What to Do When Parents Die: Settling Their Estate

I’m very sorry for your loss. From a tax perspective, your parents did a lot of thoughtful planning that should help reduce some costs of transferring wealth, though significant taxes can still arise at death. Below I’ll explain what to expect for each account type, the timing for distributions, and practical steps you can take now.

RRIF and TFSA

Because you and your brother are named beneficiaries, the RRIF and TFSA will generally bypass probate and are comparatively straightforward to settle. Once the financial institution receives the required beneficiary paperwork, you can usually access the funds within a couple of weeks.

The TFSA proceeds are received tax-free by the beneficiaries. The RRIF balance, however, is included in your dad’s income in his final tax year and the estate is responsible for the tax owing on that amount. In practical terms, that means the estate will pay the tax on the RRIF before distributing assets to beneficiaries. If one beneficiary receives most of the RRIF while another receives non-registered assets, the estate’s tax bill can effectively reduce the net value available from the non-registered assets.

In your situation the entire RRIF value—$450,000—will be added to your dad’s taxable income for the year of death. Depending on other income sources and credits, the tax could be substantial; a rough estimate for tax on that amount alone is about $197,500. Tax calculators can help produce a more precise figure based on specific deductions and credits.

Cash account / Non-registered investments

The non-registered account is usually subject to probate, so it will take longer to access. On death, capital gains are calculated by comparing the cost base to the market value at the date of death. In your case a $200,000 unrealized gain results in a taxable capital gain inclusion of 50%—that is, $100,000 of taxable income. That $100,000 is added to the estate’s other income for the year (including RRIF income and any CPP/OAS), and taxed at the applicable marginal rates.

Holding company

Your parents had separate wills for personal assets and the holding company, which is a common strategy to avoid probate on corporate assets. That can be especially valuable in provinces where probate fees are high.

The estate freeze your parents completed likely avoided a large immediate tax hit by locking in the value of their shares and allocating future growth to the next generation. Because of that freeze, the initial deemed disposition on death of the parents’ shares may have been reduced or eliminated. However, the holding company will still face tax on any gains when it sells investments, and shareholders will face personal tax when funds are paid out as dividends.

If an estate freeze was not properly completed, multiple layers of tax can arise: tax on deemed disposition of the decedent’s shares, tax when the corporation sells appreciated investments, and tax again when shareholders receive dividends. It’s important to review the corporate documentation and tax filings with your accountant promptly, because some tax-minimizing strategies or elections must be completed within a limited time after death—often within a year.

Insurance

Life insurance held inside a holding company is often used to offset corporate tax consequences on transfer to the next generation or to provide a conservative, stable asset within the corporate portfolio. When the corporate-owned life insurance proceeds are paid after death, the corporation typically credits the capital dividend account (CDA) with the tax-free portion of the proceeds. For a $1,000,000 policy, most of the proceeds may increase the CDA balance, enabling the corporation to pay out a tax-free capital dividend to the shareholders (you and your brother).

Should you convert investments to cash?

Before making any trading decisions, check the policies of the financial institutions that hold each account. Where a beneficiary is named, as with the TFSA and RRIF, accounts can usually be transferred or traded without probate delays. For assets that are part of the estate and require probate—such as some non-registered accounts—institutions often will not allow trading or transfers until probate is completed.

Also consider how your investment moves might affect family relations and each beneficiary’s plans. A good practical approach is to have named beneficiaries complete the required paperwork as soon as possible so they can receive proceeds or hold inherited investments in kind. That reduces the need for the executor to trade investments while the estate is being settled.

Trading inside the holding company

Be aware that proceeds distributed from a holding company are usually taxable dividends unless paid from the CDA as a capital dividend. If you or your brother currently receive Old Age Security or other income-tested benefits, receiving taxable dividends could trigger clawbacks or higher tax. Capital losses realized inside the corporation will reduce the CDA, while capital gains will increase it. Depending on the situation, it can make sense to extract any available tax-free CDA dividends before disposing of investments that carry unrealized losses, in order to preserve tax-free distribution capacity.

This is a complex area where timing and sequencing of transactions matter. Discuss options with your accountant and a financial planner to ensure you preserve tax attributes and avoid unintended consequences.

Marina and Jody, your parents clearly put effort into forward tax planning to benefit you and the family. That planning will help, but it’s still wise to act promptly: confirm beneficiary paperwork with the institutions, consult your accountant about corporate and estate tax matters, and coordinate with a financial planner if you’ll be managing inherited investments. My condolences for your loss and best wishes as you move through the estate process.

More from Allan Norman:

• Financial hardship withdrawal exceptions and increasing income in retirement
• Using a HELOC as an investment strategy: not as taboo as you might think
• How to model retirement income in Canada
• Should seniors cancel their life insurance policies?