Over the weekend the Globe and Mail published an excerpt from Douglas Gray and John Budd’s, the Canadian Guide to Will & Estate Planning. In it, the authors discuss some of the main areas of tax liability that arise on an individual’s death and techniques to minimize taxes.
On death, one of the biggest tax hits can come from the cash and investments sitting in an RRSP or RRIF. This is because the general rule is that the full value of an RRSP or RRIF must be included as income in the deceased’s final tax return (referred to as the “terminal return”). Depending on the value of the registered plan and the deceased’s marginal tax rate, the taxes that come due can be significant.
Another area of considerable tax liability can come from assets that have appreciated significantly since being acquired by an individual. This is frequently seen with vacation properties (that have not been designated as a principal residence) and marketable securities. On an individual’s death, the deemed disposition of assets that occurs can trigger significant capital gains that must be included on the terminal return.
The authors provide a number of tax planning goals that should be considered when doing estate planning:
- Minimize capital gains taxes arising on death by taking advantage of available exemptions;
- Eliminate or reduce foreign estate taxes that might arise;
- Take advantage of current income tax savings; and
- Create a flexible tax plan that will be adaptable to changing personal circumstances or changes in the law.
When tax issues arise with estate planning, it is always a good idea to involve an accountant so that appropriate planning techniques can be employed.