February 2020 Newsletter

We all know the old saying that there are only two sure things in life: death and taxes. While that may be true, it is also the case that one must typically pay taxes even after death (in which case the taxes will be paid out of your estate).

The Income Tax Act contains several rules that apply specifically upon the death of an individual. Some of the main rules are as follows.

Deemed dispositions

Each capital property you own is deemed to be disposed of immediately before your death for fair market value proceeds, and the person acquiring the property (e.g. your heir under your will) is deemed to have a cost equal to that fair market value (FMV). As a result, most of your accrued capital gains and losses will be realized on your death.

Whether the deemed disposition results in a significant tax liability obviously depends on the amount of your accrued gains relative to losses at the time of death.

Your income tax liability in Canada depends on your country of residence for income tax purposes.

If you are resident in Canada, you are subject to tax on your worldwide income, although as discussed below, you may receive a credit for foreign tax paid on that income.

If you are not resident in Canada, you are subject to tax in Canada only on certain Canadian-sourced income.

Resident in Canada

You must report your income from all worldwide sources on your Canadian tax return. Income earned in another country must be converted into Canadian dollars on your Canadian return.

In most cases, if you earn income in or from another country and pay income tax to that other country, you will receive a foreign tax credit in Canada to ensure that you are not double-taxed.

Most stock-option benefits are only one-half taxed. That is, although the entire benefit is included in your income, one-half of the benefit is normally deducted in computing your taxable income.

As discussed in our August 2019 Tax Letter, the government recently proposed to restrict the one-half deduction. It proposed that only $200,000 worth of stocks under an option would qualify for the one-half deduction, each year. Benefits above the $200,000 threshold would be fully taxable. However, the one-half deduction would continue to apply to all stock options of employees of smaller, start-up corporations, including Canadian-controlled private corporations.

Car Allowances Taxable

In general terms, a car allowance provided by an employer to an employee is not taxable if it is reasonable, but is taxable if it is unreasonable. Furthermore, a special rule in the Income Tax Act says that a car allowance is deemed to be unreasonable if the allowance is not based solely on the number of kilometres driven in the course of employment. In other words, if the allowance is not based on such kilometres driven, it is taxable to the employee. 

In the 2018 Positano case, the taxpayers were employed in a family snow-plowing business. One of their duties was to do “snow runs”, under which they would drive to streets and neighborhoods to determine whether snow plowing would be needed. The brothers were paid a car allowance for the snow runs, which were based on estimated travel and average travel distances throughout the year. The CRA held that the allowances were taxable because they were not based solely on the number of kilometres driven in the course of employment.