DFK Tax Newsletter
Life Events and Their Tax Implications
They say the two certainties in life are death and taxes. This article provides a basic overview of some of the tax considerations related to various life events.
Marriage
Married or common law individuals must split certain credits and benefits. Common law status is determined by living together for 12 consecutive months or sharing a child. Disclosure of the change in marital status is required in your personal tax return, including the date of marriage/commencement of common-law partnership.
Separation and Divorce
If you are separated, you are still considered married for legal purposes until divorced. However, for income tax purposes you are considered separated once you have been living separate and apart from your spouse or common-law partner because of a breakdown in the relationship for a period of 90 days. Once you have been separated for 90 days, the effective date of your separated status is the date you started living apart. Once again, a change in marital status, including the date of separation or divorce, must be disclosed to CRA. The change in your marital status is supposed to be disclosed to CRA by filing form RC65 by the end of the month following the month in which your marital status changed (with the exception of a change in status to separated, which does not need to be disclosed to CRA until you have been separated for more than 90 consecutive days). If you did not file the form RC65 by the required filing date, you should disclose the change in your marital status on your next personal tax return.
Separation and divorce often involve asset equalization and/or support payments. These can have complex and significant tax implications.
Asset Equalization
A tax-deferred transfer (spousal rollover) is available for capital assets, RRSPs, RRIFs, pensions, etc. The contingent future tax associated with each of the assets being divided is generally factored into the equalization. Professional tax advice is encouraged in order to ascertain tax considerations and planning that may improve upon the outcomes and/or assist the parties in reaching agreement. For example, it may be more appropriate in the specific circumstances for the transferring spouse to elect out of the automatic spousal rollover for certain capital property and realize a capital gain.
Support Payments
Child support is never taxable to the recipient nor tax-deductible to the payor. Spousal support is generally deductible for the payor and taxable to the recipient if it is paid on a periodic basis directly to the recipient pursuant to a written separation agreement or court order.
Associated Legal and Accounting Fees
Legal and accounting fees incurred to draft a separation agreement, obtain a separation or divorce, establish child custody or visitation rights, or determine asset equalization are not deductible. Certain other legal and accounting fees may be deductible, for example, those incurred to establish a right to child support (if by court order) or spousal support.
Buying and Selling a House
First-time Home Buyers
The first-time home buyer’s credit is a non-refundable credit up to $10,000 total ($1,500 maximum tax savings). For married and common law individuals, both individuals must be a first-time home buyer and they must share $10,000 limit.
The Home Buyers Plan allows tax-free withdrawals of up to $60,000 from an RRSP, provided the amount is paid back to the RRSP within 15 years of the home purchase.
The First Home Savings Account permits plan contributions of $8,000 per year, to a maximum $40,000. These contributions are deductible, the investment income earned in the account is not taxable, and withdrawals from the account used to purchase a home are not taxable.
Principal Residence Exemption (PRE)
When selling a home, if certain conditions are met, individuals can designate the property as their principal residence during each year of ownership, thereby reducing, or even eliminating, the capital gain and tax otherwise payable on the disposition. Where multiple homes are owned in a year, only one of the properties can be designated. In addition, for tax years after 1981, married and common law couples must each designate the same property.
As of 2016, all home sales, even those that would be fully sheltered from tax by the PRE, must be reported in your personal tax. Failure to do so will result in the PRE being denied (and the whole gain taxable!), and a late-filed PRE may be subject to penalties.
Starting with 2023, the new “anti-flipping” rule automatically treats the gain on a home sale that occurs within one year of purchase as business income, which is 100% taxable, rather than as a capital gain, which is only 50% taxable on the first $250,000 capital gains realized in the year and 2/3rd taxable on the portion of capital gains realized in the year that exceed $250,000 (50% on the entire capital gain realized prior to June 25, 2024). Even more punitive, there is no ability to claim the PRE. Exceptions to this rule apply in the case of very specific life events which include death, marriage breakdown, addition of family members, work relocation, among others.
Addition of a Child
Many tax benefits are available for families with minor dependents. These include:
- Canada Child Benefit,
- Maternity leave benefit,
- Ability to deduct Childcare expenses where conditions are met.
Parents may also choose to open a Registered Education Savings Plan (RESP). RESPs allow for tax-deferred growth of invested contributions, with a lifetime contribution limit of $50,000. In addition, the Canada Education Savings Grant (CESG) matches 20% contributions to a maximum of $500 per year. Withdrawals of the “accumulated income” and CESG for post-secondary education and training are included in the child’s income. Certain families may also qualify for the Canada Learning Bond.
Retirement
The Canada Pension Plan (CPP) is available to qualifying Canadians who have contributed during their working years (paid as premiums on their employment and self-employment income each year). The standard age to receive CPP is 65, however, you have the option to start receiving the benefit as early as 60, and the option to defer receiving the benefits as late as 70. If you choose to take CPP early, the monthly entitlement will be less, and if you choose to defer, the monthly entitlement will be more. Benefits vary based on lifetime contributions and when benefits are claimed.
Old Age Security (OAS) provides payments to eligible Canadians over 65, with maximum amounts of $727.67 a month (ages 65-74, Q4 of 2024) and $800.44 a month (ages 75+, Q4 of 2024). Benefits are gradually reduced for individuals earning over $90,997 annually (for 2024), and are completely clawed back for 2024 when annual earnings reach $148,451 for ages 65-74 and $154,196 for ages 75+.
The Guaranteed Income Supplement aids low-income seniors receiving OAS, providing up to $1,086.88 monthly (for single individuals, Q4 of 2024). Benefits are indexed quarterly and are subject to reduction or claw back based on annual income.
Taxpayers may still be working while receiving CPP and OAS benefits, although the aforementioned income driven claw back applies to OAS.
Turning 71
December 31 of the year your turn 71is the last day you can contribute to your own RRSP. By December 31 of your 71st year, you must choose one of the following for your RRSP account:
- Withdraw full balance
- Transfer to a Registered Retirement Income Fund (RRIF)
- Purchase an annuity
Withdrawing the full balance will result in the full balance being taxed in the year of withdrawal and will typically result in higher tax being paid. RRIFs require a minimum withdrawal each year that is derived from your age (or the age of your spouse or common-law partner if you elect to use their age when you set up the RRIF). RRIFs can invest and reinvest in the full spectrum of publicly available offerings. The interest earned from an annuity is established at the outset such that it provides guaranteed annual payments.
Death
Upon death, individuals are deemed to have disposed of all capital assets for proceeds equal to their fair market value, creating potential tax liabilities on unrealized capital gains. Where the assets are transferred to the deceased’s spouse (or a “qualifying spouse trust”), the transfer is automatically tax-deferred. The deceased’s estate may determine it advisable to elect out of this automatic rollover in respect of particular asset(s) in order to realize the accrued capital gain.
RRSPs and RRIFs that go directly to a surviving spouse as the named beneficiary or successor annuitant, are also tax-deferred. If the surviving spouse is entitled to RRSP or RRIF proceeds by operation of the deceased’s will, the parties can file an election to ensure that the transfer to the spouse is tax-deferred. For RRSPs and RRIFs that do not go to a surviving spouse, the value of the account on the date of death is generally fully taxable in the deceased’s final personal tax return. This results in a potential tax trap for the estate. If an RRSP or RRIF goes to a named beneficiary other than the surviving spouse and not to the estate, then the estate gets the tax bill, but the beneficiary gets all the money.
Certain types of income on death may be filed in a separate, optional personal tax return. The benefit of an additional return is that it effectively results in a doubling of the deceased’s non-refundable tax credits and graduated tax rates. The most common optional tax return is for “rights or things”. Dividends declared but unpaid at the date of death, and CPP and OAS benefits for the month of death not received at the date of death are common examples of income that may be included in a rights or things tax return.
The deceased’s “estate trustee” (executor), who is typically named in the will, is legally responsible for the gathering of information and filing of the deceased’s final personal tax returns(s). The estate trustee is also responsible for filing of tax returns reporting income earned by the estate, if any. The executor should inform CRA of the deceased person’s date of death as soon as possible, either by calling CRA or by sending CRA a completed form RC4111.
In summary, there are many life events that have taxable, beneficial and/or reportable implications. Consultation with a tax professional is key to avoiding unnecessary tax and penalties and to ensuring all available benefits are being considered. Don’t forget to let your tax advisor know when significant life events occur!
