Tax fair play

Way back when I was a pup, a popular TV commercial (I can't remember the name of the product, but it promoted breakfast cereal), spawned a significant catch phrase. An older brother who wouldn't try the new cereal said, "Give it to Mikey, he'll eat it. He'll eat anything".

Folks everywhere purloined that phrase, using it when they encountered situations they wanted to avoid by passing them on to some other unsuspecting person.

And so goes the federal budget. "Mikey" Ignatieff says he'll go along to get along, so the budget is likely to pass into law despite virulent protests from Smiling Jack and M. Hairnet le Bloc.

One small item included in the budget is a provision to allow capital losses when an RRSP or RRIF is wound up in an estate. On the death of an RRSP/RRIF annuitant the value of his plan for taxation to beneficiaries includes any gains in value that occur after death and until the estate is distributed. Then, beneficiaries pay tax on that increased amount.

However, before this budget, losses incurred by such plans were not deductible for tax purposes. Apparent unfairness isn't all that unusual in the Income Tax Act.

For instance, when you contribute to an RRSP "in kind," say a stock, a bond, or a unit in a mutual fund that you already own outside your RRSP, any capital gain accrued on the item is taxable, but when you contribute it and it's worth less than you paid, the loss you incur making the switch isn't similarly deductible. There are other examples of such one-sidedness elsewhere in the ITA too.

So, the question is whether this is a single step confined to one budget or a precedent that ripples through the system in an ongoing quest for tax fairness.

The change takes effect only on estates created in 2009 and afterward. So we can't go back. And, it's concentrated into a small time frame. Some estates can exist for a decade or more because provisions in a will dictate specific distribution schedules.

But this provision requires that the money from the RRSP/RRIF be distributed within two calendar years from the date of death. Still, a win is a win.

It appears that it was hard, even for CRA, not to be concerned about the effect of the financial market meltdown on estates created before the tumble but distributed later in 2008, when values were much lower. Unfortunate beneficiaries paid tax on money they didn't receive.

There's also a provision that allows capital losses to be applied to the current year and carried back to the deceased's previous three years' tax returns to offset previously tax-paid capital gains. Any losses left over after that exercise are fully deductible from all types of income in the year of death and prior as a "terminal loss." I'm not sure if this applies to the estate itself, but clever accountants may find a tax-efficient strategy somewhere in that mix.

The old saw that the only certainties are death and taxes was born in truth. It seems that when you die, you're the can that gets kicked one more time.

I, like most Canadians, expect to pay taxes. I don't enjoy it, I don't desire it but taxes are a fact of life. Government doesn't run on air (well maybe a little hot air).

But when you're forced to pay more than your fair share it sticks in your craw and builds resentment. So, this budget item provides a small step in the right direction, finally allowing beneficiaries to pay their fair share, but no more than that.

Alan Caplan, CFP, TEP, is with CBA Wealth. He can be reached at 780-640-1721 or by e-mail at acaplanatcba@hotmail.com.