Minimize your tax burden with a sound plan

  • November 9, 2023

It is important to be ready for the two certainties in life: death and taxes. A good estate plan will help maximize benefits and reduce taxes in the event of death and/or potential incapacity. 

There are many benefits of a proper estate plan. It allows for easier and quicker administration and ensures assets go to the intended beneficiaries. 

A Will is an important legal document that spells out your wishes regarding division of wealth, succession of your family business and care of your loved ones. If a person dies without a Will, the division of your assets will be governed by the provincial law which may not align with your wishes.

The Will sets out the powers and obligations of the legal representative of the deceased (referred to as an executor) on how and when assets will be distributed and names guardians for minor children to keep the assets in trust until they reach a certain age. A trust can be a useful tool established within the Will to deal with current and future capital and income needs of spouses in a second marriage, mentally or physically incapacitated beneficiaries or minor children.   

A Will is a public document that may need to be “probated” in order to allow the beneficiaries to deal with certain estate assets. Where the individual has shares or loans receivable from private corporations, having a separate Will may minimize the probate fees otherwise applicable. 

The executor of the Will should be advised in advance to ensure that he or she is capable and willing to take on the responsibility. Also, it is recommended to communicate your wishes with your family members to ensure they understand why you have arranged things the way you have.  This often avoids surprises, undue conflict or potential breakup of family members after your death. 

When drafting a Will, it is important to identify all of your assets (bank accounts, investment accounts, real estate, collections, art and jewelry) along with your liabilities (mortgages, line of credits, loans and credit cards) both inside/outside Canada. Having the location of the original documentation also leads to a smooth administration. This can be distributed to the executor, spouse, adult children or anyone who should know about your estate plan.

Besides having a Will to deal with assets, an individual should also have a (i) Living Will which dictates instructions for your health and personal care when you are incapacitated; (ii) Power of Attorney for Personal Care which gives someone else the authority for your health and personal care when you are not able; and (iii) Power of Attorney for Property which allows someone to deal with all your financial assets in the event you become incapacitated.

When preparing a Will, it is important to assess the income tax implications. Upon death there is generally a notional sale of all assets (Canadian and foreign) at fair market value with income taxes payable thereon. In Ontario, such income taxes can be as high as 26.7 per cent on the appreciated value of capital property (i.e. real estate or stocks) and up to 53.5 per cent on the value of RRIFs and RRSPs.    

Following strategies can defer income tax and maximize the wealth to go to your beneficiaries:

  • Leave assets to spouse or a spousal trust where the assets vest indefeasibly in the spousal trust, if a spouse is alive at the date of death;
  • The estate created upon death (called a Graduated Rate Estate) can make charitable donations for up to five years after the date of death. Donations of appreciated publicly traded securities have special enhanced tax treatment;
  • Purchase life insurance early in life when it is cheaper;
  • The proceeds of a deceased individual’s RRSP can be rolled over on a tax-free basis to the Registered Disability Savings Plan of the deceased’s child or grandchild who is dependent because of physical or mental impairment;
  • Consider filing multiple tax returns (terminal and rights or things), where allowed, in the year of death. Also, an estate could reduce taxes paid on realized capital gains in the year of death by triggering capital losses in the first year of the estate;
  • Sell assets to either your children directly or set up on “intervivos” trust to control the assets after the sale to the children. This will minimize assets owned at the date of death. This alternative will trigger income taxes unless one has losses to offset any accrued gains;     
  • In both sales alternatives ensure that you will have enough cash resources to meet your future needs, such as nursing home and future medical costs in old age.

For more complicated situations, an “estate freeze” can be undertaken to transfer assets which have or will be appreciating significantly to a limited company or a holding company in exchange for fixed value shares with certain characteristics. Future growth and inherent taxes in the asset will hence be transferred to other family members. In the case of shares of a company that qualify as a “qualifying small business corporation” special rules were introduced in 2021 to allow parents to claim an enhanced tax free capital gains exemption of $913,630 (indexed to inflation each year). 

The estimated taxes upon death can be quantified at the time of an “estate freeze.” Moreover, the inherent income taxes can be eliminated by the time of death by restructuring your annual remuneration strategies. 

Where private company shares are involved, it is important to ensure your corporate structure allows your beneficiaries to maximize the available lifetime capital gains exemptions, minimize the tax and ensure the estate has sufficient liquidity to fund the resulting taxes. 

A sound estate plan is an effective tool to maximize family value retention of assets and family harmony which requires a careful review by your family and trusted advisors.

(Anthony Cusimano, CPA, and Thomas Bang CPA are partners in Williams &Partners, LLP, Markham, Ont.)

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