Minimizing Taxes on Your Estate

As the old adage goes, “nothing is certain but death and taxes”. So it is surprising that many of us 
are reluctant to address the issues that surround death, especially as they relate to taxes. 
There are a number of strategies that may minimize the amount of your hard-earned wealth that will 
be left to the tax collector.

Unlike the U.S., Canada does not have an estate tax. Rather,in Canada you are deemed to have sold 
all of your assets at death and your estate is subject to tax on any accrued gains. For many estates,
the greatest tax exposure arises from investments sitting in a registered account such as a
Registered Retirement Savings Plan (RRSP) or a Registered Retirement Income Fund (RRIF), capital gains 
on other investments, and assets such as vacation properties that have appreciated in value over time.
Here are some ways to minimize the tax when it comes to your estate:  

• Defer Taxes — In extreme cases, the tax liability
associated with appreciated assets can be so significant
that estates have to liquidate assets, such as businesses
or cottages, to cover the tax expense. In such situations
and in many less extreme cases, it may make sense to
defer taxes. With a spousal rollover, as one example,
assets may be transferred upon your death to your
surviving spouse, or a spousal trust, on a tax-deferred
basis with the associated tax liabilities being deferred
until your spouse dies or the asset(s) are sold.

 

• Use Exemptions — Exemptions within the tax rules can
offer significant savings. As an example, if you own more
than one property, proper planning and use of the principal
residence exemption (PRE) may provide an opportunity
to reduce the total tax liability on these properties. If you
are a business owner, the lifetime capital gains exemption
(LCGE) may be potentially applied by the estate.

 

• Minimize Foreign Estate Taxes — This may be
necessary if you own assets outside of Canada or if any of
your beneficiaries reside in a country which has an estate
tax. For many Canadians it is common to own U.S. assets.
Under U.S. tax law, U.S. “situs” assets, which include
U.S. real estate and shares in U.S. corporations, may be
subject to the U.S. estate tax, even for Canadian residents.
There are a variety of ways to minimize a potential U.S.
estate tax bill, including disposing of U.S. situs assets prior
to death or using a Canadian holding company, trust or
partnership to own the U.S. situs assets.

 

• Freeze Taxes — If you own a business, you may wish 
to freeze your tax liability at death based on today’s 
value of the business and transfer any future growth (and 
the related tax liability) to another party, such as your adult 
child. This is called an “estate freeze”. This allows you to continue 
to control the business and lock in your future tax obligations, 
while the other party benefits from any increases in the value 
of the business (but is also liable for the future taxes on
the growth) after the date of the estate freeze.

• Permanent Life Insurance - Permanent life insurance can play a 
significant role in your estate plan as it provides tax-free 
liquidity in an estate to settle liabilities such as estate taxes. 
This will ensure that non-liquid assets, such as a cottage or a 
business, do not have to be sold, but can remain within the family. 
Examples include having a life insurance policy that would cover 
estate taxes on death, capital gains generated due to the deemed 
disposition rules or the ability to leave bequests without the 
onset of taxes payable. As with all insurance products that are 
used for estate planning purposes, a thorough cost-benefit analysis 
should be performed in order to assess the appropriateness of the 
strategy.

• Plan on Giving — Leaving a legacy through a charitable donation 
can have a lasting impact while potentially offsetting 100 percent 
of net income in the year of death and the year preceding death, 
if structured properly.

When it comes to your estate, various tax planning techniques can have a significant 
impact on the assets that you leave behind. Seeking advice from a professional can help 
to ensure that your plan has been structured properly and most effectively, in order to 
keep your estate’s taxes to a minimum so that more of your assets can be passed on to your
beneficiaries.