Tax Shock Adds to Family Heartbreak

Evelyn Jacks

Last month the sad story of an Ontario family who suddenly lost both parents in 2024 was shared in Burlington Today.  The tax outcomes were just as shocking as the two deaths from unrelated causes.  There was a cottage, a large RRSP and a big tax bill.   Some of the outcomes could have been mitigated with some planning.   I sat down with CTV’s Pat Foran to discuss the outcomes – with a message important to family planning.  

Deemed Dispositions at Death.  Under normal circumstances the properties  in question – the RRSP and the 2^nd personal residence – would rollover to the surviving spouse and this likely would have happened in this case on the death of the first spouse.  However, when the last surviving spouse passes away, the tax must be paid on the deemed disposition of those assets at the Fair Market Value at this time, which may now be worth even more than when the first spouse died.

Seek Immediate Tax Help.  There would be things to double check with a professional, and it could be well worth the cost. 

The Cottage. Regarding the cottage, for example, were there any capital additions to the cottage over the years that were missed in the capital gains calculations or any capital losses to apply to the capital gain? Is the cottage the right property to report as the second residence?  Should that have been the home in the city?  Did they both own it jointly?  Should that capital gain be split on the death of the first individual with the surviving spouse, as opposed to simply rolled over?  This is an option.  Was the cottage owned in 1994 – the year a capital gains election could be made to bring the cost base up to $100K? 

The RRSP.  Unfortunately the amounts are taxable in the hands of the second surviving spouse and fully taxable on that person’s death, unless there is a qualifying individual, such as a dependent child or grandchild.  There is no pension income splitting either in this case, because both parents were under age 65.  

Charitable Donations and Medical Costs.  Including a charity as a beneficiary of the couple’s estate could also help ease the tax burden. So could a review of medical expenses claimable.

Final Tax by Instalment.  In the case of this family, there is an option to defer the tax for up to 10 years, in equal instalments, to mitigate the immediate tax cost, using Form T2075.  It will cost some interest, but will allow for a break on the immediate tax hit otherwise generated.

The Bottom Line.  Taxpayers spend a lot of time worrying about “Will I have Enough?”  A better question:  “How much is enough, after tax?” 

One important message to couples is to plan early on how to generate the tax on RRSP accumulations, to “average down” the ultimate tax  liability over time.  You don’t have to spend the money left after paying the taxes. . .just invest it into a TFSA, or if you have maxed out the annual contribution, a  non-registered account to keep growing your investments.   

Planning can help, with some sound  tax advice  about tax efficient retirement planning.  It can  quite possibly be your most important investment when things change, unexpectedly.