CANADA Law and Practice Contributed by: Ian Hull, Suzana Popovic-Montag and Nick Esterbauer, Hull & Hull LLP
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 the spouse’s or partner’s benefit) that would otherwise arise where the property’s fair market value exceeds its adjusted cost base. Tax will be deferred until the sale of the asset or the death of the surviving spouse. A similar exemption applies to registered investments – including Registered Retirement Savings Plans (RRSPs) and Registered Retirement Income Funds (RRIFs) – transferred to eligible beneficiaries, includ - ing: • 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 The CRA distinguishes between legitimate tax plan - ning, tax avoidance and tax evasion. Tools to minimise the tax burden of an individual or estate while com - plying with the Income Tax Act include the following. • Registered Education Savings Plans (RESPs) – tax on investment income is deferred in RESPs until funds are withdrawn for eligible post-secondary education expenses. • Tax-Free Saving Accounts (TFSAs) – contributions to TFSAs are not tax deductible, but any income or capital gains earned are not taxed when with - drawn. • Spousal RRSPs – one spouse may contribute to the other spouse’s RRSP to facilitate income split - ting, particularly where one spouse is in a higher tax bracket. • Splitting pension income between spouses – a spouse who earns more income may share up to 50% of their pension income with the other spouse, excluding the Canada Pension Plan (CPP) and Old Age Security (OAS). mentally or physically infirm. 1.3 Income Tax Planning In contrast, tax avoidance is inconsistent with the spir - it of the law and may contravene the Income Tax Act, including the general anti-avoidance rule. The conse - quences of engaging in tax avoidance may include a
CRA audit, reassessment of tax liabilities, and denial of tax benefits. Tax evasion goes further by violating the Income Tax Act, and may include under-reporting income or false - ly reporting tax credits or deductions. Tax evasion is criminally punishable in Canada. The CRA monitors trends in tax avoidance and con - sults the Department of Finance to develop new tax avoidance measures. 1.4 Pre-Immigration and Exit Planning For individuals who own property, pre-immigration tax planning may be advisable. When immigrating to Canada, individuals are generally deemed to have dis - posed of their property and reacquired it at fair market value. As a result, only the appreciation in value that occurs after immigration is taxed. In addition, Canada does not currently have pre-immigration trust rules. Exit planning is also advisable for individuals who emigrate from Canada. When an individual ceases to be a Canadian resident, the Income Tax Act generally imposes a departure tax through a deemed disposi - tion and deemed reacquisition of most types of prop - erty at fair market value. Certain types of property, such as Canadian real property, are excluded from the departure tax. However, an individual may elect to include otherwise excluded property in the departure tax calculation if doing so would offset capital gains that would otherwise arise on their departure. It is also possible to defer payment of the departure tax. Usually, an election must be filed by April 30 of the year following emigration, although the Minister has discretion to accept late elections. If payment is deferred, the individual must generally post security. If it is not deferred, in most cases it will be due by April 30th of the year following the individual’s departure. If the individual passes away between October of the year they emigrate and the following April 30th, the departure tax will instead be due within six months of the individual’s death.
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