When a person dies,all ofher property is taxed. Thishappensbecause the taxdepartmentconsidersthe propertyto besold at fair market value on the day the persondies.The difference between the valueof the propertywhen the persondiesand the original price paid is called the capital gain.The capital gainmust be declared to the taxdepartment.
This article talks aboutsomestrategiesyou can use to decreasethe taxes your estate will have to pay when you die, or at least postpone them. Some of these strategies might not apply to your situation! It can be a good idea to consult a specialistto getadvice on which are suitable for you.
Leavepropertytoyourspouse.
If you leave property to your spouse,neitherofyou will have to pay taxesimmediately on the capital gain. The taxable capital gainwill bepostponed until your spouse sellsor givesthe propertyto someone, or until he or she dies.This is called the “spousal rollover.”
This strategyis extremely usefulforproperty with a large capital gain (e.g., cottage, investment property,land, non-registered investment).
If you don’t leave your property to your spouse, the capital gains taxwill be due when you die.Thistaxtakespriority andispaidbythe estate, which decreasestheamount theheirsreceive.
For example, you decideto leave yourcottage, worth $150,000, to your daughter. You bought the cottage 10 years ago for $50,000.If you die today, your estatemustdeclare a capital gain of $100,000($150,000–$50,000).
Since 50% of the capital gain is taxable,your estatemustpay taxes on $50,000, on top ofthe taxes owing on your other incomeand capital gains.
How can you leave your property to your spouse?Inyour will.
Leave your registeredretirement savings plan (RRSP) to yourspouse.
If you leave your registered retirement savings plan (RRSP) or your registered retirement income fund (RRIF)to your spouse,he or she can transfer the funds to his or herownregistered plan when you die.No taxes will bedueifno funds are withdrawn.
For example,ifyou leave your $200,000 RRSP to your wife, she can transfer it to her own RRSP. No taxes will bedueuntil she withdraws money fromit.
If you don’t leave your RRSP to your spouse,thetaxes on the amountsaccumulatedwill be due when you die.These taxestakepriorityand are paid bytheestate, which decreasestheamount theheirs receive.
For example, you leave your $200,000 RRSP to your 26-year-olddaughter.When you die, this amount will be added to your incomein your final tax return. The only way to avoid taxes is by leaving your RRSP to your spouse.
How can you leave yourRRSPto your spouse?In your will.
Leaveyourregisteredretirementsavingsplan (RRSP) tochildren financiallydependent on you.
If you leave your registered retirement savings plan to a child or grandchildwho is financially dependent on you,themoneycan be used tobuyan annuity. The childwill receivethe annuity until the age of18An annuity is a set of payments over a fixedperiod of time.By doing this,you are spreading out thetaxes over several years. The tax rate will be lowerbecausepeople under 18have low incomes.
If you havea child or grandchildwitha physical or mentaldisability,you can transfer the amountsinyour retirement plan to an RRSP or RRIF tothe child’sname, or you canbuyan annuity for the child.If the child is disabled, the annuity can be paideven afterhe or she turns 18.
For example, you leave your $90,000 RRSP to your grandson, Simon, who is six years old. You have been taking care of him since your daughter died.Simon will receive an annuity of$7,500 (plus interest) for 12 years. Since this is Simon’s only income, he willpayvery little tax.
If you don’t use this strategy, the taxes on the amounts accumulatedin your RRSPwill beduewhen you die.These taxestake priorityand are paid by the estate,which decreasestheamount theheirsreceive.
For example, youleave your $90,000 RRSP to your 19-year-oldgranddaughterAlexia, who is notfinanciallydependent on you. When you die, this amount must be added to your income in your final tax return.
Howcan you leave your RRSP to children who are financially dependent on you?In your will.
Leave yourTFSAto your spouse.
If you leave your tax-free savings account (TFSA)to your spouse, he or she cantransfer all or part of the funds to his or herownTFSAbefore December 31 of the year following your death.
This will not affect your spouse’s own contribution limit.Your spousemustfill out a form called “Designationof an ExemptContribution–Tax-Free Savings Account (TFSA).”However, theinterest earned in your TFSA between the dayof your death and the time of the transferis taxable and must be declared by your spouse.
For example, you leave your $9,000 TFSAto yourspouse.Theincomeearned in your TFSAsinceyour deathis$150.He can transfer $9,150to hisownTFSA and complete thenecessaryform before the deadline.He must declare the $150in his tax return. He can also continue to contribute to his TFSA as if he hadn’t inherited the $9,150. In other words, the amount transferred does not affect his contribution limit.
If you don’t leave your TFSA to your spouse,the income and capital gains from the TFSA will be taxable from the date of your death.However, anything accumulated in the TFSA before your death is not taxable.
How do youleave your TFSA to your spouse?Inyour will.
Buy life insurance.
Life insurance proceedsgodirectly to one or morebeneficiaries,tax-free.
The beneficiary can be a specific person,orit can bethe estate(orthe“heirs” or “assigns”).
For example,imagine thatyou havequite a fewdebts. Youdecide to buy life insurance sotheproceeds canbe used to pay off your debts. You specify that “your heirs” are the beneficiaries of the policy. When you die,the life insuranceproceedscan be used to pay off your debts and funeral expenses.Without the life insurance, your executor would have to sell the house or other property or reduce your family’s inheritance.
If you do not have life insurance,your estatemightnot be able topaythe taxeson your income and capital gains(unless your estate is quite large),not to mentionthe estate’s other debts. This might affect thesize of thebequests.
How do you do this?By buying life insurance and naming one or more beneficiariesinthe policy.Usually,you can changethe beneficiary at any time without the beneficiary’s permission, unlessthe designationwas “irrevocable”, which means it cannot be changed.
However, divorce ordissolutionof a civil union automaticallycancelsthe spouse as a beneficiary, even if it wasirrevocable.
Createatrust inyour will.
By creating a trust in your will, you candivide the income between the trust and the beneficiaries,whoare considered separate taxpayers.This means the income of the trust and the income of the beneficiarieswill be taxed separately.
Also, ifthe trust is created for your spouseonly,taxes can be postponed untilhe or she dies, or untilthe trust transferstheproperty received under the will to another person.
For example, you create a trust in your will. You transfer a rental property and your stock portfolio to the trust. Together, they bring in $25,000 a year in rent and dividends. Your spouse and four children are the beneficiaries.You can distribute the income amongthemthroughthe trust.Each will receive $5,000, and this amount will be added to theirincome.
If you do not create a trust, the income from the property the estate receives is added to the income of the person receiving it,which increasesthetaxesdue.
For example, you leave yourrental property and stock portfolioto one of your children, butyou decide not to usea trust.
Your childwill have to pay taxes on his or her own income, in addition to the incomeproduced by the propertyreceived from the estate. Since his or her income will be higher, the taxes owing will be higher too.
Howcan you create a trust?In your will.
Givesome of your property to your familyduring your lifetime.
Every time you sell or give certain types of property, you must pay taxes on the capital gain in that year.
However,thisdecreasesthe total value of your property, whichalsodecreases the taxes owingupon your death.The taxes will be lower because they are calculated based ona progressive rate structure. “Progressive” means thatthe rate increasesaccording tothe amount of taxable income.By adding these taxable amounts to yourcurrentincome,instead of waiting until you die, they willbe taxed at a lower rate.
Also, by giving property to your family, theywill beresponsible for any increase in future value, which means that income tax can be postponed until they sell the property themselves,or later, when they die.
Make surethat whatever you giveawaydoesn’thave a negative effect on your lifestyleduringretirement.
For example, imagine that you are retired and live in a small house by a lake. You are living well, though modestly, off your RRSPs. You also own land in another municipality. You bought it 20 years ago for $50,000 but didn’t build anything on it.
While you are still alive, you give the land, worth $100,000, to your two sons.
The gift of the land to your sons must be declared in your tax return for that year, as if you had sold it. You declare a capital gain of $50,000 ($100,000-$50,000). Since 50% of the capital gain is taxable, you must pay taxes on $25,000, which will be added to your other taxable income for the year. By reducing the total value of your property, you decrease the amount of taxes due when you die.
If you don’t give some of your property to your family members while you are still alive, the capital gain on all of your property must be declared when you die. The more property you have that has increased in value since you bought it, the more taxes will be due when you die.
How do you give property to your family? At any time, by following the rules that apply to the type of property (a document prepared by a notary for buildings and property that you are not giving – and handing over – to a family member right away, registration for vehicles, etc.).
Donate to a registered charity.
You canleavemoney or propertyto a registered charitywhen you die.Thisgives your estatea major tax credit thatit can use to reduce the taxes owing.
For example,let’s say thatyou want to leave some property to your loved ones,but you also want toleave something to “KindHearts,” a registered charity thathashelpedyour family.
By giving$1,000to thecharity through your will, you will decreasethetaxesowingwhen you die by about $450.The person settling your estatecan use this tax savings to reduce theamount ofincome taxowing.By makingthis gift, you are supporting the charity of your choice, decreasingthe taxesdue, and maximizingthe inheritance yourloved oneswill receive.
If you hold securities (e.g., shares, bonds) that are not “registered”(not part of your RRSP), you can also leave them to a registered charity and take advantage of a major tax credit to decrease the taxes owing when you die.
If youdon’tdonate toa registered charity, your estate can’t take advantage ofthecharitable donationtax credit.
How do youdonate to a registered charity?By identifyingin your willthecharityyou want to donateto.Be sure to includeits registration number with the Canada Revenue Agencysothatyour wishes are carried out.
