A trillion-dollar tsunami': Canadians grapple with unprecedented wealth transfer

[lazypucker]

Originally Posted by kipperiggy

Sorry, I'm not following your posts.

Upon a parent's death, the deemed dispositions are taxed like you say, on the parent's final tax return upon death (geez, morbid).

Why should the beneficiary have to pay an additional wealth or inheritance tax on top of it? It's already being taxed once.

Hence my question - why would we do this? Other than to pay for ballooning deficits I supposed.

All the more reason for the boomers to gift money now rather than later.

Let's say your parents paid $250k for the house, on their death, the house is worth $500k, so % of 250k captial gain is charged on the final tax return.

Now you inherit the house that's worth $500k on paper, and years later you sell it for $1-mil. You are now on the hook for the $500k in capital gain?

[CorsiHockeyLeague]

Originally Posted by lazypucker

Is it true that there is no inheritance tax in Canada. But let's say you inherit a house from your parents, you pay 0 tax, but when you sell it later, you will get taxed for capital gain?

Houses are a special case because of the principal residence exemption. So if you inherit it from your parents and you live there, then no, you wouldn't be taxed on that sale. If you inherit it, keep your current residence and sell your parents' home, you would get taxed, but only on the increase in value between when you got it and when you sold it. If you inherit it one day and sell it the next, there should be no tax bill.

[Fuzz]

Originally Posted by DoubleF

Final returns and trust returns scenarios are complicated AF. CRA gives the option for filing taxes in multiple ways to address the multiple situations and circumstances that pop up (ie: Terminal, estate and trust returns). Many people are getting lost and basically paying tons more in taxes than they need to. (ie: Just because you can defer taxes on a rollover or delay taxes on a delayed transfer/deemed disposition, doesn't mean they should).

I'm not worried about CRA trying to implement auto-file or something similar. I think it's great for straight forward returns. I do warn people that the odds that these programs will essentially file the tax returns somewhat tax inefficiently and err in CRA's favor vs taxpayer favor is high. (ie: glazing over certain deductions, serious problems with data accuracy on certain slips even in this day and age and selecting the appropriate box of multiple boxes in situations such as a T4A for Calgary Co-op and scholarships). It's the taxpayers responsibility to optimize their taxes. CRA is shooting themselves in the foot if they optimize it for you.

People are too concerned about things like max tax rate. CRA could easily drop the top rates a few percent and with a few minor tweaks that most people would think are innocuous, walk away with more taxes than ever before. There are serious problems with our existing tax system that require an overhaul. It's currently disadvantageous to both CRA/DOF and taxpayers alike. But the CRA are working towards making sure it's disadvantageous to taxpayers instead of primarily them and the Department of finance. Tax reform is required to make it fair for all sides.

Taxpayers need to think more in terms of income inclusion rates/portion of income that is not included for tax purposes vs effective tax rates on certain transactions. Otherwise, they risk being penny wise, pound foolish.

But the CRA isn't in charge, we are. So if the government decides auto-filing should also be optimized for returns(great campaign message), the CRA would have to implement that.And I know it wouldn't be easy as there are choices, but perhaps it would also help to work to eliminate those and simplify.

[chemgear]

Originally Posted by kipperiggy

All the more reason for the boomers to gift money now rather than later.

Are they though? And is that what people are banking on?

I always figured or wanted my parents to spend it all on whatever they wanted. Wasn't expecting anything to pass on tbh.

(Aside from the $4 million dollar minimum threshold test we all had to pass before being allowed to post on CP of course.)

[the-rasta-masta]

Originally Posted by lazypucker

Is it true that there is no inheritance tax in Canada. But let's say you inherit a house from your parents, you pay 0 tax, but when you sell it later, you will get taxed for capital gain?

The person who dies gets hit with a pretty large tax bill so the overall inheritance amount in a sense gets taxed.

When one parent passes, the property gets passed directly to the surviving spouse with no tax. But when the second parent passes, it is called a deemed disposition.

Say the final parent passes away and owns:

$750,000 Primary Home (purchased for $300k)
$400,000 Second Home (purchased for $300k)
RRIF (RRSP): $500,000
Cash: $50,000
Life Insurance: $100,000

The Primary residence does not get taxed on capital gains. However the second home would have capital gains tax applied to the $100k appreciation in value from purchase.

The cash doesn't get taxed, but the value in an RRSP or RRIF would be taxed all at once so at a $500k value it would be taxed at the highest tax bracket and so quite a large portion of that money would be sent to CRA as a final tax return for the deceased individual.

Life Insurance Proceeds have no tax.

[troutman]

Originally Posted by lazypucker

Is it true that there is no inheritance tax in Canada. But let's say you inherit a house from your parents, you pay 0 tax, but when you sell it later, you will get taxed for capital gain?

It varies between the provinces. Alberta has no tax. Other provinces take a percentage on probate.

You would get taxed on house later if it was not your principal residence.

[bizaro86]

I'm confident that many/most boomers will find a way to spend it all. Reverse mortgages are becoming more popular for a reason.

[Paulie Walnuts]

Originally Posted by opendoor

It's not the lack of qualifiers; it's that you suggested that estates are taxed anywhere near 48%. Primary residences aren't taxed, cash isn't taxed, and assets are only taxed on their unrealized gains. The effective rate is near zero for most estates.

Having just gone through this with a relative, on a 3M estate (including a secondary property and a bunch of equities), the total final tax bill from deemed dispositions was about $80K, which is an effective rate of about 2.5%.

That seems low they didn’t have any RSP or RRIF accounts? Aren’t those taxed dollar for dollar v

[opendoor]

Originally Posted by Paulie Walnuts

That seems low they didn’t have any RSP or RRIF accounts? Aren’t those taxed dollar for dollar v

There was some money in an RRIF ($80K or so), but most of the original amount was drawn down earlier in retirement. Just from memory, but I think the rough breakdown of assets was:

$1.5M primary residence
$500K secondary residence (w/ ~$250K gain)
$400K cash and other income generating holdings (so no real capital gains)
$250K TFSA (incl. room from deceased spouse)
$250K non-registered equities (w/ ~$75K unrealized gain)
$80K RRSP

So the final tax return was $325K in capital gains ($162.5K in income) and $80K in RRIF income. In BC, that results in about $80K in tax. I suppose to be fair, they did die early in the year, so their non-deemed disposition income was very low. But even if they had earned their normal income in the year they died, the ~$242K in deemed disposition income would still only result in about $100K in income taxes in BC, which is 3.33% of their estate value.

I guess if someone has a massive RRSP and dies, then they'll see a higher hit. But that's certainly not typical. Most people will have the vast majority of their net worth in assets that don't get taxed at death (principal residence, cash, TFSA, etc.) and the median RRSP value at age 65 is only about $100K.

[bizaro86]

Originally Posted by opendoor

the median RRSP value at age 65 is only about $100K.

Your forgot to apply the 10x CP adjustment factor here

[The Yen Man]

Originally Posted by the-rasta-masta

The person who dies gets hit with a pretty large tax bill so the overall inheritance amount in a sense gets taxed.

When one parent passes, the property gets passed directly to the surviving spouse with no tax. But when the second parent passes, it is called a deemed disposition.

Say the final parent passes away and owns:

$750,000 Primary Home (purchased for $300k)
$400,000 Second Home (purchased for $300k)
RRIF (RRSP): $500,000
Cash: $50,000
Life Insurance: $100,000

The Primary residence does not get taxed on capital gains. However the second home would have capital gains tax applied to the $100k appreciation in value from purchase.

The cash doesn't get taxed, but the value in an RRSP or RRIF would be taxed all at once so at a $500k value it would be taxed at the highest tax bracket and so quite a large portion of that money would be sent to CRA as a final tax return for the deceased individual.

Life Insurance Proceeds have no tax.

Which makes sense. When the person dies, they do a final tax return as if they've divested in all their assets, it gets taxed appropriately, and the settled amount after tax goes to the inheritor. In Canada, there's no inheritance tax, so you don't get taxed after that.

I think the original argument is Canada's got it right, and that introducing a inheritance tax doesn't make sense, because then you get taxed twice if you do so.

[lazypucker]

So in summary, the CRA makes money off dead people

[Buff]

Originally Posted by Slava

A lot of that inheritance is pre-spent because people are carrying significant debts and plan to use the inheritance to deal with that as well. But, like everything else with the boomers, this is something I've heard about as "imminent" for years, and it never seems to come to fruition. When I graduated from University, it was, "Oh man, you're graduating at the perfect time...all those boomers are retiring, and there are so many great jobs about to come through!" Fast forward more years than I care to consider and many boomers are still working, not leaving until they absolutely have to.

In my line of work, we hear about this enormous wealth transfer all the time, and that's been for at least 15 years now. It has to happen because people die, but at the same time, I've heard that this is imminent for so long that I am far too cynical.

That is the boat I'm in.


My parents always told me that they wished they could have saved better in their lives to be able to give me a nice inheritance when they pass. After my dad passed my mom told me that she is broke and has no money to be able to live anymore. Her monthly income from pension and investments doesn't let her live in the fanciest place but she has a lot of money saved up that when she passes away I'll pay off all my debts and do a much needed upgrade on my house that I can't currently afford. At that point, no longer having to may payments my Line of Credit, car loans or mortgage will be life changing. I only learned about this in January and I feel much stress has been lifted off of my shoulders.

[Buff]

Originally Posted by fotze2

Just make sure you are the crappier sibling so as to not have executor duties bestowed.

Unfortunately for my wife, she is not the crappy sibling and is fully aware that she has a fight on her hands because she is the executor of her mom's will. The crappy sibling has no grip on reality and doesn't understand how anything works.


Fortunately for me, I have no siblings to make it things difficult for when I have to the the executor stuff.

[The Yen Man]

Originally Posted by lazypucker

So in summary, the CRA makes money off dead people

Sure, but why shouldn't it be taxed? What's the difference between this situation vs. someone who's still alive who decides to sell all their investments and cash in on their RRSPs?

[DoubleF]

Originally Posted by CorsiHockeyLeague

Houses are a special case because of the principal residence exemption. So if you inherit it from your parents and you live there, then no, you wouldn't be taxed on that sale. If you inherit it, keep your current residence and sell your parents' home, you would get taxed, but only on the increase in value between when you got it and when you sold it. If you inherit it one day and sell it the next, there should be no tax bill.

People don't realize you can have more than one property that qualifies as a principal residence.

Assuming you inherit a tax paid up house from the parents. Your child moves in and lives in that house, you live in a condo. The house skyrockets in value, your condo increases incrementally. You may need to do an analysis and calculation to see if you'd rather save the PPRE for the house vs the condo you live in.

Typically, the PPRE selection is more for your primary home vs a vacation property that qualifies as a PPRE.

Also, part of the PPRE exemption formula is N+1. If you have a vacation property and a primary residence with nearly identical gains per year, electing both, but for different years could be in the taxpayers advantages due to the N+1 coverage.

Originally Posted by Fuzz

But the CRA isn't in charge, we are. So if the government decides auto-filing should also be optimized for returns(great campaign message), the CRA would have to implement that.And I know it wouldn't be easy as there are choices, but perhaps it would also help to work to eliminate those and simplify.

Yes and no. Initially, yes, you can opt out. But later on, I assume we're moving towards certain Asia or European auto filing requirements.

The returns will be auto filled, you have a time frame to review for errors and accept for filing, or failure to accept by deadline means it's considered acceptance for filing. But if there is missing info for tax transactions that you don't correct that cause you to under pay taxes, the government will destroy you on those.

Spain filing situation is an interesting case of something I think we may be moving towards... holy crap don't piss those tax guys off. Hong Kong/Singapore I don't think we are moving towards those types of auto filed returns (those governments basically have 95% of every shred of detail required for your filing). I think a zero return acknowledgement is still required.

The issue is that Canada's tax system is fundamentally a self assessment system. Until tax slips, donations, asset ownership/registry and banking info basically goes full blockchain or similar, our filing requirements are going to continue to be a ####show. Our "basic" tax returns are literally like 4-5x longer than many other countries out there. I've literally read them. I tell people there's no such thing as a simple return anymore. Straight forward at best.

[kipperiggy]

Originally Posted by chemgear

Are they though? And is that what people are banking on?

I always figured or wanted my parents to spend it all on whatever they wanted. Wasn't expecting anything to pass on tbh.

(Aside from the $4 million dollar minimum threshold test we all had to pass before being allowed to post on CP of course.)

My parents can spend every last penny if they want, I just meant gifting money now might be easier than later if we are seriously looking at an inheritance tax, but I think we have a ways to go before we see that.

[CliffFletcher]

Originally Posted by bizaro86

I'm confident that many/most boomers will find a way to spend it all. Reverse mortgages are becoming more popular for a reason.

Becoming more popular, but still not close to being typical. I couldn’t find Canadian numbers, but only 2 per cent of seniors households in the U.S have a reverse mortgage. The people calculating the trillion dollar/year wealth transfer are taking things like seniors debt in and reverse mortgages into account.

While younger retirees can go through a lot of money with travel, new cars, etc., spending typically declines sharply as people move through their 70s. I’ve been in charge of my parents’ finances for a few years now, and expenses are low. Between CPP, OAS, a modest pension, and income from RIFFS, everything is more than covered. We’re actually having to stash my mom’s money in a TFSA, as at 80 her income exceeds her spending.

That’s not even getting into the increasingly common household type of middle-aged adults living with their aging parents and sharing expenses, which saves everyone money.

[blankall]

Originally Posted by kipperiggy

I think that would end up hurting average joes more than the wealthy. But I don't have evidence either way and you bring up an interesting point.

Housing used to be the way that average joes built wealth. Now the average joe can't afford a house and rents for much longer. Housing has become an investment, that in many areas of Canada, only the rich can partake in.

Many people are receiving massive payments from their parents to use as down payments on their own homes.

When the capital gains exemption came into place, this was never its intention. It was meant to allow working people to build up wealth, not facilitate tax free transfers between generations of the privileged.

[DoubleF]

Originally Posted by CliffFletcher

Becoming more popular, but still not close to being typical. I couldn’t find Canadian numbers, but only 2 per cent of seniors households in the U.S have a reverse mortgage. The people calculating the trillion dollar/year wealth transfer are taking things like seniors debt in and reverse mortgages into account.

While younger retirees can go through a lot of money with travel, new cars, etc., spending typically declines sharply as people move through their 70s. I’ve been in charge of my parents’ finances for a few years now, and expenses are low. Between CPP, OAS, a modest pension, and income from RIFFS, everything is more than covered. We’re actually having to stash my mom’s money in a TFSA, as at 80 her income exceeds her spending.

That’s not even getting into the increasingly common household type of middle-aged adults living with their aging parents and sharing expenses, which saves everyone money.

The vast majority of people have passive approaches to their terminal return/estate. But many of them shouldn't be doing that.

It literally sounds like you're getting to the point your mom should consider getting a tax planning engagement done. Start doing some of the estate transfers to the beneficiaries/kids earlier and while mom is still alive. Pay more taxes upfront and regularly so that when a long enough timeline passes and they pass away, more of the assets end up in the hands of the beneficiaries instead of as taxes. Clean up any potential messy assets with the estate.

People need to have better conversations about how to deal with their estates while still alive and consider certain intervivos activities if makes sense for their asset holdings/objectives. Don't leave them to the terminal return when all the available options are no longer available. If you do that, the government typically wins.

Just be aware there's a ton of things you can do (ie: be idle or take action) but you shouldn't do (ie: take wrong action/be unaware of difference of tort/tax law implications, be idle when you needed to take action).

For instance, some people do things to avoid probate, which means they pay more taxes, but it's the cleaner better outcome based on the attitudes of the beneficiaries. But others don't need to avoid those fights (ie: one beneficiary), so doing that means they needlessly pay extra taxes by doing that. For some, transferring everything at the last possible moment (terminal return) means the best approach. For others (and I've seen and I don't understand this), multi millionaire parents with kids whose net worth are like <$250K... do a 10-15 year plan to steadily transfer certain assets to the kids so that more ends up in the hands of the beneficiaries/kids (plus growth) vs leaving all of the deemed dispositions at the last moment (especially if it's just one parent remaining situations). But if the kids are high net worth, then this makes no sense.

Also, there's too many kids who think that money represents the love their parents have for them. That's incorrect and kinda crazy to distill the relationship down into a monetary value. Some people will leave more than half of their estate to one kid and not the other, not because they don't like the other kid, but that the other kid is doing well (multimillionare) and doesn't need the financial help while the other is barely scraping by (perhaps no fault to their own). Doing your tax planning, death planning etc. isn't just about money. It's also stuff like making sure that anything that needs to be said and/or repeated is done before the chance to do so is gone.