Deferred Payment of Tax on Death

“The prescribed rate does not fluctuate over the deferral term.”

Immediately before death, a taxpayer is deemed to dispose of all assets at their fair market value (subject to various rollover provisions).  As a result, an estate may face cash flow problems where the taxpayer’s wealth was in the form of illiquid assets, such as private company shares.  In some cases, an election to defer payment of some or all of the tax over a maximum ten-year period may be available to the estate.  Generally, this election is restricted to taxes owing on the following types of inclusions in the year of death:

  1. the value of a “right or thing,” such as declared but unpaid dividends, CPP payments for periods prior to death, or unpaid bonuses;
  2. deemed proceeds of disposition from capital property, such as private company shares; and
  3. deemed proceeds of disposition of resource properties and land inventories.

Taxes owing on other types of income in the year of death, such as regular salary, are not eligible for the election.

To make the election to defer the payment of the tax on death, Form T2075 must be filed and acceptable security must be provided to the Minister on or before the day on which the taxes owing would otherwise have to be paid. The first payment is due on the normal balance due date for the terminal tax return with subsequent payments due on or before the next following anniversary of that day.

While the election allows the taxes owing to be paid in equal annual consecutive instalments (to a maximum of ten years), the CRA has confirmed that future instalments can be reduced when a “balloon” payment is made.  The CRA will apportion the adjusted balance owing equally over  the remaining term of the chosen deferral period.

Interest is charged on the unpaid balance at the prescribed rate applicable in effect when the election was made (currently 5%, compounded daily) from the date when the tax would normally have been due.  The prescribed rate does not fluctuate over the deferral term as it is fixed at the rate applicable when the election is made.

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The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.

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Cadesky Tax