Techniques to defer or reduce final tax obligations
Per the Income Tax Act you are entitled to arrange your financial affairs in such a way as to defer and/or avoid, but not evade your tax obligations, both in life, but also upon your passing. By considering potential tax consequences in advance, you may take steps to reduce your final tax liability. Though not an all-inclusive list, outlined below are various tax planning techniques which may be considered in an effort to reduce or offset the ultimate departure tax.
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Income-splitting
In addition to receiving an immediate tax deduction against income and the benefit of long-term deferral, Spousal RRSP contributions may serve to transfer potential future tax liability upon withdrawal of RRSP/RRIF proceeds into the hands of a lower income spouse; creating the potential for significant tax savings. Further, income-splitting of pension and/or RRIF income (after age 65) as well as early RRSP/RRIF withdrawals (tax leveling) may further reduce your combined tax obligation in life, and may also help to reduce your final tax obligations. -
Spousal transfers
Assets with unrealized capital gains may be rolled-over tax-free to a spouse, common-law spouse or spousal trust. The asset is transferred to the surviving spouse at the Adjusted Cost Base (ACB) and consequently taxes are deferred until such time as the surviving spouse liquidates the asset or passes. Unused capital losses carried forward may be applied prior to the spousal transfer. -
Name your spouse as beneficiary of registered plans
Upon the passing of the original Annuitant, the full value of the plan(s) may be transferred without tax consequences to the surviving spouse beneficiary/successor annuitant. In cases where the “Estate” is named as beneficiary, the surviving spouse may request the tax-free roll-over as above. Where no beneficiary is named, remaining assets are payable into the Estate without recourse and may be subject to taxes and/or probate fees. -
Name children as beneficiaries of registered plans
Financially dependent children (or grandchildren) under the age of 18 may be named as beneficiaries of registered plan savings. Upon the Annuitant’s passing, proceeds may be used to purchase an annuity which matures at the time the child turns 18. Because income from the annuity will be taxed in the hands of the minor child; likely at a lower rate than the surviving spouse, from a planning perspective it may be prudent to name a financially dependent minor child as beneficiary – annuity income may be used to fund the child’s education or for other needs. Upon the child’s 18th birthday however, the Annuitant should consider updating the beneficiary information to reflect his/her spouse. Note that an RRSP can be transferred to a child who is dependent as a result of a disability. -
Transfers as a result of marriage breakdown
Registered plans including RRSP/RRIF and TFSA accounts may be transferred by court judgment or written separation agreement to a (former) spouse as a result of marriage breakdown. Income attribution rules which might otherwise penalize the plan contributor do not apply. -
One last registered plan contribution
The Estate of a deceased Annuitant may make a final contribution to the Annuitant’s RRSP or Spousal RRSP within 60 days of the end of the calendar year in which the taxpayer passed, provided the Annuitant has contribution room available and was younger than age 71 prior to passing. The corresponding tax deduction may be significant. -
Life Insurance to create and preserve your estate
Proceeds from a permanent life insurance policy may be used to create, enhance or replace estate value which may otherwise be lost to taxation or other expense and or provide for necessary liquidity in the wind-up of an estate. From a funding perspective, the cumulative cost of the annual life insurance premiums is often only a fraction of the related death benefit. Further, related probate fees may be avoided by naming beneficiaries to the contract...more -
Optimize retirement spending
An ideal estate plan would be one which could anticipate the spending of your last dime upon taking your last breath... Unfortunately longevity is unknown and the many other variables involved make it impossible to pinpoint your outcome to this degree of accuracy. Though spending your child’s inheritance (or an early distribution to children) may be an effective means of reducing your final tax obligation (and probate fees,) the risk of outliving your capital may increase as a result. -
Philanthropy for legacy goals and potential tax savings
As a result of more recent changes to how the non-refundable Donations Tax Credit is applied, gifting of cash and/or securities to an eligible registered charity (or your private foundation) has become a very effective estate planning strategy, both from the standpoint of creating a lasting legacy, but also from a tax savings perspective; both in life and upon passing. -
Estate Freeze
Taxpayers, especially business owners may pursue an estate freeze to reduce or defer income taxes otherwise due upon their passing as a result of deemed dispositions. An estate freeze in combination with a living (inter vivos) trust and a corporation, may allow you to transfer future gains and their related tax liability into the hands of your children and other beneficiaries. This may have the effect of multiplying the allowed $750,000 lifetime capital gains exemption for qualified small business shares...more -
Living and Testamentary Trusts
A trust is a legal arrangement whereby a person (Settlor) gives property to another person (a Trustee who retains legal title to the property) to hold for the benefit of one or more persons (Beneficiaries who retain beneficial ownership.) Trusts may be used to solve a variety of Estate planning concern; from tax reduction and deferral to helping protect beneficiaries/dependents from potential creditors and/or from marriage breakdown...more -
Segregated funds
Segregated funds offer a number of estate planning benefits – beyond defined maturity and/or death benefit guarantees, where beneficiaries are named on the segregated funds contract, proceeds may bypass probate. In certain circumstances, segregated funds may potentially also offer protection from creditors...more -
Apply capital losses
Upon your passing, any unused capital losses may be applied against all types of income; not just capital gains. This claim may be made on the final tax return and/or the previous year’s tax return. -
Market volatility after death
Where the market value of assets held in an Estate (prior to distribution of proceeds to beneficiaries) declines, and where the Executor liquidates assets (within a year) and realizes losses, capital losses can be carried back to offset capital gains (if any) on the deceased’s final tax return.
