Contributor: Pension lawyer Jean Pierre Laporte, BA, MA, LLB. (Jp.laporte@integris-mgt.com)

It may be morbid, but as the old adage says, “two things are inevitable, death and taxes.” 

This is particularly true when it comes to the wealth a REALTOR® might have been able to accumulate during their lifetime.    

Those who have had loved ones pass away and were involved in the settlement of their estate will be familiar with the concept of the “deemed disposition”, a tax concept found in the Income Tax Act. 

When a taxpayer passes away, the tax authorities use a legal fiction for tax purposes – they deem that a deceased taxpayer sold their property at fair market value the day before the date of death.   

Since a sale of capital property is a taxable event, this triggers a tax consequence that the estate must now settle.   

Let’s look at some examples.  

A Realtor incorporated a PREC and the value of the shares at incorporation was $1 per share.   

Over a successful 20-year career, the non-registered investment account of the PREC is now valued at $2,000,001.   

The Realtor/shareholder of the PREC then dies.   

Under the deemed disposition rules, those shares are deemed to have been sold for $2,000,001.  From these “proceeds of disposition” we subtract the adjusted cost base of $1 and end up with a capital gain of $2,000,000.   

Under current laws, 50 per cent of that capital gain is taxable to the estate, so $1,000,000 is now subjected to tax within the estate. We’ll further assume that the estate is taxed at 50 per cent.  So, the tax bill is set at $500,000. 

But the estate doesn’t have $500,000 of ready cash since it hasn’t sold anything yet.  

Hopefully, the Realtor had life insurance to help with this tax bill, but we’ll further assume no insurance can come to the rescue at this stage.   

The estate must sell some of the properties it owns in its non-registered investment account, thereby triggering corporate taxes.   

Once the corporation has paid its own taxes it can make cash available to the estate to satisfy the $500,000 tax bill.   

If the corporation must pay $500,000 on selling its property and then the estate also must pay $500,000, we are approaching a million dollars in total taxes. 

With RRSP balances, the tax consequences are even more direct.  The Income Tax Act simply treats the entire account balance of the RRSP to be an income inclusion (as ordinary income) in the “terminal tax return”.  

The terminal tax return is that “stub” year from January 1 until the date of death.  (Note, this rule doesn’t immediately apply if the deceased has a surviving spouse since a “rollover” of the RRSP assets is permitted deferring tax until that surviving spouse dies in the future.)   

If the RRSP had $2,000,001 in it, since none of this income has even been taxed, the entire amount is now subject to graduated taxes within the estate.   

If the estate also has an average tax rate of 50 per cent, the tax bill owed to the CRA is now $1,000,000.50.   

It is only after the estate has paid that tax that beneficiaries of the RRSP can get their respective percentage entitlement of what’s left.   

In both of the above cases, the death of the Realtor can be costly to the survivors.

Can a Realtor do better if some of their wealth is inside of a PPP instead? 

In many cases, we can reduce the total taxes paid thanks to the special rules that govern registered pension plans – and we’ll cover that next week.