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info@pyc.net |
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Two Things are Certain - Death and Taxes September 2004 Whether you are nearing retirement or prudently
investing for that seemingly far-off future, you may be accumulating a substantial
portfolio for your retirement years. This may include contributions to an RRSP, a private
pension plan and perhaps investments in mutual funds, shares, stocks and bonds, a cottage
or rental property. If you are an entrepreneur, you may also have a successful company
that you may plan to sell or pass on to family members when you retire. But what happens
when you die? In tax law, a person is deemed to dispose of all property at fair market value immediately before death. As the income from that property will be taxed as part of the deceased's estate, the taxes will ultimately affect the size of the estate that you pass onto your beneficiaries. Unless you have made appropriate plans, this accumulated wealth may be subject to substantial income taxes as well as probate fees/taxes. Of course, the tax liability of the deceased's estate will depend upon a number of variables, such as a surviving spouse or partner, bequests willed to charities, the amount of tax already paid at source and income earned from investments. When Should You Start Your Estate Planning? Many taxpayers may feel that tax planning for the event of their death is not an urgent matter. It may be that they: • Are young and not concerned with the inevitable. • Perceive tax liability on their estate as relating only to annual income rather than changes in the value of their entire portfolio of assets. • View any discussion of estate planning and their eventual demise as morbid. • Underestimate the value of their holdings and the potential tax liability that may arise upon their death. However, estate planning is an essential part of your personal financial planning, regardless of your age or the size of your portfolio. As such, it is something you should be doing now, not some time in the future. Prepare a Will The most basic estate planning strategy is making sure you have a will. Anyone who owns assets should have a will to simplify matters upon death and to ensure that all property is distributed according to his or her wishes. When drawing up your will, it is important to get professional advice on ways you can: • Minimize or defer taxes upon death. • Provide a means of funding taxes upon death. You may also wish to make gifts during your lifetime to reduce the value of your estate at death. What are the Tax Implications? Discussing the tax implications of your estate planning with your chartered accountant will give you the opportunity to find ways to minimize or defer taxes on your estate. You need to consider matters such as: • Yearly income from investments, dividends, and other income sources such as rental properties. • The value of all properties including a cottage or rental property. • Using the principal residence exemption to shelter the residence with the highest gain and possibly part of the gain on another property. • The value and location of properties owned in foreign jurisdictions and the applicability of estate or other taxes in that jurisdiction. • Capital growth of mutual funds or investments in stocks that are held outside of an RRSP. It is important to have the appropriate records of the cost and timing of all transactions for determining capital gains or capital losses. • Whether the February 22, 1994 Capital Gains Election placed a valuation on assets as at that date that would affect the tax liability at the time of death should this property form part of your estate. • The value of a sole proprietorship or a partnership with consideration to buy-out clauses or the sale of the assets of the business or the business itself. • The value of shares in privately held corporations taking into account the provisions of any shareholders' agreement regarding the deceased shareholder's shares. Consideration should also be given to funding alternatives to pay the tax liability on the gain if the shares cannot easily be sold or the company is to be retained in the family. • Insurance policies and whether the beneficiaries are individuals or a corporate entity. • Company pension plans from your owner/managed company and/or current or previous employment. • The value of RRSPs and the ability to roll over these assets to a spouse or dependant, as provided under the Income Tax Act. • Capital gains or losses and the CNIL (Cumulative Net Investment Loss). • The various taxes that can have an impact on succession planning for a family business. • Any GST/HST consequences that may be involved in wills and estate planning matters. What are Your Options? What are some of the estate planning options you could discuss with your tax advisor? Depending on your particular circumstances, you may discuss how you could: • Provide for property to pass outside of your will to reduce the value of your estate for probate purposes, such as having property in joint ownership. • Designate beneficiaries for the proceeds from your insurance and RRSP or RRIF rather than make your estate the beneficiary. • Use an estate freeze to limit the increase in value of some or all of your assets, in order to minimize the tax liability arising from the deemed disposition of property on death. • Create a family trust as a will substitute to simplify estate administration and avoid probate fees/taxes. • Prepare multiple wills. In some jurisdictions, a will can be prepared for assets that will be probated and another for those that do not require probate. A separate will may also be prepared for assets held in a foreign jurisdiction. • Create an alter ego or joint spousal or common-law partner trust to extend rollover treatment as well as take advantage of the additional tax and estate planning alternatives these trusts provide for individuals 65 years of age or older. Get Professional Advice Estate planning is a complicated area of tax law. Simple solutions do not exist as each individual has particular circumstances, holdings, expectations and financial requirements. Your chartered accountant can help you carry out a preliminary analysis of: • Cash flow; • Estimated tax liability at death; • Disability insurance needs; • Life insurance needs; • Estimated probate fees/taxes; and • Calculation of estate needs after death. With this analysis, your chartered accountant can then help you address the ways you can achieve your estate planning goals and minimize the impact of taxes upon your death. Estate planning also involves consulting your lawyer and, depending on your particular circumstances, other professionals such as your banker, trust officer, insurance agent, investment advisor, financial planner and a valuator or real estate appraiser. An Estate Plan is Dynamic Be sure to review your estate plan periodically. Circumstances change. Tax laws and other laws change. As these changes can have an impact on your estate planning strategies, adjustments may be necessary. You cannot cheat the inevitability of death, but can achieve the satisfaction of knowing you beat the taxman.
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