CANADA Law and Practice Contributed by: Ian Hull, Suzana Popovic-Montag and Nick Esterbauer, Hull & Hull LLP
inclusion rate was scheduled for June 2024, but was cancelled before it took effect. 1.2 Exemptions Certain exemptions apply to estate assets. By way of example, the sale or transfer of real property typi - cally results in a significant capital gain, but a principal residence exemption allows the transfer or sale of a property where an individual ordinarily resides without triggering a taxable capital gain. A capital gain tax will typically apply, however, to any additional residences owned by the deceased. A cumulative lifetime capital gains exemption also applies to the disposition of qualified property, such as small business corporation shares. Only half of the capital gain resulting from the disposition of qualified property must be included in the deceased’s taxable income. A tax incentive for entrepreneurs that will apply to the sale of qualifying small business shares worth up to CAD2 million, reducing the capital gains inclusion rate to 33.3%, has also been proposed but has not yet been enacted. Estates are also exempt from paying capital gains tax - es on property transferred to the deceased’s spouse or common-law partner (or a trust established for their benefit) that would otherwise arise if the fair market value of the property is greater than its adjusted cost base. The taxes will be deferred until the sale of the asset or the death of the second spouse. A similar exemption applies to registered investments – including Registered Retirement Savings Plans (RRSPs) and Registered Retirement Income Funds (RRIFs) – that are transferred to an eligible person, such as: • the deceased’s spouse or common-law partner; • a financially dependent underage child or grand - child; or • a financially dependent child or grandchild who is also mentally or physically infirm. 1.3 Income Tax Planning The CRA distinguishes between tax planning, tax avoidance and tax evasion. Tools that can be used to minimise the tax burden of an individual or an estate
in a way that is consistent with the Income Tax Act include the following. • Registered Education Savings Plans (RESPs) – taxes are deferred on income set aside in RESPs for post-secondary education-related costs. • Tax-Free Saving Accounts (TFSAs) – funds put in TFSAs are not taxed, and any income or capital gains earned from an investment in a TFSA are not taxed when the funds are withdrawn. • Spousal RRSPs – one spouse may contribute to the other spouse’s RRSP account, thereby income splitting (this is a particularly useful strategy if one spouse is in a higher tax bracket than the other). • Splitting pension income between spouses – the spouse who earns more income may share up to 50% of their pension income with the other spouse, with the exception of the Canada Pension Plan (CPP) and Old Age Security (OAS). Tax avoidance is inconsistent with the spirit of the law and typically in contravention of the Income Tax Act and the general anti-avoidance provision locat - ed therein. Tax evasion goes further in disregarding the Income Tax Act and may include under-reporting income or falsely reporting tax credits or deductions. Tax evasion is criminally punishable in Canada. The CRA has the power to audit tax filings by Canadi - an taxpayers. It also monitors trends in tax avoidance and consults the Canadian Department of Finance in order to enhance the efficacy of new prohibitions against tax avoidance strategies. 1.4 Taxation of Real Estate Owned by Non- Residents Non-citizens and non-residents who purchase real property in Ontario must pay a 25% non-resident speculation tax (NRST). Agreements for the purchase of real property entered into before 25 October 2022 were subject to a 20% NSRT, and the NSRT was 15% for agreements entered into prior to 30 March 2022 in certain regions. Agricultural land and commercial property are exempt, as is the transfer of property to foreign spouses of Canadian citizens and to cer - tain foreign nationals. A rebate of the NRST may be available if the purchaser becomes a permanent resi - dent within four years, or is a foreign national work -
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