Updated: Jul 10, 2023
The estate planning process can range from simple to complex, depending on the tax rules set by the government. This guide aims to provide testators and executors with a better understanding of the expectations set by the Canada Revenue Agency (CRA) in the context of Islamic estate planning. The primary responsibility of the testator is to create the most effective estate plan possible, enabling the executor or trustee to distribute assets and manage related matters. Sometimes, the same individual may act as the testator for their estate plan and executor for other family members, relatives, or friends. It's important to note that "testator" refers to the creator and owner of an Islamic or Muslim Will, while "grantor" refers to the trust owner. Unfortunately, estate planning is often neglected, seen as an afterthought due to the legal complexity and uncertainty about future issues. Moreover, people are often preoccupied with wealth creation and tend to overlook the well-being of their inheritors. While Canada does not impose federal inheritance, estate, or death taxes, certain assets like real estate, stocks, bonds, and investments have specific tax implications for heirs. In Canada, the absence of an inheritance tax does not mean that all is clear, as individuals still need to pay the "Deemed Disposition Tax" on capital gains from properties, which is not the same but similar to an inheritance tax. The tax implications vary depending on the asset type, such as cash, capital property (e.g., houses, land, or fishing properties), registered investments (e.g., RRSP), or non-registered investments. It's important to note that the tax treatment of land or fishing properties differs from that of houses or recreational properties. Before delving further into this guide, we recommend familiarizing yourself with the definitions provided in the earlier sections. It's crucial not to confuse the terms "gifts" and "charity." While the CRA considers charitable donations as gifts for tax purposes, they are distinct from gifts given to loved ones, family members, relatives, friends, or others.
Giving away Gifts while an owner is alive is the best way to reduce taxes up to death. Before beginning this strategy, review the allowance for tax-free gifts in the jurisdiction (country, state, province, or territory) where the Will is applicable. Not claiming gifts means you may expect a big estate (or inheritance, death, disposition) tax bill in the final income tax return of the deceased.
BASICS ABOUT GIFTS: There is a big difference in how gifts are treated regarding government tax purposes. You may be giving gifts as a Charity or helper to family members or loved ones, or you may have a farm or fishing property you plan to transfer.
NON-TAXABLE GIFTS: The gifts in the form of cash (from the cash in your bank or the money outside the bank) transferred to family members, relatives, friends, or anyone else are non-taxable, i.e., no-tax impact upon the transfer. You can give away any (amount of) cash to anyone, and there will be no tax implications for the donor or recipient. The only exception is the Cash (or near-Cash) gifts received from an employer when you must report on your tax return and pay tax on the gift amount from the employer; however, you may be exempted from non-cash gifts and awards from employers in some cases.
GIFTS ALLOWING TAX CREDITS: If you are giving gifts to registered Canadian registered charitable organizations, Canadian municipal or public bodies, Her Majesty in Right of Canada, a province, or a territory, the United Nations and its agencies, registered Canadian amateur athletic associations, registered national arts service organizations, registered housing corporations resident in Canada set up only to provide low-cost housing for the aged, ecologically sensitive land, certified cultural properties, the United States (U.S.) Charity registered foreign charities to which Her Majesty in Right of Canada has or any other charitable organization recognized and registered by Canada Revenue Agency. You could claim tax credits or refund up to 50% of your gift amount. Generally, you may be eligible to claim gifts up to 75% of the year's net income.
GIFTS WITH TAX IMPACTS: If you are giving Non-cash gifts in the form of capital property (House, land, farm, fishing property) as well as investment assets, RRSP, or Non-registered assets to your family members, relatives, friends, or anyone else, then the receiving person will be paying capital gain tax in Canada (instead of receiving tax credit). The donor (or transfers) or recipient will be paying capital gain tax depending on the types of assets and the recipient. Depending on the situation, you may be eligible for tax deferral for properties such as farms, family cottages,s or recreational properties.
ATTRIBUTION RULE: The attribution rule may apply in one or more situations, and you may need to report it in your income tax return. The requirement to report income in these circumstances is called income attribution. Some of the important terms we will be using in our discussions are.
The "attribute back to you" refers to paying the transfer tax.
"Attributable" refers to you or someone else paying tax.
"Non-Attributable" refers to neither donor nor recipient paying taxes upon transfer.
"Non-arm's length" refers to a relationship or transaction between related persons. The "Non-arm's length Adult" is an individual connected by a blood relationship, marriage, or adoption, such as a child, parent, brother, sister, brother-in-law, sister-in-law, etc., and the "Non-arm's length minor" is a child, grandchild or a niece or nephew of the transferor who is under the age of 18 throughout the taxation year.
"Arm’s length" refers to a relationship or transaction between persons acting in their separate interests. An arm’s length transaction generally reflects ordinary commercial dealings between parties acting in their separate interests.
GIFTS OF FARM OR FISHING PROPERTY: Farm and fishing properties are treated differently for transfer or gift than House. It allows the deferral of taxes. If you (as an individual or partnership) transfer farm or fishing property to a child, to a spouse or a spousal trust or a Canadian corporation, or to a Canadian partnership, and if there is capital gain, you may be able to postpone any taxable capital gain or recapture of capital cost allowance. Qualified farm or fishing property (QFFP) includes
A share of the capital stock of a family farm or fishing corporation that you or your spouse or owns.
An interest in a family farm or fishing partnership that you or your spouse owns
Real property, such as land, buildings, and fishing vessels
The property included in capital cost allowance Class 14.1, such as milk and egg quotas, or fishing licenses
GIFTS OF CAPITAL PROPERTY: If you may be intending to give away gifts in the form of capital property, you (as a donor or transferee) or the recipient may have to report (or pay) income or losses as well as Capital gains or losses.
GIFT TO SPOUSE: Irrespective of the situation, whether the property is loaned at a low-or no-interest rate or Gifts made with no restrictions (as to its use or requirement of future repayment), the attribution rules apply to income and losses (excluding business income) as well as Capital gains or losses transferred to a spouse. As a donor (or transferor), you may not have to pay capital gain tax in the following situations.
If you transfer the capital property to the spouse until he or she keeps it for his or her in your lifetime.
If you transfer the capital property to a spouse and if he or she sells it when you (as a donor or transferor) die.
If you transfer capital property to anyone, the property is depreciated in value or price. However, because of the superficial loss rules, you may not be able to use the loss to reduce your capital gains.
You generally do not have to pay capital gain or loss if you gift or transfer capital property to your spouse, a spousal trust, a joint spousal, or an alter-ego trust. But If a spouse or spousal Trust sells the property during your (or the transferor's) lifetime, you (as a transferor) usually have to report any capital gain or loss from the sale. You usually have to do this if, at the time of the sale, you meet two conditions: (1) You are a resident of Canada (2) Both you are still married. If you are living apart because of a breakdown in the relationship, you may not have to report the capital gain or loss when your spouse or spousal trust sells the property. In such a case, you have to file an "Election to not report capital gain or loss" with your income tax and benefit return (for allowing you not to pay the capital gain or loss).
SELLING TO SPOUSE: Instead of gifting or transferring, if you are selling the capital property to a spouse, then it is a different story.
If you sold the property to your spouse or a spousal trust for your and were paid an amount equal to the property's faith market value (FMV), there is another way to report the sale. Generally, you can list the sale at the property's FMV and report any capital gain or loss for the year you sold the property. To do this, you have to file an election with your return. To make this election, attach to your return a letter signed by you and your spouse or spousal trust and state that you are reporting the property as being sold to your spouse or spousal trust at its FMV and that you do not want subsection 73(1) of the Income Tax Act to apply.
If your spouse or spousal trust later sells the property, your spouse or spousal trust has to report any capital gain or loss from the sale (But you are not reporting any capital gan or losses because you sold it).
CALCULATING CAPITAL GAIN: A special situation may exist if all of the following apply to you (as a donor or transferor). In this case, certain rules apply when calculating your and your spouse's capital gain or loss to remove any capital gains accrued before 1972.
You owned capital property (other than depreciable property or a partnership interest) on June 18, 1971.
You gave the property to your spouse or spousal trust after 1971.
Your spouse or spousal trust later sold the property.
GIFTS TO NON-ARM'S LENGTH TO MINOR: Irrespective of the situation, whether the property is loaned at a low- or no-interest rate or Gifts made with no restrictions (as to its use or requirement of future repayment), the income and losses (excluding business income) transferred to minors are attributable, but the Capital gains or losses are not attributable. It is the donor's (or transferor's) responsibility to report and pay any outstanding balance in the income tax return out of the income and losses on the property transferred to Minors.
GIFTS TO AN ADULT CHILD OR OTHER ADULT NON-ARMS LENGTH INDIVIDUAL: It can have a different outcome based on the types of gifts you are transferring.
If the Gifts of property to an adult child are made with no restrictions (as to its use or requirement of future repayment), then there is no attribution rule on any type of income or losses.
But, if the property is loaned at a low-or no-interest rate to an adult child (or non-arms length person), then Income or loss is attributable; however, the capital gains or losses are not attributable. The donor (or transferor) or recipient's responsible for reporting and paying any outstanding balance in the income tax return out of the income and losses on the property transferred.
GIFTS TO AN ARM'S LENGTH INDIVIDUALS: If you give capital property as a gift to Arm's length individuals (i.e., who is not in your blood relationships, marriage, or adoption such as a child, parent, brother, sister, brother-in-law, sister-in-law and also includes minor child, grandchild or a niece or nephew of the transferor), you are considered to have sold it at its fair market value (FMV) at the time you give the gift. You (as a donor or transferor) will have to report and pay any taxable capital gain or loss on your income tax and benefit return for the year you give the gift. If the capital property is sold to a non-arms-length person for less than FMV, It does not deem the cost to be at FMV where the cost is less than FMV. This may result in the selling taxpayer having deemed proceeds of FMV while the acquiring taxpayer must use the actual transaction amount as their cost. -Subsection 69(1) of the Income Tax Act. We recommend consulting CRA or tax specialist if the capital property is sold to a non-arms length person for less than FMV.
GIFT S TO CANADA PROVINCES AND TERRITORY: You can claim a tax credit based on the eligible gifts to the Government of Canada, a province, or a territory. These types of charitable donations do not include contributions to political parties. The amount that qualifies for the tax credit is limited to 75% of your net income. Enter the eligible amount on line 2 of Schedule 9, Donations and Gifts.
GIFTS OF ECOLOGICALLY SENSITIVE LAND: You can claim a tax credit based on the eligible amount of a gift of ecologically sensitive land, including a covenant, an easement, or, in the case of land in Quebec, a real servitude, a personal servitude (the rights to which the land is subject and which has a term of not less than 100 years) you made to Canada, or one of its provinces, territories, or municipalities, or a registered charity approved by the Minister of Environment and Climate Change Canada (ECCC). A gift of ecologically sensitive land cannot be made to a private foundation. Your claim for a gift of ecologically sensitive land is not limited to a percentage of your net income.
GIFTS OF CERTIFIED CULTURAL PROPERTY: Special incentives have been implemented to encourage Canadians to keep cultural property in Canada that is of “outstanding significance and national importance.” Under the Cultural Property Export and Import Act, people can donate this property type to Canadian institutions and public authorities designated by the Minister of Canadian Heritage. You can claim a tax credit based on the eligible amount of gifts of certified cultural property. The eligible amount of your gift is calculated based on the property's fair market value (FMV), as determined by the Canadian Cultural Property Export Review Board (CCPERB).
GIFTS OF NON-QUALIFYING SECURITIES: You can claim a tax credit based on the eligible gift amount to a qualified donee. Qualified donees are: Special rules apply if you make a gift of non-qualifying security, such as shares of a corporation you control, or obligations, or any other security issued by yourself (other than shares, obligations, and other securities listed on a designated stock exchange and deposits with financial institutions).
GIFTS TO UNITED STATES (USA) CHARITIES: Generally, if you have U.S. income, you can claim a gift to a U.S. charity if it meets the following conditions: (1) It is generally exempt from US taxes. (2) It could qualify in Canada as a registered charity if it were a resident of Canada and created or established in Canada.
TRUST: The attribution applies if the property is transferred to a trust, and the donor has to report and pay any income or loss as well as the capital gain or loss.
GIFTS OR CHARITY AFTER DEATH: If you are not planning to give away gifts during your lifetime, then you are limited to what you can gift after death. The eligible gift amounts can be claimed on the deceased’s final income tax return. The eligible gift amount claimed is limited to the lesser of:
100% of the Deceased person’s net income in the year of death.
The eligible amount of the gift(s) made in the year of death, PLUS the unclaimed portion of the eligible amount of any gifts made in the five years before the year of death (or, for a gift of ecologically sensitive land made after February 10, 2014, in the ten years before the year of death). Any excess can be claimed on the return for the previous year (up to 100% of the deceased’s net income for that year).
THE LIMIT OF "FMV (FAIR MARKET VALUE)": For a gift of property made to a qualified donee, special rules may apply to limit the FMV of the property gifted, which limits the eligible amount of the gift that can be used in computing the donation tax credit amount. When the rules apply, the FMV of the donated property will be deemed to be the lesser of the property's: FMV otherwise determined, and the cost (or its adjusted cost base (ACB) if it is capital property), at the time the gift was made.
FMV IS MORE THAN ACB: A capital property is sometimes gifted if FMV is more than ACB. When the property is gifted to a qualified donee, its FMV may be more than its ACB. When the FMV is more than the ACB, you may designate an amount that is less than the FMV to be the proceeds of disposition. This may allow you to reduce the capital gain otherwise calculated. If you designate an amount that is less than the FMV as the amount to be used as the proceeds of disposition, this amount will be used to determine the eligible donation amount. You can choose to designate an amount that is not greater than the FMV and not less than the greater of any advantage in respect of the gift and the ACB of the property (or, where the property was depreciable property, the lesser of its ACB and the non-depreciated capital cost of the class of the property), at the time you made the donation. Treat the amount you choose as the proceeds of disposition when you calculate any capital gain.
LIMITATIONS APPLICABLE ON THE ELIGIBLE GIFT'S AMOUNT: It will apply where;
The donated property was acquired as part of a gifting arrangement that is a tax shelter.
The property is being gifted otherwise than as a consequence of the taxpayer's death, and the property was acquired less than three years, or in some cases, less than ten years, before making the gift.
LIMITATIONS NOT APPLICABLE ON THE ELIGIBLE GIFT'S AMOUNT: It will NOT apply below.
Inventory, real property, or an Immovable property located in Canada.
Certified cultural property (unless it was gifted after February 10, 2014, and was acquired as part of a gifting arrangement that is a tax shelter).
Ecologically sensitive land, including a covenant, an easement, or in the case of land in Quebec, a real servitude (or for gifts made after March 21, 2017, a personal servitude when certain conditions are met).
A share, debt obligation, or right is listed on a designated stock exchange.
A share of the capital stock of a mutual fund corporation.
A unit of a mutual fund trust.
Interest in a related segregated fund trust.
A prescribed debt obligation.
Shares of controlled corporations in certain circumstances.
Property acquired by a corporation in certain circumstances where the property was acquired under a tax-deferred rollover.
SPECIAL ANTI-AVOIDANCE RULE: Special anti-avoidance rules may apply where a taxpayer has attempted to avoid applying the aforementioned limitations.
The principal residence is tax-free for capital gains tax purposes upon sale or death. The Principal residence has many tax benefits, and many properties that can be considered as Principal residences are houses, apartments, or units in a duplex, apartment buildings or condominium, a cottage, a mobile home, a trailer, houseboats, leasehold interest in a housing unit, a share of the capital stock of a co-operative housing corporation if such share is acquired for the sole purpose of obtaining the right to inhabit a housing unit owned by that corporation and the land on which a housing unit is situated can qualify as part of a principal residence, subject to certain restrictions. If you are married or unmarried and your partner wants to optimize the capital gain tax savings, there are a few options to select from.
FORMULAE: The following two formulas are critical for making objective decisions in all cases.
Capital gain or Loss = ACB (Adjusted cost base) - Selling price
Principal residence exemption claim = Capital gain x (1+ Number of years designated as a principal residence) /(Number of years the property is owned)
DEEMED DISPOSITION RULE: A deemed disposition occurs when you are considered to have disposed of the property, even though you did not sell it. A deemed disposition may occur if there is a change in use of the property.
You change all or part of your principal residence to a rental or business operation.
You change your rental or business operation to a principal residence.
CHANGES IN THE USE OF PROPERTY: Every time you change the use of a property, you are considered to have sold the property at its fair market value (FMV) and immediately reacquired it for the same amount. You have to report the resulting capital gain or loss in the year the use change occurs. If the property was your principal residence for any year you owned it before you changed its use, you do not have to pay tax on any gain related to those years. You only have to report the gain related to the years your home was not your principal residence.
DESIGNATING PRINCIPAL RESIDENCE: For a property to qualify for designation as the taxpayer’s principal residence, it meets all of the following four conditions. However, in some situations, you may choose not to designate your home as your principal residence for one or more of those years. Joint ownership with another person qualifies for this purpose. The land on which your home is located can be part of your principal residence. Usually, the land you can consider as part of your principal residence is limited to 1/2 hectare (5,000 square meters), which converts to about 1.24 acres (54,000 square feet). However, if you show that you need more land to use and enjoy your home, you can consider more than this amount as part of your principal residence. For example, this may happen if the minimum lot size imposed by a municipality when you bought the property is larger than 1/2 hectare.
It is a housing unit, a leasehold interest in a housing unit, or a share of the capital stock of a cooperative housing corporation you acquire only to get the right to inhabit a housing unit owned by that corporation.
You own the property alone or jointly with another person.
You, your current or former spouse or any of your children lived in it at some time during the year.
You designate the property as your principal residence. A taxpayer can designate only one property as his or her principal residence for a particular tax year. Furthermore, for a tax year after the 1981 year, only one property per family unit can be designated as a principal residence.
LOSING PRINCIPAL RESIDENCE STATUS: Many factors affect the status as well as the exemption of your Principal residence, such as.
If you rent it out more than 50% of your home.
When you decide to claim CCA (Capital cost allowance) on the portion of your home, that is the rental.
BUYING DEPRECIABLE PROPERTY: In the year you buy a depreciable property, such as a building, you cannot deduct its full cost. However, since this type of property wears out or becomes obsolete over time, you can deduct its capital cost over several years. This deduction is called CCA. One of the reasons to claim CCA is if you have lived in your property for so long and the property is usually considered depreciable (i.e., obsolete in the long run) and so, you may consider offsetting losses in value by deducting the depreciation over several years. Claiming CCA on your property, in other words, you are producing income that will automatically disqualify your home to be a Primary residence, and you will lose the capital gain exemption.
SELLING PRINCIPAL RESIDENCE: When you sell your principal residence or when you are considered to have sold it, usually you do not have to report the sale on your income tax and benefit return, and you do not have to pay tax on any gain from the sale. This is the case if you are eligible for the full income tax exemption (principal residence exemption) because the property was your principal residence for every year you owned it. Starting with the 2016 tax year, generally due by late April 2017, you will be required to report basic information (date of acquisition, proceeds of disposition, and description of the property) on your income tax and benefit return when you sell your principal residence to claim the full principal residence exemption.
PRINCIPAL RESIDENCE EXEMPTION LIMIT: An income tax benefit generally provides you an exemption from tax on the capital gain realized when you sell the property that is your principal residence. Generally, the exemption applies each year the property is designated as your principal residence. For the sale of a principal residence in 2016 or later tax years, CRA will only allow the principal residence exemption if you report the sale and designation of principal residence in your income tax return. If you forget to make a principal residence designation in the year of the sale, it is very important to ask the CRA to amend your income tax and benefit return for that year. Under the proposed changes, the CRA can accept a late designation in certain circumstances, but a penalty may apply.
PRINCIPAL RESIDENCE USED PARTIALLY AS A BUSINESS PROPERTY: If only a part of your home is used as your principal residence and you used the other part to earn or produce income, whether your entire home qualifies as a principal residence will depend on the circumstances. It remains the CRA’s practice to consider that the entire property retains its nature as a principal residence where all of the following conditions are met: (1) The income-producing use is secondary to the property's main use as a residence. (2) There is no structural change to the property, and (3) No capital cost allowance (CCA) is claimed on the property. If your situation does not meet all three conditions above, you may have to split the selling price and the adjusted cost base between the part you used for your principal residence and the part you used for other purposes (for example, rental or business). You can do this using square meters or the number of rooms, as long as the split is reasonable.
PRINCIPAL RESIDENCE USERS TOTALLY AS A BUSINESS OR RENTAL PROPERTY: When you change your rental or business property to a principal residence, you can elect to postpone reporting the disposition of your property until you sell it. However, you cannot make this election if you, your spouse, or a spousal trust under which you or your spouse or spousal trust is a beneficiary has deducted CCA (Capital cost allowance) on the property for any tax year after 1984 and on or before the day you change its use.
TWO OR MORE PRINCIPAL RESIDENCE IN ONE YEAR: There is a situation where Canada's revenue agency allows to claim two or more primary residences. For example, if a person had his Principal residence for all the time he has owned it, and He purchased a new property in April 2019 and took possession of it as his principal residence in March 2019. There is a special rule, the “plus 1” rule, that allows a taxpayer to treat both properties as eligible for the principal residence exemption for a year where one residence is sold and another one purchased in the same year, even though only one of them may be designated as such for that year. However, a seller should keep his decision in writing for future reference, especially when he sells the new property. For dispositions after October 2, 2016, for a taxpayer to be eligible for the "plus 1" rule, the taxpayer must be resident in Canada during the year the principal residence is purchased. Therefore, if a taxpayer is a non-resident throughout the taxation year in which the property was purchased, the taxpayer will not be eligible for the extra year in calculating the principal residence exemption amount.
PRIMARY RESIDENCE AND OTHER PROPERTY: If you want to keep two properties and one of them to be your Principal residence and the second property to be for home as an income property, you may be able to minimize the taxes owed by keeping good records and also completing the property valuation or appraisal just before you change the use of the property. As time goes on and if you want to sell the home, the capital gains tax will be calculated from when the home became an income-generating property, not from when you first purchased the house. For example, your original property price is $100,000, and when you converted to rental property, the price is $300,000 (based on the valuation done after converting to rental property). If you decide to sell the rental property a few years later when the price is $400,000, then your capital gain will be $100,000 ( equals $400,000 minus $300,000). If you did not have the appraisal done after converting to rental property, then your capital gain would be $300,000 (equals $400,000 minus $100,000), instead of $100,000.
TWO PRINCIPAL RESIDENCES OWNED BY TWO PARTNERS: You are planning to marry,, and you and your future partners own the separate houses. To save the capital gain tax, one of you may sell the property he or she owns. The selling partner could claim the principal residence exemption and avoid paying capital gains taxes. But to qualify for a principal residence exemption,, you must sell the house before getting married (or moving in together). As per CRA rules, family units (including spouses and all dependent children) can designate only one property as their primary residence.
SELECTION OF PRIMARY RESIDENCE BETWEEN TWO PROPERTIES: There are a few scenarios where you can optimize capital gain taxes as follows.
If you are selling one of the properties, You may select one of the properties as a primary residence (as long as meeting the Primary residence requirements), which has the largest difference between Capital gain and the Principal residence exemption claim to optimize Capital gain tax savings and sell the other property which has the smallest difference between Capital gain and the Principal residence exemption claim.
If you are selling two properties at the same time, then you have an option to select either of the property as a primary residence (as long as meeting the Primary residence requirements) based on the calculations that allow maximum utilization of the Principal residence exemption claim.
If both properties are depreciating and you are not in hurry to sell the property, then it is best to wait until one of the properties is appreciated (which qualifies as a Primary residence) to get the most benefit out of it from the property tax exemptions.
If you're both the properties are appreciating then select the property (as long as meeting the Primary residence requirements) that gives the largest difference between Capital gain and the Principal residence exemption claim to optimize Capital gain tax savings.
FARMING PROPERTY AS THE PRINCIPAL RESIDENCE: If you are a farmer and sell land in 2018 used principally in a farming business that includes your principal residence, only part of the gain is taxable.
Pamphlet RC4111 Canada Revenue Agency - What to Do Following a Death.
Pamphlet P113, Gifts, and Income Tax YYYY.
Pamphlet T4011, Preparing Returns for Deceased Persons YYYY.
Pamphlet T4037 Capital Gains YYYY.
Note:-Where YYYY refers to the current tax year. All above mentioned Pamphlets & guides can be found on Canada Revenue Agency (CRA) website HERE.
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