Inheritance Tax Estate Planning For Canadians

Many people wonder why it is important to worry about inheritance tax estate planning when there isn't an inheritance tax in Canada. The main reason is because there may be certain tax consequences.

Inheritance Tax Estate Planning For Canadians

Even without a specific inheritance tax, you may want to protect your family from these consequences with clever inheritance tax estate planning. But you may need the help of an experienced financial adviser to do it correctly.

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What Happens When a Person Dies?

When a person dies, according to the law all of his assets have been disposed of one minute before death occurred.

For example, if you own an RRSP, you know that there is no tax on the money you deposit. But any money you withdraw is subject to income tax. Therefore, the money is not really tax-free, it is more like tax-deferred.

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It works the same with your estate. It is as if you withdrew the entire amount of your estate the minute before you died, and now have to pay taxes on that amount.

These taxes are paid by the estate. You can avoid these taxes by leaving your estate to your spouse or a disabled child.

Inheritance Tax Estate Planning For Capital Gains

Another tax that may arise when you pass away is the capital gains tax. Any real estate or shares you own in a corporation, or anything that has increased in value since you acquired it, is subject to capital gains tax.

For example, if you paid $40,000 for a summer cottage, and this cottage is worth $80,000 when you die, your property gained $40,000 in value. Half of this gain is taxable.

Whoever completes your final tax return will have to include half of the gain, $20,000 as income on your final return. This is also payable by your estate.

Your personal residence is exempt from this rule. If you own a home and a cottage, or a home and a property you rent out, one property may claim this exemption and not pay the capital gains tax.

Inheritance Tax Estate Planning: Use the Tools

This tax liability may be addressed using various tools. This is where inheritance tax estate planning comes in.

Life insurance policies, trust funds, beneficiary designations and restructuring of assets may help defer some taxes.

It could be well worth your while to consult a lawyer experienced in estate planning to ensure you are aware of any possible tax consequences. You will want to be aware of any ways you may be able to reduce the taxes owing, and leave enough money available to pay the remainder.

Inheritance Tax Estate Planning: A Will vs an Estate Plan

The difference between preparing a will and having a solid estate plan, is similar to hiking in January with a warm parka, mittens and boots, as opposed to shorts, tee shirt and boots.

The parts that are covered, your feet, will be fine. The others parts will not do as well. A will is only part of an estate plan. To be fully protected, you need to cover all aspects.

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A solid estate plan includes:

  1. A will. You must name an executor, how you would like your assets distributed and who your beneficiaries are, and the powers of the executors and trustees. You can not will minor children, but you should state who you would like the guardian to be. In most cases your wishes will be honoured.
  2. Power of attorney. Name the attorney you would like to be represented by, how or when this appointment will come into effect, and any limitations on the attorney. This could include any immediate powers in the case of incapacitation.
  3. Health care. It is important to name who you would like to take responsibility for your well being if you are unable to care for yourself. This may include assisted living arrangements and managing your finances.
  4. Titles to properties. You need to take into consideration any joint ownerships, the rights of the survivor, tax consequences, potential disputes and any other issues that might arise.
  5. Insurance. Make sure your policies are easy to liquify to cover any taxes and to make distribution easier.
  6. Beneficiary designations. Consider tax savings, obligations to your spouse, creditors and the impact on your estate plan. This could affect savings plans such as your RRSP, your pension and your life insurance policy.
  7. Business succession. You need to decide who will take control of your business, will your business be liquified, or plan for some other type of exit strategy. This should include considerations for shareholders and company owned life insurance policies.
  8. Taxes. Try to find as many ways as possible to reduce taxes.
  9. Trusts. Issues to consider include income spitting for tax purposes, protecting handicapped adults, protecting children and protecting assets that a beneficiary will inherit at a later time.
  10. Charitable donations. Making provisions in your will for charities allows you to give back to the community, create a lasting legacy and create a tax credit.
  11. Planning for your retirement. This may include selling current assets, changing your insurance needs, planning for incapacitation and business succession.
  12. RESPs. You need to appoint someone to become the director.
  13. Family make up. When planning how your estate will be handled upon your death, the personalities, abilities and shortcomings of your beneficiaries is a major consideration. Issues that may arise include subsequent marriages, additional children, separations or divorce, common law relationships, illegitimate children, children with disabilities, a child vying to head the family business, overbearing or aggressive children, disputes within the family, estranged members of the family, untrustworthy or greedy family members and family members with addictions.
Many of these inheritance tax estate planning items may seem to overlap, but it is very important to take all of these items into consideration at each step in your planning, especially your family make up.

The main point is to make sure everything works together effectively and there won't be any question as to how you want your estate divided.

With careful inheritance tax estate planning you can reduce the amount of taxes your estate pays in order to leave as much as possible for your beneficiaries.

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