Dealing with the loss of a loved one is always difficult. Amidst the grief, there are obligations that must be met such as handling their final tax return. It's a task that intertwines emotion with the cold hard facts of finance. I will tell you that being a CPA and having done this for both my parents, it is not easier. This is especially true when it involves significant amount of tax owing from an RRSP with non-spousal beneficiaries or the tricky income inclusion from outstanding Homebuyer's Plan (HBP) or Lifelong Learning Plans (LLP) withdrawals.
Today, let's unpack a critical aspect of this - the increased withdrawal limits under the HBP, which now stands at $35,000, repayable over 15 years. While the amounts available under the LLP haven’t changed, you can withdraw up to $20,000, and is repayable over 10 years. What follows applies to this program too.
Let’s consider a practical example where you purchase a home in 2024, both you and your spouse utilize the full HBP amount, but then, unfortunately, your spouse passes away in 2026, the first year of repayment. This situation leads to a potential $35,000 of income being added to their final tax return. If taxed at a 36% rate (applicable for Ontario residents in the income band between $107,000 and $150,000), this translates to an additional $12,000 on the return.
Many believe that upon death, all financial matters seamlessly transfer to the surviving spouse without tax implications. While this generally is true for assets (unless you choose otherwise), it's different for liabilities like HBP repayments.
Here's a silver lining, though: You can choose to take on your spouse's HBP repayment obligations. This decision prevents the immediate income inclusion and tax hit on their final return. However, it doubles your annual repayment burden - from $2,333.33 to $4,666.66 until the HBP is fully repaid. This move also means you forfeit the associated tax deduction.
Whether or not to make this election depends on your financial situation. But remember, this isn't a decision to take lightly or delay. To make this election, you and your legal representative must attach a letter to the tax return (or send it to the tax center) by the return's due date. Missing this deadline could result in a late filing penalty of $100 per month, up to a maximum of $8,000. While it's possible to request relief from this penalty, it's granted at the Minister's discretion and isn't always a given.
When it comes to the final return of a loved one, I can't stress enough the importance of consulting a tax professional, especially when dealing with HBP and LLP withdrawals. They can guide you through the complexities of the final tax return, ensuring you make informed decisions that ensure your financial well-being.
Standard Disclaimer: This is intended to be a guide and not binding tax advice. If you need that, call me.