Two certainties in life

It is said that the only two certainties in life are death and taxes. Since we have not (yet) discovered how to elude death, maybe we can lessen the impact that taxes may have at the time of death.

Here are six tips that could help reduce the tax on your estate:

Leave it to your spouse

The simplest and cheapest way to avoid taxes at the time of death is simply to leave your assets to your spouse. Most assets can be transferred on a tax-deferred basis to your spouse, who will inherit your adjusted cost base but will eventually have to pay the tax (when the assets are sold or when your spouse dies). This tax deferral has merit and can be easy to arrange (as long as you are married).

Give it away now

There is nothing like dying broke to minimize a tax bill at the time of death. Hopefully you will not be destitute, but your estate will not be liable for tax or probate fees if you don’t have many assets at the time of your death.

You may want to consider giving assets to family, friends, or charity during your lifetime. Keep in mind, however, that when you offer an asset to anyone except your spouse, you will be deemed to have sold that asset for fair market value on the day you transfer ownership. Even though it could trigger capital gains tax, it may be worth doing. You should calculate the tax cost first and add in the benefit of seeing your money go to someone you have chosen.

Estate freeze

An estate freeze is the process of designating a value on certain assets you own at a certain point in time. This allows you to pass on the future growth, or appreciation in value, to your heirs.

When you arrange an estate freeze, the level of capital gain that will be triggered at the time of your death will remain at today's value. Your heirs will eventually pay the tax on any growth in value of the asset after the freeze. There are various methods of accomplishing this depending on your situation, and it can be quite complicated. However, it can be an effective technique for business owners to use in succession planning.

Principal residence exemption

The sale of your principal residence (PR) is not taxable at the time of death and it does not necessarily have to be your city home. A vacation property that you spend time in each year can also qualify.

You will have to decide which property you want to designate for each year since you can only have one PR. As a rule, you would choose as your PR the property with the biggest gain per year of ownership. We always recommend, however, that you visit a tax professional before making a decision.

Designation on your RRSP or RRIF

It makes the most sense to name your spouse as the beneficiary of your RRSP or RRIF since a spouse can benefit from tax-free transfer of those assets to his or her RRSP or RRIF.

Naming a child who was financially dependent on you at the time of death can also defer the tax, but a child may normally not qualify as being "financially dependent" on you at the time of death.

Life insurance

This strategy may not reduce your taxes at death, but for tax-free death benefit of life insurance may be sufficient to cover the full tax bill. In some cases, it may be the only practical way to deal with the taxes owing.
For example, the sale of private company shares or a second property (cottage, rental property, etc.) can result in a sizeable tax bill without providing enough cash to cover it.

If your heirs want to keep the private company or second property (as many do), you may want to consider life insurance to pay the taxes, unless you have enough other liquid assets. Life insurance is like any other type of insurance; you pay a smaller premium today to look after a longer- term risk.

Many other strategies can be used to minimize taxation, based on your specific circumstances. If you would like to review your situation in this regard, please call our office for an appointment.