What Happens When You Are a Surviving Spouse?
You are a 75-year-old woman. Your husband of 50 years has just died, the funeral has been held and he has been buried. In the middle of this grief and loneliness, you remember that you had named each other as executors in your respective wills. You have some time, but you need to begin addressing the matters of getting on with your life alone.
Estate Matters
Your late husband’s estate was fairly simple, fortunately. You had made mirror wills, leaving everything to the survivor. All your assets and bank accounts were jointly owned, and for registered accounts, you were named a successor (beneficiary) so there was little extra to do except to present death certificates and update the ownership of the accounts.
Tax Matters
When a person dies, the executor needs to file a terminal return. You need to report your late husband’s income up to the date of death.
Your husband routinely made charitable donations. As in previous years, these can be claimed for a tax credit. However, as executor, you can carry them back to the previous year as well.
When filing a terminal return for your husband, you have until 6 months after his death or the usual tax filing deadline, whichever is later. Assuming he died on June 15, 2021, the two possible deadlines are December 15, 2021 (6 months later) or April 30, 2022. Since April 30 is later, you do not need to file until then.
Like many retirees, you and your husband were paying your taxes by quarterly installments. These payments are no longer required for your husband.
You never owned any investment assets outside of registered accounts, so no capital gains tax was due.
Financial Matters
When a couple is reduced to a surviving spouse, there is an impact on your income and taxes. Your individual income is likely to go up but as a household it is almost certainly going to decrease. At the same time, your taxes are likely to increase as you lose the opportunity to split your income. Here are some of the details.
Government Benefits
Canada Pension Plan
Death Benefit
As executor, you can claim a death benefit of $2,500 through the Canada Pension Plan system. This is intended to help defray the cost of final expenses such as the funeral.
Survivor’s Benefit
You also will receive a CPP survivor’s benefit. When you both retired in 2011, when you were 65, you received about 80% of the maximum CPP. In 2021, that maximum for those who begin their CPP retirement pension at 65 is $1,203.75 per month. At 80% of the maximum, you were each receiving $963 per month this year. You will continue to receive your $963, but you can also receive 60% of your husband’s CPP payments, as long as it does not exceed $1,203.75. Sixty percent of $963 equals $577.80. Adding that figure to the amount you are already receiving adds up to $1540.80. As that figure exceeds the maximum for those who retired at age 65, $1,203.75 is the maximum you will receive, which is $240.75 more than you were receiving as an individual.
Old Age Security
You will continue to receive the OAS that you were receiving before, but your husband’s OAS will stop. As of the April – June 2021 quarter, that figure is $618.45 per month.
The following table summarizes the differences involved.
Pension
For the last part of your husband’s career, he was employed in a position that gave him a defined benefit pension plan. It is fully indexed to inflation and you as the surviving spouse will receive two-thirds of the pension he was receiving. At the time he retired 10 years ago, he was receiving $1,000 per month. As of 2021, he was receiving $1,170 per month. You continue to receive $780 per month ($1,170 x 2/3) for the remainder of this year, but it will be adjusted upward according to the Cost-of-Living Index in the new year.
Investments
In addition to your husband’s pension, both of you had contributed to a combination of defined contribution plans through work and registered retirement savings plans. You had converted these to LIFs and RRIFs at age 65, when you had retired. Because your husband had been in a defined benefit plan for part of his career, his accounts amounted to a little less, about $650,000, while yours was almost $835,000. In 2021, you had both already withdrawn your Annual Minimum Payments (AMPs) of just under $40,000 for your husband and a bit more than $51,000 for yourself.
You also have Tax-Free Savings Accounts (TFSAs) to which you have maximized contributions each year. You have found that you don’t spend all your income so you have been putting the surplus into your TFSAs each year on the assumption that they would eventually form part of the inheritance for your children.
You and your husband had prepared well regarding these accounts. You had named each other as successor annuitants for your LIFs and RRIFs and as successor holders for your TFSAs.
Now that your husband has died, his LIF and RRIF will become yours. You will have more than enough to live on.
Tax Matters Revisited
Taking all these assets into your name has revealed a bit of a surprise, though. Your tax bill has gone up considerably. Between the two of you, you were paying about $27,000 in taxes. Going forward, you discover that you are likely to pay over $36,000 in income taxes each year since there is no longer an opportunity to split income between the two of you. Note as well, that about $6,400 of those extra taxes includes the OAS recovery tax, which claws back 15% of net income above $79,845 in 2021. This effectively reduces your OAS to about $1,000. The table below lays out those differences.
The effect is that you are going to be living on an after-tax income of about 74% of what you had lived on previously. Although rules of thumb need to be tested, it is often said that a single person can live at the same level as a couple on approximately 70% of a couple’s income.
The emotional and psychological impact of losing a spouse is much more significant than these bureaucratic and financial matters. However, having these things anticipated and planned out can help you get them out of the way so that you can take the time you need to reflect, to mourn, and to be with your loved ones.
Tax estimates courtesy of taxtips.ca.
This is the 104th blog post for Russ Writes.
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Disclaimer: This blog post is intended for general information and discussion purposes only. It should not be relied upon for investment, insurance, tax, or legal decisions.