Q.

My mother passed away two years ago and her assets are in a graduated rate estate (GRE). My father has been deceased for 10 years now. We have probated her assets (four real estate properties), sold two of the properties and paid full

capital gains tax

owing for the entire estate. We have now sold a third property (small hobby farm) and the sale price was less than what the property was probated at. The fourth property is a family cottage and will be sold next year. There are no other assets besides the real estate in the GRE. The tax return for the GRE shows a total taxable capital loss for this year of $75,000 and that’s at an inclusion rate of 50 per cent. Can these losses be carried forward for when we sell the cottage and applied against those capital gains? Will there be a return of the overpayment of capital gains to the beneficiaries if the cottage is not sold?

—Thanks for the clarification, Martin S.

FP Answers:

When someone dies, they are deemed to have sold all their assets, and this can trigger tax payable for certain assets. There is an exception for assets left to a surviving spouse or common law partner, so that tax can be deferred until the second death for a couple. But when assets are left to other family members or beneficiaries such as children, tax is generally payable on the final tax year of the deceased.

In your case, Martin, the tax paid on your mother’s death reset the cost base for all the real estate to the fair market value of each at the time of her death.

Most beneficiaries are not familiar with the concept of a graduated rate estate (GRE). When someone dies, assets that do not have named beneficiaries or surviving joint owners with the right of survivorship are held by their estate before being distributed. If the assets are modest or primarily cash or real estate, especially if the estate is distributed quickly, there may be little to no taxable income earned by the estate. The beneficiaries may choose to report the income on their own tax returns. But if the assets generate significant income, or if the will states that assets are to be held in trust for a period of time, the estate may have an optional or required T3 trust tax filing obligation.

Depending on a taxpayer’s province of residence, the first $9,000 to $16,000 of income they earn is tax free and as their income increases above that threshold, the rates of tax also increase. A taxpayer’s marginal tax rate is the rate they pay on the net dollar of their income. A graduated rate estate benefits from low tax rates on low income and increasing tax rates as income rises, so can provide an additional set of low tax brackets beyond that of the beneficiaries. As a result, a graduated rate estate can save tax for high-income beneficiaries if the estate’s income is significant.

Since you elected or were required to hold these properties in a GRE, Martin, any subsequent capital gains will be taxable to the GRE if the properties are sold while held in the trust. With respect to the capital losses realized on the hobby farm sale, the estate can use those losses to offset capital gains it realizes or can potentially be claimed on your mother’s final tax return.

There is a special election to treat all or part of the losses within the first year of a GRE as losses on the deceased person’s final tax return. This can reduce capital gains as well as other income reported on their tax return. So, if those losses occurred during the year following your mother’s death, you may be able to get a tax refund on her final personal tax return for the year she died.

Otherwise, the capital losses can only be claimed against capital gains of the GRE and cannot be transferred to you or other beneficiaries in your personal capacity. So, this is an important planning consideration for the sale of other properties held by the estate. You may want the estate to sell them to have a capital gain that can be reduced by the previous capital losses.

The longer an estate is administrated, the higher the potential costs to maintain the structure, such as tax filing fees, executor compensation and opportunity cost for beneficiaries. The

Canada Revenue Agency

may also take exception with an executor who intentionally delays the estate settlement to take advantage of GRE tax rates. An executor also has a responsibility to efficiently settle an estate so there may also be legal implications if the will does not provide for the assets to be held in trust for a period after death.

  • How does John decide whether to sell or lease his grain farm before he retires next spring?
  • Should Bob be withdrawing more than just the minimum from his $550,000 RRIF?

This is a complex situation, Martin, where you should seek tax and legal advice and be mindful of tax planning opportunities as well as legal obligations of the trustees for the estate.

Andrew Dobson is a fee-only, advice-only certified financial planner (CFP) and chartered investment manager (CIM) at Objective Financial Partners Inc. in London, Ont. He does not sell any financial products whatsoever. He can be reached at adobson@objectivecfp.com.