Inheritance in Canada

[londjc]

Hi there,

I wonder if anybody might be able to give me some guidance on a scenario for my 2010-2011 tax year.

My father passed away in 2009. He was domiciled, resident, and ordinarily resident in Canada so no question of any IHT liability on the estate. I was named administrator of the estate and sole beneficiary under his will. The principal asset in question was his home. Due to the situation with the property market, etc. the home was not actually sold until December of 2010. It sold at a loss from its assessed value at the time of death but, due to the strengthening of the Canadian Dollar in the past two years, there is still a gain when you convert the relevant Canadian Dollar amounts into Pounds Sterling using the exchange rates applicable on the relevant dates.

Here are the questions I have:

1. The sale of the property was in the name of the estate but all of the paperwork was signed by me in my capacity as administrator (executor). The proceeds of sale were remitted to me here in the UK in my capacity as beneficiary shortly after sale. For CGT purposes, am I still deemed to have acquired the property on the date of my Dad's death (even though it was technically owned by the estate trust)? It's the estate that files the relevant tax returns in Canada (which, admittedly, are not particularly relevant because there was a loss for Canadian tax purposes). Alternatively, am I only deemed to acquire the proceeds of sale and, therefore, only liable to any gain on the currency exchange in the period between the date of sale and remittence to the UK? I've looked but I can't seem to locate any sort of deeming provision one way or the other.

2. I'm a student (resident and ordinarily resident here in the UK) so I currently have no employment income. My only income is through proceeds of investments, etc. As such, I've only been paying relatively small amounts to HMRC on account and my guess would be that, for income tax purposes, I'm probably not going over the lowest tax band this year. If I am going to be liable to CGT on the sale of the house (I work out the gain is about £11,000 after the CGT reliefs have been applied) would it be best for me to pay more on account in July than I am otherwise scheduled to so as to avoid interest on the CGT liability?

3. Presumably, all exchange rates used should be the closing rate on the date of the event in question (i.e. his date of death for the value of the property then and the date of sale)?

4. Is my understanding correct that the estate agents' fees (i.e. the commission on sale of the property) and the legal fees related to the sale (but not the administration of the estate) are deductible from the gain?

Thanks everyone. Any thoughts or direction towards HMRC guidance etc. gartefully received.

[maths]

My understanding is that under Canadian law, on death, the assets effectively are acquired by the executors at their then market value.

If the assets are sold by the executors in their capacity as such any capital gain/loss is that of the executors not the beneficiary.

Prima facie, you as beneficiary simply received the cash proceeds. If the executors appointed the cash to you and you brought it to the UK straight away and converted it into £ there should not be any UK CGT.

No payments of account are made with respect to CGT liabilities.

[Michael I. Atlas, CA]

I do not think it is that simple, and the answer can sometime depend on the laws of the particularly province.

However, looking at a situation like this where the sole executor is also the sole beneficiary, and more than a year had passed, one could argue that, notwithstanding the fact that the property was still in name of the estate at the time of sale, it was fully vested in the beneficiary by the time it was sold.

From a Canadian tax perspective this distinction would have been of significance because if the vendor was the beneficiary, a tax clearance would have been required, since there would be a non-resident selling Canadian real estate; on the other hand, that would not have been the case if the Estate was selling it, since the Estate would have been deemed to be Canadian resident. Likely, they took the latter position.

[maths]

Other than a requirement for a tax clearance, given the sale price and original cost in C$ is the same (ie no gain), what difference in Canadian tax terms does it make whether the sale is by the executor or the beneficiary?

Other things being equal, in the absence of positive evidence that some form of assent to the beneficiary has occurred I would suggest it highly unlikely that the sale could be regarded as having been made by the beneficiary.

[Michael I. Atlas, CA]

In this particular case, that would be the only difference from a Canadian tax perspective that I can see.

However, ultimately, the question was concerned with certain UK tax implications, and to the extent that the answer to those was dependent on that issue and the application of Canadian estate law, I just wanted to caution that the mere fact that it was still in the name of the Estate was not necessarly conclusive.

Certainly, in similar situations where it could have make a real difference in terms of the Canadian tax results, the legal advice I have obtained has often indicated that one should view the property as being fully vested in the beneficiary.

In addition, in Canada, (I am not sure whether this is also true in UK) there is a common law concept of "executor's year" which many people view as leading to the conclusion that if an estate provide for outright bequests, as opposed to ongoing testamentary trusts, then unless there is some legal impendiment to distributing the assets (e.g. disputes with beneficiaries; uncertainty re certain tax issues) the executors are merely bare trustees for the beneficiaries. In a case like this, where the executor and the beneficiary are one and the same, that certainly would often lead to the conclusion that the asset is fully vested, regardless of how it is registered.

[Michael I. Atlas, CA]

In above post, I should have added "after the first year" after "bare trustees for the beneficiaries"

[collich]

Hello Londjc

You seem to be getting a lot of Canadian tax advice here (which I'm sure is relevant) but from your question it seemed like you were more concerned with UK tax.

I can tell you that for UK CGT purposes that on your father's death he was treated as disposing the house at the market value to his PRs (there was no UK tax though).

The PRs base cost was the market value and it seems like the house was sold by the PR (not you as a legatee). Don't get confused here - although you are the PR - the PR and you as a legatee are treated as separate people. Therefore the PRs will be subject to CGT on the gain

The PR will get an annual exemption as it was sold within 2 years of the death (£10,100). But it doesn't look like there is PPR as this requires the house to be your main residence (as legatee) immediately after death.

Your payments on account question falls away (as this is not your liability but that of the PR). Ignore the fact that it is the same individual here. Tax is due on 31 January 2012 - so there is currently no interest. The expenses you mentioned are also deductible

[maths]

Collich states:

I can tell you that for UK CGT purposes that on your father's death he was treated as disposing the house at the market value to his PRs (there was no UK tax though).

This is incorrect. On death there is no disposal by the deceased of property owned. The PRs are simply deemed to be acquired at mkt values.

The PRs base cost was the market value and it seems like the house was sold by the PR (not you as a legatee). Don't get confused here - although you are the PR - the PR and you as a legatee are treated as separate people. Therefore the PRs will be subject to CGT on the gain

As Michael indicates, whether this statement is correct or not is not a matter for English law but Canadian law.

The PR will get an annual exemption as it was sold within 2 years of the death (£10,100). But it doesn't look like there is PPR as this requires the house to be your main residence (as legatee) immediately after death.

The PR does not get an annual exemption as the PR is not resident in the UK and thus any disposals by the PR is outside the scope of UK CGT.

[collich]

Am I missing something. Point 2 of the enquiry:

"I am a student (resident and ordinarily resident here in the UK)"

[collich]

Ignore that comment - I now know