Estate Planning, Part 2
Estate Tax Implications
“The hardest thing to understand in the world is the income tax” – Albert Einstein
For the vast majority of Canadian residents, the single largest expenditure that they will pay upon their ultimate passing is income tax. A key component of a well-crafted estate plan is a tax plan that will seek to address the tax liability that may arise.
One foundational concept in Canadian tax is that unrealized gains (and losses) on certain properties at the date of death are realized in the final tax return of the deceased taxpayer. In simple terms, this treats most properties as being “sold” at the point of death, even if they are not sold until much later. Certain properties, such as the taxpayer’s principal residence or properties left to a spouse or common-law partner may be exempt from the payment of tax. This deemed disposition applies predominately to income-producing properties, as well as funds held in registered accounts such as RRSPs.
With Canadian tax rates as high as 54.00%[i], this can result in a significant outflow to Canada Revenue Agency and less property left over to pass to the next generation, charities, or to whomever or whatever else the deceased wishes to pass their accumulated wealth. Provincial probate tax and land transfer tax can also reduce the amounts available to pass on to heirs, and should be considered in any estate plan.
Fortunately, there are conservative tax planning tools available that can assist in reducing the tax obligation upon death.
The following are effective planning tools:
Purchasing life insurance policies to fund the resulting tax liability
Ensuring desired wealth is passed to a spouse or common-law partner in a Will
Passing wealth to heirs during the taxpayer’s lifetime to take advantage of marginal tax rates
Transferring assets to a family trust during the taxpayer’s lifetime
Transferring assets to a private corporation or partnership during the taxpayer’s lifetime
Charitable donation planning
Moving to a lower-tax jurisdiction (whether inside or outside Canada)
Each of the above carries their own tax implications and require precise planning in order to implement. A tailored estate plan may contain more than one of these items to reduce (or fund) the expected tax liability.
The plan may also change as life circumstances change. The plan as implemented today may change tomorrow based upon changes in family dynamics, tax legislation, or the jurisdiction where heirs reside. These potential changes should be reviewed frequently to ensure the plan as contemplated is still effective.
As discussed in part one of this series, the most important part of addressing any estate concern is to have a plan in place. Tax is an important consideration that will drive many decisions in the plan, but the most important part of any plan remains that it suits your intentions and desires.
If you would like to discuss estate or tax planning with a GGT professional, please call us at (403) 475-8033 or email us at info@ggtcpa.com
[i] Nova Scotia’s tax rate on taxable income over $214,368 in 2020. The information in this publication is current as of November 9, 2020.
This publication has been carefully prepared; however, it was written in general terms and should not be seen as legal or tax advice. This publication should not take the place of professional advice specific to your own family circumstance. GGT Chartered Professional Accountants, its partners and employees do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken based on a decision made in relation to the concepts discussed in this publication.