I previously wrote about the benefit of a separate tax return of the deceased to report certain receipts referred to as “rights and things”. Where death is imminent, careful tax planning with dividends for the shareholder of a private corporation may return benefits to the estate and beneficiaries of the estate.
A taxpayer’s estate is allowed to file a separate tax return in respect of “rights and things” that the taxpayer owned at death and that would have been included in the taxpayer’s income had the taxpayer lived to receive them. This separate tax return has separate basic tax credits and a separate set of graduated tax rates. The tax rules prevent the deduction of “combined” credits in an amount in excess of what would be deductible if only one tax return was filed on behalf of the deceased. Examples of rights and things include work in progress of professionals, debts receivable, unpaid employment bonuses, and dividends that have been declared but are unpaid, unless the dividend pertains to the payer’s post-death earnings. A deemed dividend arising from the redemption of shares is not a right or thing.
If the taxpayer is a shareholder of a closely held corporation and the shareholder’s estate would otherwise have no rights and things income, the corporation can declare a dividend to the shareholder as a shareholder of record with the dividend payable after the shareholder’s death. The applicable corporate law must be considered to ensure that the dividend is effective as some jurisdictions require that a record date in respect of the payment of a dividend not precede the payment of the dividend by more than two months. This means that a dividend declaration cannot simply be prepared and forgotten, but must be considered and passed in the period leading up to the taxpayer’s death. Additional savings may be available by income splitting. If the taxpayer’s will provides that income can be paid to beneficiaries, the estate can allocate rights and things income in excess of its top rate income to beneficiaries.
Be sure to consult a pro with knowledge of the relevant tax and corporate law to benefit from the tax savings.