Death & Taxes

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

Here are six tips that may help you to reduce that tax:

1. 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. They can be transferred on a tax-deferred basis to your spouse, who will inherit your adjusted cost base and will eventually have to pay the tax (when the assets are sold or when your spouse dies). This tax deferral has much merit.

2. 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 have few assets at the time of your death.

You may want to seriously consider giving assets away 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. This could trigger capital gains tax, but may still be worth doing. You should calculate the tax cost first.

3. Estate freeze

An estate freeze is simply the process of taking certain assets you own today, and freezing them at their current value in your hands. An estate freeze allows you to establish the value of an asset today, and to pass the future growth, or appreciation in value, to your heirs.

When you do this, 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 particular situation.

4. Principal residence exemption

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

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

5. 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 will normally not qualify as being "financially dependent" on you at the time of death.

6. Life insurance to cover the tax bill

This strategy may not reduce your taxes at death, but should cover the 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, life insurance may be necessary to pay the taxes unless you have enough other liquid assets.

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