New Posts From The Canadian Tax Resource Blog

Calculate The Pension Adjustment
Principal Residence, Joint Ownership And Death
Capital Gains On The Principal Residence After Death

Posted: 22 Feb 2011 07:00 AM PST

The pension adjustment (PA) represents an individuals total pension credits for the tax year. The PA reduces the amount of RRSP contribution room that an individual can make.

For defined benefit pension plans, the calculation of the PA can be complex. Generally, the PA represents and employee and employers contribution to an registered retirement savings plan (RRSP), deferred profit sharing plan (DPSP), money purchase pension plan or MPP (also known as a defined contribution pension plan), or to a defined contribution pension plan.

Make-Up Of the PA

The PA for a DPSP = The employers contribution to the plan
The PA for a MPP = The actual contributions made by the employer to the plan
The PA for a Defined Benefit Pension Plan = A complex mathematical calculation (well not really, see below).

The PA Defined Benefit Pension Plans

The actual contributions to a defined benefit pension plan are not directly reflected in the PA. Rather the PA reflects the current value of the future benefit entitlement. Stated a little differently, the PA reflect what you would put into an RRSP to get the same benefit in the future assuming you get the same rate of return as the pension. The calculation is:

For 1997 and later: [(9 x benefit entitlement) - $600]
Before 1997: [(9 x benefit entitlement) - $1,000]

Here is an example: Assume you a taxpayer earns $75,000 per year and participates in a 2% defined benefit pension plan. Their RRSP limit on $75,000 is $13,500 (18% of $75,000). Their PA would be:

(9 x 2% x $75,000) – $600 or $12,900.

Note that the 9 x 2% equals 18%! This is the RRSP limit for the year. The maximum defined benefit RPP contribution as it relates to the PA is 1/9 of the RRSP limit.This shows that the defined benefit pension and the RRSP contributions are related.

Questions?

Do you have a question or want to comment about the pension adjustment? Please feel free to share your questions or comments in the comment box.

Principal Residence, Joint Ownership And Death

Posted: 20 Feb 2011 06:00 AM PST

This question was originally posted in February 2009. The reader had asked about how the principal residence exemption is handled following the death of the property owner.

Question: My mother died Jan 2007, and left her house and estate to me in her will.
My name was added to the house deed just before her death in October 2006. The home was her principal residence, but not mine.
The house was sold in March 2008 to a third party. The value of the property at time of death and at the time of sale did not change (according to real estate agent).
How do I report this property on income tax. Is it on her estate income tax or mine?
Given that the house value did not change between the death and sale, there should not be any capital gains. I have searched the net for any guidance on this, can you help me. Probate was not necessary as all documents were in my name as well as hers.

Technically your mother would have been deemed to have sold 50% of her home to you in October 2006 and you would have acquired 50% of the home at that time. Given the above you may have a capital loss or gain from October 2006 until sale and your mom's estate would have a taxable capital gain from death until sale.

Now the property should have been valued at the time of transfer to joint ownership, death, and subsequent sale to determine the gains or losses. The CRA may look at comparable property in the area to assess value.

If the intent was to transfer to joint ownership for convenience then there is no capital gain or loss to either you your mom or her estate. But probate should have been paid.

Capital Gains On The Principal Residence After Death

Posted: 20 Feb 2011 05:00 AM PST

A visitor to the Canadian Tax Resource Blog wrote in asking a rather interesting question about how an estate was taxed on the capital gain from the sale of the deceased’s principal residence.

The visitor was the executor of an estate where the deceased's principal residence was included in the assets of the estate. At no point during the life of the deceased was the property rented nor was it ever used for anything but the deceased's principal residence. However, the CRA has reassessed the estate and determined that there is a taxable capital gain on the difference between the date of death and the subsequent sale date.

When The Principal Residence Exemption Applies

When a taxpayer dies their principal residence is deemed to have been sold at the date of death. The estate of the deceased therefore acquires the property at the property's value at the date of death. The deceased is entitled to claim the principal residence exemption up to the date of death.

If the terms of the Will leaves the property to an adult child who does not have a principal residence for tax purposes, then the beneficiary may claim the principal residence exemption from the date of death forward.

If the property is sold outright to an outside party then a taxable capital gain or loss will be incurred based on the value of the property as of the date of death and the subsequent sale date.

In order to maximize the principal residence exemption, you should leave your principal residence to a beneficiary who will be eligible to claim the principal residence exemption. This means you will have to leave the property to an adult child who does not own their own home.