minimizing estate taxes
TRANSCRIPT
MINIMIZING ESTATE TAXES
MINIMIZING ESTATE TAXES
• No inheritance tax in Canada• CRA treats estate as a “sale”• No taxes paid unless the estate is inherited by the surviving
spouse or common-law partner, where certain exceptions are possible.
• The estate pays the taxes owed to the government, rather than the beneficiaries paying.
WHAT HAPPENS TO THE ESTATE?When a person dies, their legal
representative has to file a deceased tax return to the government. Any taxes owing from this tax return are taken from the estate before it can
be settled.
Once the executor has settled the estate, the CRA issues a clearance certificate to confirm all income taxes have been paid or that the
CRA has accepted security for the payment.
As a legal representative, it is important to get this clearance
certificate before distributing any property. If you do not get a
certificate, you can be liable for any amount the deceased owes.
INHERITANCE TAXES• No inheritance tax in Canada, all income earned by the deceased is taxed
on a final return.• Non-registered capital assets are considered to have been sold for fair
market value immediately prior to death. Any resulting capital gains are 50% taxable and added to all other income of the deceased on their final return where income tax will be calculated at the applicable personal income tax rates.
• Capital asset i.e. land, buildings, machinery, etc. Generally, these are assets that cannot quickly be turned into cash and are often only liquidated in a worst-case scenario. For example, a company might look at selling a capital asset if it was looking at restructuring or the business was engaged in bankruptcy proceedings.
ESTATE TAXES• Certain exemptions are available for tax liability incurred for
deemed disposition. These include the Principal Residence Exemption and the lifetime Capital Gains Exemption ($750,000).
• Deemed Disposition: When a person dies, we consider that the person has disposed of all capital property right before death.
RRSPs
• The fair market value of a Registered Retirement Savings Plan (RRSP) or a Registered Retirement Income Fund (RRIF) is included in the deceased person’s income and taxed at the regular applicable personal income tax rates with no special treatment for any capital gains earned within the RRSP or RRIF.
• RRSPs can be transferred to spouse IF they have contribution room
• No contribution room = more taxes to pay
REDUCE ESTATE TAXES• Government will look after your estate’s best interest when
you leave planet earth• Proven to be good money managers• Leave a valid will: without one estate gets settled according to
laws of your province and not your wishes• Name beneficiaries for insurance and registered plans.• Benefit: beneficiaries receive money directly and bypasses
normal estate process and not subject to Probate fees (taxes)
REDUCING ESTATE TAXESMuskoka cottage bought in 2000 for $100,000
Fred Flintstone the owner dies Jan 1 2015 but lives in Markham, ON
The market value has increased to $200,000.
How much will Fred Flintstone’s estate pay in taxes?
Do capital gains taxes apply?
REDUCING ESTATE TAXES
We know:Fred Flintstone lives in MarkhamHouse in Muskoka NOT primary residenceCapital gains may be applicableWhat do you think?
REDUCING ESTATE TAXES
Capital gains taxes are payable
Bought in 2000 for $100,000
Market Value on Jan 1 2015 is $200,000
Capital gains tax calculated as $200,000 minus $100,000 = $100,000
$100,000 Capital Gain multiplied by 50% (capital gains tax) = $50,0000
$50,000 now payable to CRA in taxes
REDUCE ESTATE TAXES:JOINT OWNERSHIP
• Jointly own a property: i.e. home, cottage another strategy for reducing probate fees (taxes)
• Joint assets pass automatically to surviving joint owner and are not considered part of estate and not subject to probate taxes.
Should be aware of:• If transfer half to adult child and they separate from their
spouse- spouse can make a claim on child’s half of the asset• If child has financial difficulty or declares bankruptcy their
ownership could be open to claims from creditors
REDUCING ESTATE TAXES:JOINT OWNERSHIP
• Pay tax on capital gains when transfer due to increased value of asset
• Considered ‘sale’ when transfer asset• You can no longer deal freely with the asset and must make
joint decisions in managing or selling the asset.• Get expert legal and tax advice before entering into these
arrangements
REDUCING ESTATE TAXESPERMANENT INSURANCE
• Consider a permanent insurance policy for estate planning purposes. Permanent insurance covers you for life, no matter how long you might live. Term insurance does not.
• Buy permanent life insurance proceeds can be paid to your estate to cover estate costs or left directly to a beneficiary to provide additional amounts to a particular person.
• The proceeds are always paid tax-free.
ESTATE TAXES
Up to date of death all income earned reported on personal tax return
After date of death all income received i.e. CPP death benefit, investments etc received by estate go on T3 Estate Tax Return
Gets tricky because income comes in after person died and most people don’t know what to do.
