THIS MONTH'S CONTENTS: No Estate Taxes in Canada - eh? When Will You Be Able to Retire? How To Be More "Tax Efficient" Succession Planning Q&A's Ask the Advisor

No Estate Taxes in Canada - eh?

The majority of people take the government at it its word when told that Canada doesn't have any "estate taxes". Read how CCRA has just by waiting hedged their bets to convert more non-taxable assets into taxable elements.

In actuality, most people's assumptions about "estate taxes" couldn't be further from the truth. Canada Customs & Revenue Agency (formerly known as Revenue Canada) has long been able to put the grab on your estate through an assessment of Capital Gains on just about everything you own except your principal dwelling - to the tune of 50%! They just prefer to wait until both you and your spouse pass away, and then hit your heirs with a "deemed disposition tax" right between the eyes. All They Have To Do Is Wait... Lawmakers long felt it to be a political boondoggle and just bad business judgment for the Government to tax the estate of a primary wage earner at time of death, just when the surviving spouse is most vulnerable both in financial and emotional terms. This decision did not come from an act of kindness. Their actuarial projections clearly indicated that the greater majority of estates substantially increase in value if left untaxed. The remaining survivor often liquidated the principle dwelling and other joint assets no longer needed, and continued living out their remaining years at a much diminished lifestyle, investing most of the assets in interest bearing, and therefore taxable investments. As most spousal unions are usually between individuals who are just a few years apart in age, it was quite predictable how long CCRA would have to wait until they could put their hands on the balance of your estate, and dip into your children's inheritance. I once jokingly said on a recent CablePlus24 TV interview, that the only way around this inevitable fate for half of your estate was for the remaining survivor to remarry an individual 20 years younger in order to perpetuate the tax-free zone a while longer. Surprisingly, this tongue-in-cheek comment resulted in several phone calls to our office asking if there actually was such a way to transfer wealth across generations without the tax man taking such a significant bite. The answer is "yes" there are several solutions, but they all must be properly planned and structured early on in an individual's life in order to pass CCRA's very stringent regulations.   Here are some tips that might be employed to save your heirs thousands of dollars in unnecessary tax:   On the death of the second spouse, tax shelters and investments including RRSPs, RRIFs, and capital gains on any assets except the principal residence are fully taxable. So let's assume you have a RRSP or RRIF worth $500,000 and a cottage that you bought for $45,000 many years ago that is now worth $200,000. Your children would be obligated to pay taxes of $288,750 assuming they were in the 50% tax bracket. (50% of 500,000 plus 50% tax of 50% of the $155,000 capital gain on the cottage.) What happens in most unplanned and unprepared situations, is that the children are forced to liquidate the assets usually in an untimely manner, just to satisfy the government's demand for payment. The most cost effective way of eliminating this avoidable crisis is to purchase a $288,750 simple life insurance policy which pays out on the death of the remaining spouse. The annual premium for this type of policy for a 62 year old male and a 60 year old female is only $3,020 and often, the children are asked to contribute to the cost of the premium as they will be the benefactors of this preplanning

The insurance option makes the most economic sense. Alternatively, assuming you invested $3,020 annually earning 10% before tax that is 5% after tax it would take you 37 years to accumulate the same amount of $288,750 and if both spouses died before the investment matured, there would be insufficient money available to pay the taxes. Since the life expectancy of a 60 year old female is 21 years, buying an insurance policy is a really good investment as its payout value (which is tax exempt) and premiums can be dynamically adjusted to suit the situation as it may change. Other alternatives.... Nothing rings quite so true as that the only thing that is certain in life is "death and taxes." There are a few other options that can reduce the taxation burden upon death of the surviving spouse, and these include the creation of a testamentary or inter vivos trust, and even having the investment portfolio and secondary property owned by a corporation in which your family are its shareholders. These options in order not to be challenged by CCRA, require careful preplanning usually at the time of acquisition of the asset and should only be considered after consulting with a taxation specialist knowledgeable on these matters.   Planning for death is crucial: Here are some checklist suggestions you should discuss with your Financial Planner, Lawyer and Accountant: Take whatever steps you can to minimize Ontario probate fees Ensure that you have an up to date will in place Question whether you are eligible to establish a family trust structure Prepare to take action prior to the 21st anniversary of the family trust creation to minimize any"deemed disposition" rules Investigate how you might employ an "estate freeze" strategy" Consider taking out insurance to cover remaining taxes against your estate Donate assets and stocks instead of cash to registered charities Have a business succession plan in place if you are self-employed Investigate the "non-credit" tax implications relating to foreign ownership of assets. eg: Florida condo Gift "ownership" of your assets to your heirs while they are young and still have minimal taxable income Consider using a Line of Credit with which to purchase property instead of taking out a mortgage. These suggestions should only be implemented after a full assessment of your complete financial and business status has been properly explored.