FOR A SUCCESSFUL SUCCESSION (PART TWO)

DEATH TAX: WHAT YOU NEED TO KNOW

FOR A SUCCESSFUL SUCCESSION (PART TWO)

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This is the dream of every entrepreneur: starting from scratch, you founded a company that has achieved resounding and consistent success over the years. Such success undoubtedly led you to dream about your retirement plans rather than a staggering tax assessment at your death. However, death brings its share of pain… including the taxman. What should your liquidator and your estate expect?

Under tax laws, the deceased is presumed to dispose of all their assets at the time of death as if it were a sale. In addition to the income received during the year (such as salary, interest income, rental income, and dividends), they will be taxed on the deemed disposition of all their assets as a capital gain. While it’s unfortunately not possible to completely avoid death taxes, sound tax planning can help defer or reduce the tax payable. Before delving into the study of these plans, it’s crucial to understand the mechanisms underlying death taxation.

1. Final Tax Return

The liquidator will need to prepare the deceased’s personal tax return, often referred to as the final return. As a general rule, this return must be filed within six months of the death. It includes the income earned by the deceased during the calendar year in all its forms. However, amounts due at a later date, such as unpaid rents or accrued interest after the date of death, will not be included. These should be included in the estate’s tax return instead.

2. Estate Tax Return

To whom do the assets presumed disposed of by the deceased at their death go? Although their ultimate owners may be the legal heirs (in the absence of a will) or the legatees (named in a will), and except in the case of a rollover to the spouse or other exceptions, it is the estate (represented by the liquidator) that has custody until the time of distribution. The estate itself will need to file a tax return and be taxed on any income generated during this transition period, which begins immediately after the deceased’s death. But is the estate then considered an individual or a corporation?

3. Trust

The estate is not considered an individual or a corporation. Instead, the law generally treats the estate as a trust. A trust does not have a legal personality (unlike a corporation), but rather a distinct estate. Three main actors are required for the creation of a trust: the settlor who establishes it by contributing assets (here, the deceased); the trustee who administers it (here, the liquidator); and the beneficiaries, who benefit from the trust’s estate (here, the heirs and legatees, if any).

4. Testamentary Trust

Since it is the trust itself that is taxed on the income earned and not the beneficiaries who are taxed only on distributed amounts, the potential benefit of this entity is immediately apparent. So, is it possible to create a trust? Absolutely! A trust is established through a trust deed or by will. In the case of creation by will, it comes into existence on the day of the deceased’s death and is called a testamentary trust. One of the major advantages of a testamentary trust is that, in certain cases and for a certain period, it can be taxed at progressive rates like individuals. However, there’s a catch: beneficiaries are not taxed, but trusts, in general, are subject to a higher tax rate that can be disadvantageous. Therefore, it’s crucial to gather thorough information.

WARNING: The information contained in this article, while of a legal nature, does not constitute legal advice. It is recommended to consult with a professional for advice that will address your specific situation.