship training tax credit and the Ontario interactive digital media tax credit
  • Ontario continues to combat the underground economy with a focus on residential roofers this year and auto-body repair shops next year
  • Introducing laws to make “zappers” illegal
  • Ontario wants to enter into information sharing agreements, including with municipalities

This analysis is intended as a brief overview and does not include all of the details to help you take advantage of these rules as applicable. Please contact me to see how these changes can impact you and your Oakville small business. 

William Khalilieh is a Chartered Professional Accountant, based in Oakville, Ontario, who provides practical tax and accounting solutions to individuals and their businesses in the Greater Toronto Area.

2015 Federal Budget Summary & Analysis

Today the federal government released the 2015 budget to the public. Here are the highlights that will have an impact on you, your business, and your Toronto corporate taxes.

Personal tax changes

Lower minimum required withdrawals from Registered Income Funds (RIFs)

Easily the biggest change for personal taxes, this amendment lowers the minimum required withdrawal from your RIF if you are between 71 and 94. The amendment allows the minimum withdrawal to be approximately $17,885, and also  may allow seniors to keep or get the Guaranteed Income Supplement and/or Old Age Security.

Increase to the Tax-Free Savings Account Limit

The limit has been increased to $10,000. The limit will not increase any further. This is another beneficial change for seniors as well as those who have the funds to invest.

Home Accessibility Tax Credit

At the end of the year, this credit will allow people 65 or older and individuals who otherwise get the disability tax credit to claim expenses (up to $10,000) as a non-refundable tax credit (i.e. the credit can only reduce your tax bill to zero and not generate a refund) to help these individuals to continue to live in their home. Examples of expenses that qualify include wheelchair ramps, walk-in bathtubs, wheel-in showers and grab bars. While I am not a fan of these boutique tax credits, this credit is easy to support. Other “minor” changes:

  • Simplified reporting of foreign assets if your foreign asset is between $100,000 and $250,000.
  • Sales of qualified farming and fishing property are now valid for a $1,000,000 capital gain exemption rather than $800,000 (indexed to inflation) for small business corporations.
  • Registered Disability Savings Plans (RDSP) can still be opened by relatives of individuals who cannot enter into a contract – extended to 2018 from 2015.
  • Repeated Failure to Report Income Penalty is reduced for individuals who unintentionally failed to report income. This change benefits lower income earns who didn’t report income from CPP or something similar in cases where the tax was small compared to the income.
  • Procedural changes that make it easier for CRA to advance theories in tax litigation.
  • CRA agents can now share information between “tax” and “non-tax” departments.   For example, CRA will now be able to use income tax returns to determine an individual’s student loan repayments.
  • Changes to the Family Tax Cut that allow tuition credits to be used to help split income.

Changes to Toronto corporate taxes

Reduction in the tax rate to corporations that get the small business deduction (“SBD”)

Currently, corporations that qualify for the SBD pay 11% tax to the federal government. The tax rate will be reduced by .5% per year for the next four years to take it to 9% starting in 2016. This change is a bit of a surprise as it was not mentioned in any political commentary.

As a result of these changes, dividends received from these corporations will have a higher effective tax rate due to a lower  “dividend tax credit” resulting from lower Toronto corporate taxes being paid. However, a side effect of this change is that if your corporation earns rent and other passive income you may be better off taking some dividends out now to save tax overall.

New small businesses can remit their payroll quarterly

Currently, all new small businesses must remit payroll taxes monthly before qualifying to go quarterly. This change allows all small business to go immediately remit quarterly starting in 2016 assuming all of the qualifications are met.

Employment Insurance Premium Rate reduction

The rate will be reduced to $1.49 per $100 of earnings in 2017 from $1.88 per $100 of earnings in 2016. However, if Ontario goes ahead with its Ontario Pension Plan in 2017, you may not see this reduction.

Other changes that will impact your small business

  • The government is inviting comments on whether changes should be implemented in regards to the types of income that qualify for the small business deduction.  Businesses like campgrounds, hotels, and self-storage units that do not employ more than 5 full time employees are affected by these laws.  Any relief to these types of businesses would be welcome.
  • The government may release draft legislation regarding the conversion of the “eligible capital property” system into the regular capital cost allowance system sometime this year.

This analysis is intended as a brief overview and does not include all of the details to ensure you can take advantage of these rules as applicable.   Please contact me to see how these changes can impact you and your Toronto corporate taxes. 

William Khalilieh is a Chartered Professional Accountant, based in Oakville, Ontario, who provides practical tax and accounting solutions to individuals and their businesses in the Greater Toronto Area.

Calculating ACB: Not as Easy as ABC

Mutual funds investments are popular with Canadians as they offer the opportunity to access professional money managers without a significant upfront investment. Yet, unlike buying stocks, tracking your tax cost (Adjusted Cost Base or “ACB”) takes a lot of work and many people simply don’t bother.  Even though the CRA does have a guide to assist you in this task (RC4169 Tax Treatment of Mutual Funds of Individuals)  and they have made the guide as simple as possible sometimes it’s just easier to talk to an Oakville tax advisor.

The most significant challenge is having the patience and the time to review your old investment statements and tax slips to calculate the tax cost correctly. Perhaps your mutual fund company has done this work for you as part of the information it provides to you during tax season. However, it may not be correct. Possible reasons include incorrectly programmed computer systems or the superficial loss rules may have applied to prior sales and you may have the same investment at a different institution. Note that fund companies will have a disclaimer that information may not be accurate and direct you to an Oakville tax advisor to review the calculations.

I have also noticed that mutual fund corporations are getting more popular with Canadians as they offer tax-efficient and tax-deferred investing. Tracking the ACB for these investments is even harder because, unlike a mutual fund trust that uses a T3 slip to report distributions, mutual fund corporations issue distributions on a T5 (like interest from banks). Mutual fund corporations, like trusts, can pay you a distribution that is considered a “return of capital”. The return of capital is a non-taxable distribution that lowers your ACB and creates a capital gain in the future. However, there is no space on the T5 to indicate a return of capital. As an Oakville tax advisor, I have seen some mutual fund companies put this amount into an empty space on the T5. If the return of capital is not put onto the T5, you would have to look at your investment statements and perhaps even talk to the fund company to ensure you calculate your cost correctly.

Getting the ACB right is important so that you pay the proper amount of tax. You want to avoid overpaying your taxes and giving the government a gift / interest-free loan or underpaying only to risk the CRA charging you large amounts of interest. Bringing in an Oakville tax advisor is the safest way to calculate ACB. Please contact me and I will be happy to review your ACB calculation or do it for you. 

William Khalilieh is a Chartered Professional Accountant, based in Oakville, Ontario, who provides practical tax and accounting solutions to individuals and their businesses in the Greater Toronto Area.

Reduce Taxes After Loved Ones Pass

Dealing with the passing of a loved one is tough enough but taking care of the financial responsibilities makes the grieving process even more difficult. Often, those closest to the one who passed are responsible for dealing with the deceased’s assets. What are the tax implications of selling the assets? I can help you find Oakville practical solutions in this difficult time.

For the most part if the deceased has a spouse, the assets would be left to him or her. This transfer is normally done on a tax-free basis. If this is not the case, then all of the assets are deemed to be disposed at fair market value upon passing, resulting in a tax bill. However, this “deemed disposition” now establishes the cost of the asset, for tax purposes, to the estate at that same fair market value.

For example, if you owned 100 shares of ABC Inc. and you purchased it for $10,000 and its fair market value on the day you died was $50,000, then there would be a capital gain of $40,000 and your estate has “purchased” it for $50,000. In the process of selling the shares to give cash to the beneficiaries, your estate would likely have a gain or a loss. If there is a gain, the estate will pay the tax at graduated rates like an individual does. But what happens if there is a loss?

In theory, the loss could be used against future capital gains. But the estate will likely be wound-up as quickly as possible (especially with the changes in the 2014 Federal Budget) and are likely not to have a capital gain in the future to use it against. Fortunately, tax law allows for the capital loss to be used against the capital gain that was triggered on death instead of remaining in the estate. The executor will have to apply for it and file some paperwork with CRA. CRA will (eventually) reduce the tax bill that was assessed on death. However, the executor must do this within one year of the person passing away or the executor will have to make a request from CRA to apply this rule.

This works for most other types of capital assets, including the deceased’s main residence, as long a family member does not live in the house while it is being sold. If a family member does live in the house after passing then there is no loss created because the loss is classified as a “personal use property” loss which is zero under tax law.

If you have any questions about how you can find Oakville practical solutions, please do not hesitate to contact me.

William Khalilieh is a Chartered Professional Accountant, based in Oakville, Ontario, who provides Oakville practical solutions for taxes and accounting to individuals and their businesses in the Greater Toronto Area.