Succession: How and When to Transfer Assets during Your Lifetime

Benjamin Franklin famously stated that life has two certainties - death and taxes - and it makes sense to plan for the inevitable. Despite this, many people are reluctant to discuss succession plans with their loved ones and some don’t even have a will.  No personal financial plan is complete without a map for transferring assets, be it to the next generation, a charity, or other beneficiary. So when is the best time to do so: during your lifetime or after your death? 

Assets transferred during your lifetime

In general, if you transfer RRSPs or RRIFs to your spouse during your lifetime, you’ll pay tax on the full amount at the time of transfer. A preferred strategy is to hang on to the money and to split the income taken from RRSPs\RRIFs with your spouse at age 65.

It’s possible to transfer your TFSA to your spouse’s TFSA during your lifetime, but only up to your spouse’s TFSA contribution room. That’s generally not a good idea, either, as you’ll each want to maximize your own TFSA room, which is -a lifetime balance of $63,500 for every resident adult, as of January 1, 2019.

Capital assets held in a non-registered account may be transferred to your spouse during your lifetime at your choice of adjusted cost base (ACB) or Fair Market Value (FMV). Both will have tax consequences. If you do transfer funds at ACB, draw up a spousal loan using commercial terms, because without this, income and capital gains generated from the transferred funds are attributed back to the transferor.

Transfers of assets to children – minor or adult – occur at FMV, but accrued gains at the time of transfer are taxed in the hands of the transferee. In the case of minor children, dividends and interest income will be attributed back and taxed in the hands the transferor.  (Note, where dividends are distribute to non-active members of a private corporation, at any age, top tax rates will be charged, unless certain exceptions are met).    

Transfers at time of death

When you die, one mandatory final tax return must be filed for the period January 1 to the date of death, and this return must be filed by the later of April 30 of the year immediately following the year of death, or six months after the date of death. There are several elective returns that can be filed on death, which will allow certain personal amounts to be claimed again on these additional returns.  This can result in a substantial tax benefit, in many cases. 

You are deemed to have disposed of your assets immediately before death, usually at FMV. However, the value of the deemed disposition can vary, depending on who will acquire the assets: your spouse (including common-law partner), your child, or another unrelated third party.

Transfers to children or others are generally made at the property’s FMV. It is possible to choose to make transfers to the spouse at either the asset’s Adjusted Cost Base (ACB) or FMV, or Undepreciated Capital Cost (UCC), in the case of depreciable assets. If ACB or UCC is chosen, there is a “tax-free rollover”; that is, the tax consequences are completely postponed until the surviving spouse dies. 

Alternatively, your executor may decide to transfer some or all of the assets to the surviving spouse at FMV. This may make sense if the assets have increased in value and income in the year of death is low.

In other cases, there may be unused capital losses at death. Such balances can be used to offset any capital gains income reportable in the year of death, the three prior years or other income in the year of death. This strategy can work well in establishing a higher ACB on the acquisition of your assets (the actual FMV), which will save your spouse money down the line.

RRSPs and other pensions

What happens when you leave untaxed accumulations in your RRSP or RRIF? In this case, you are deemed to have received the FMV of all assets in your RRSP or RRIF immediately prior to death.

If there is a surviving spouse, the assets may be transferred tax-free to that person’s registered plan (RRSP or RRIF). In certain circumstances, the RRSP can be transferred to a financially dependent child or grandchild, even when there is a surviving spouse. Speak to your tax advisor about these options.

If there is no surviving spouse, the RRSP assets are transferred to the estate (unless a beneficiary is specified ). Any decrease in value of RRSP assets while held in the estate may be used to decrease the income reported on the deceased’s final return. 

Note that the rules around the taxation of estates have recently changed:  graduated tax rates are now only available in Qualified Disability Trusts and Graduate Rate Estates and in the latter case, top-rate taxation applies to income from undistributed assets after 36 months.  

Tax-Free Savings Plans

Earnings in your TFSA are tax-free during your lifetime, but not after death; however, assets may be rolled over to the TFSA of a surviving spouse or common-law partner.

Life insurance policies

To preserve wealth, the acquisition of a life insurance policy can make some sense, especially if deemed dispositions of capital assets result in a hefty tax bill. When an individual buys an insurance policy, the premium is not deductible, but subsequent benefits or proceeds paid out to beneficiaries are tax exempt. The proceeds from a life insurance policy can help to pay the taxes which arise on the deemed disposition of taxable assets at death.

Clever financial moves

Despite best-laid plans, the deemed disposition rules for capital assets on the death of a taxpayer may result in a large tax liability. It’s possible to postpone the tax payment until the asset is actually sold. Post security with the government and file form T2075 Election to Defer Payment of Income Tax, Under Subsection 159(5) of the Income Tax Act by a Deceased Taxpayer's Legal Representative or Trustee.  Although the CRA will charge interest while awaiting payment of outstanding taxes, this option may provide much-needed cash flow relief when high value, low liquidity capital assets must be disposed of to pay the final tax bill.  

Also, be sure to provide your executor with a copy of your 1994 tax return and Form T664 Election to Report a Capital Gain on Property Owned at the End of February 22, 1994. The intent was to increase the cost base of certain assets up to the previously available $100,000 Capital Gains Exemption limit before it expiry on this date. Missing this will cause executors to over-report capital gains on elected assets on the final return.

Finally, don’t forget to complete Form TX19 Asking for a Clearance Certificate, before the proceeds from the estate are distributed, to absolve the executor of any future liabilities from the CRA.