Of the G7 nations, Canada is the only one without an estate tax. But the federal government still has its ways of collecting tax when someone passes. Remaining assets in a Registered Retirement Savings Plan (RRSP) or Registered Retirement Income Fund (RRIF) are taxed as income on the final tax return, which means about half of the balance could go to tax. And 50% of realized capital gains are also taxable on the final return – that could amount to tens of thousands of dollars in the case of vacation property, for example.
There are ways, however, to minimize the amount of tax payable by an estate. Here are some of the more common strategies.
Transferring assets through your will to your spouse can defer taxes. This means no tax is payable on income or capital gains involving these assets on your final return. Tax will be payable when your spouse sells the assets or passes away. This strategy includes RRSP or RRIF assets, which can also go to your spouse on a tax-deferred basis.
In some cases it makes financial sense to gift assets during your lifetime that would trigger tax on capital gains if left through your will. Stocks in a non-registered account, for example, or a more significant asset, like vacation property. If you were to gift the cottage, cabin or chalet to your children now, it could result in a tax bill that is manageable, compared with a burdensome tax liability for your estate after many more years of capital appreciation.
An advantage of donating to a charity through your will is that the claim for a charitable donation can be up to 100% of net income, instead of the usual 75% limit. Also, you can be certain you’re donating funds not needed during your lifetime. The person filing your tax returns has the flexibility to report the donation in your estate, your final taxation year or the previous year.
In some cases, the value of vacation property can appreciate more than the family home. You may be able to apply the principal residence exemption (PRE) to the vacation property instead of the home, reducing the tax on capital gains.
If you’re a business owner counting on the lifetime capital gains exemption (LCGE), it’s critical to remain eligible for the tax break. Say that a business owner passes away prematurely and triggers capital gains tax on business shares. In 2018, with a capital gains exemption limit of $848,252, the LCGE would save over $210,000 in tax (at a 50% marginal tax rate). But the estate could only apply these savings if the owner met all qualifying criteria for the exemption. It’s important to work with your tax advisor to remain eligible, in case purification, crystallization or another technique is required.
Please contact us or your tax advisor about these strategies and other ways to pay less tax on estate assets and leave more funds for your heirs.