TIPS FOR REDUCING TAX AND FEES
- Have a will signed and in a place where the executor can find it
- Try to use up your RRSP / RRIF savings before life expectancy. Put extra in the TFSA instead.
- Have an exit plan for your business
- Keep your will simple. Specific gifts can be done outside the will.
DEATH AND TAXES
In Canada, we do not have an estate tax like in the US, but that does not mean there are no tax consequences at death. A resident of Canada who dies is deemed to have disposed of everything they own at fair market value, so if there was any gain in value on property or stocks, that gain would all be taxed in year of death. Even worse, any amounts left over in a retirement account like a RRSP / RRIF would all be added to income. Imagine a person passing away with $400,000 left in their RRSP. That would be $400,000 extra taxable income in year of death! In BC, anything over $220,000 income is taxed at 53.5%.
It gets even worse for an incorporated small business owner. If the business has increased in value, at death there is a capital gain on any shares held by the owner. The problem is that to take money out of the company, it is a dividend, which is a completely different layer of tax. Unless the executor can find someone to buy the shares directly from the estate, there will be double tax on the value of the business shares held by the estate – first the gain on the shares, then the dividend to strip the value out of the company and wind up the business. Only exception is if the company itself buys back the shares from the estate for a deemed dividend within one year of death. Then the capital gain portion of the tax can be avoided.
The main exception to the deemed disposition rules is if the deceased had a spouse that inherited the assets. The tax rules allow for a rollover at original cost to a surviving spouse or common law partner. This could include the RRSP, TFSA, investment property, and business shares amongst other things. The tax would then be avoided until the surviving spouse passes away.
Income tax isn’t the only tax a person can face at death. Each province in Canada has its own fees for overseeing the will. In BC, that fee is about 1.4% of the entire value of the estate. For an estate worth $1,000,000, that would be a fee of about $14,000.
There are ways to have amounts bypass the will and go straight to a beneficiary, avoiding the provincial fee. There are also ways to plan to reduce your estate income tax or the double tax on a corporation. Every person’s situation is different and needs to be carefully considered.
Contact me to discuss how a legacy plan can save tax and administration costs and help make sure your stuff goes to the people you want it to go to.