Deemed dispositions ensure you don’t avoid tax
In Canada, a deemed disposition is a tax treatment applied primarily (but not only) at death.
“You don't get taxed on the full value of your assets, you get taxed on the gains that you haven't realized,” explains Weissman — meaning in essence gains on assets you haven't sold.
Deemed dispositions were introduced in 1971 as part of the government’s tax reform legislation. The new policy on taxing capital gains — the difference between what you paid for an asset and its current fair market value — replaced federal estate and gift taxes.
By taxing gains at the time of death, the government was able to ensure assets don’t get passed along for generations, avoiding tax perpetually.
In a deemed disposition, everything in your estate will be assessed, but you won’t necessarily owe tax on it. For example, taxes are waived on your principal residence. But your vacation home or rental property? Expect to pay for your gains.
“The idea is to try to make it a closed system,” says David Rotfleisch, a tax lawyer with Rotfleisch & Samulovitch in Toronto. “So you can't just keep pushing off capital gains (taxes) forever.”
The only way to avoid this tax is to live forever. As far as tax strategies go, Rotfleisch says he’s never heard of that one working before.
Events other than death can trigger taxation
But there are a few other situations other than death when people find themselves on the hook for the deemed disposal of their assets.
Emigration is one such situation. Canadians who give up their residency and move to another country will be subject to a deemed disposition.
If your possessions total more than $25,000 when you leave the country, you’ll be taxed — with a few exceptions, including any cash in your bank, registered accounts or pension plans and personal items like furniture, clothing or cars, which are worth less than $10,000.
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Another example is when turning your home into an income property. While principal residences are exempt from tax, converting yours into a rental — or renting out more than half of it — isn’t.
You’ll owe the government a cut on the difference between your home’s value right before any changes you make and when you choose to sell it — although Weissman adds you can often defer the payment until you officially sell the home.
Even changing your investment account to be jointly owned with your spouse can trigger tax implications, says Weissman. That’s because in sharing half of the ownership, you’re deemed to have disposed of your partner’s half.
“It's not as simple as just adding someone to ownership of property,” he adds. “And by making it joint, it's not necessarily a tax-free transaction.”
Getting prepared for this tax treatment one day
Weissman says deemed dispositions should be on everyone’s radar, knowing it will happen to their estate one day.
Preparing in advance, like using an estate freeze for business owners, setting up a trust or naming a beneficiary on your registered accounts so it bypasses your will can all be ways to reduce your tax liability.
Some people may decide to take out a life insurance policy so the proceeds can help their family settle their taxes without having to actually dispose of the inherited assets.
But regardless, there’s no way to escape taxes forever. Even trusts will be subject to a deemed disposition after 21 years.
If you’re ever unsure of the tax implications of a simple action — whether it’s transferring an account into someone else’s name or renting out a room in your house — Weissman says it doesn’t hurt to consult a professional.
It’s certainly better than receiving a surprise tax bill — or worse yet, leaving one for your loved ones.
“If you bury your head in the sand … what could end up happening is your estate ends up paying a lot more taxes than it needed to — which means you're leaving more to the government than you are to your family,” says Weissman.
