In an increasingly complex world, the Financial Post should be the first place you look for answers. Our FP Answers initiative puts readers in the driver’s seat: you submit questions and our reporters find answers not just for you, but for all our readers. Today, we answer a question from Ann about survivor taxes.

Q.

It is my understanding that in the event of the death of either my husband or me, any assets passing to the survivor are not taxed. The tax will occur when the second spouse dies and the gain in value is determined from the date they were obtained by the original owner and the date the assets passed to a non-spouse beneficiary. Am I correct in this assumption? And when exactly does taxation happen upon the death of the second partner.

—Ann

FP Answers:

When a Canadian taxpayer dies, most assets can pass over to the surviving spouse or common law partner without triggering immediate tax through a spousal rollover, Ann. The rollover defers tax on any gains until the surviving spouse sells the assets or passes away. The deceased spouse’s original cost base carries forward, meaning the surviving spouse assumes the same tax cost, and no

capital gain

is realized at the time of transfer.

The rollover applies by default if all statutory conditions are met. Namely, the survivor must be a Canadian resident and married or living common-law with the deceased. The legal representative can elect out of this tax deferred rollover for specific assets to trigger capital gains on purpose. For example, to use capital losses or the lifetime capital gains exemption.

Also, if the deceased spouse’s income was low in the year of their death, it may make sense to not roll over all assets to take advantage of their low marginal tax brackets.

Registered plans such as

registered retirement savings plans

(RRSPs) and registered retirement income funds (RRIFs) can also roll over to a spouse if they are named as beneficiary or successor annuitant, or if the estate is named and the spouse is an estate beneficiary.

Tax-free savings accounts

(TFSAs) work differently. If the spouse is named as a successor holder, the TFSA continues tax-free, while a spouse who is merely a beneficiary can contribute the value at death to their own TFSA without affecting contribution room.

When the surviving spouse dies, their estate disposes of all assets at their fair market value, and any taxes owing are paid before distribution to beneficiaries. While Canada has no inheritance tax, provinces and territories may levy probate fees or estate administration tax (EAT).

Probate and EAT apply to assets that form part of the estate but assets such as registered plans and insurance policies with named beneficiaries are not included. Assets that are joint with your spouse can also generally bypass probate and EAT as they can be transferred outside the estate. Assets held jointly with adult children may not, depending on the circumstances.

In certain provinces, such as Alberta or Quebec, probate fees could result in only a few hundred dollars of costs to the estate. In Ontario, EAT is 1.5 per cent of the estate value for estates over $50,000.

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A common strategy used by widowed parents is adding their child or children as joint owners on bank or investment accounts or even the title for their home. Parents should proceed with caution in this area, as these arrangements are often seen as “resulting trusts,” which results in the assets forming part of the estate. It can also expose them to creditors or family law disputes, let alone conceding control of their assets.

Careful planning can defer tax and preserve wealth for the surviving spouse. More intricate planning also is needed to ensure that the remaining estate is passed on efficiently from the surviving spouse to other beneficiaries.

Andrew Dobson is a fee-only, advice-only certified financial planner (CFP) and chartered investment manager (CIM) at Objective Financial Partners Inc. in London, Ont. He does not sell any financial products whatsoever. He can be reached at adobson@objectivecfp.com.