When passing wealth to your children.

Over 3 million Canadian couples will each pass an average of one quarter of a million dollars on to the next generation over the next 30 years. Consider that 50% of all personal assets are owned by people 50 years or older. The inheriting recipients will be faced with a host of new responsibilities when they inherit. They will have to decide: should I sell the house, what assets should I keep or place in storage, which assets should I share, which should I sell? Therefore, before you die, include these in your estate planning directives, so your estate’s executor(s) will understand what to do after you die.
Hire estate and tax planning lawyers to work with your financial advisor if your inheritance is complex, and have them discuss your estate with the children.

You can cover your cottage’s estate tax liability.

Perhaps you acquired a cottage that has increased in value from next to nothing, over several years of inflation while people seeking vacation properties pushed the fair market values up. Just like a business, a cottage can have capital gains growth. Thus, that asset can also later present you with a tax liability. If you die, or sell it, capital gains tax will be triggered on the portion that exceeds the amount originally invested. Consider passing the cottage on to the children. Personal life insurance, purchased with after-tax dollars, can offer a non-taxable death benefit to pay the tax. You can buy additional life insurance, at volume discounts that can be substantial, for other needs such as the disposition of business capital gains and buy-sell agreements; creation of future income for a spouse or dependent child, if necessary.

Where the property passes to the deceased’s spouse, taxation of the capital gain may be deferred. Once it passes to the next generation, tax is finally due at once.

By using life insurance, they won’t inherit the cottage with a large income tax bill. For a minimal monthly premium payment, your potential capital gains tax liability on a family cottage can be immediately covered. You can purchase a life insurance policy on the owner(s) for the projected tax liability of the estate.

While you’re alive, let your children buy your home or cottage.

Consider a family-run reverse mortgage on the parents’ home or cottage. One or more of the children can increase their parent’s cash flow by agreeing to buy their real estate while they are alive. The parents hold a mortgage on the property and receive monthly payments that buy their home or cottage. Life insurance can pay off any unpaid portion of the mortgage to equalize the estate with other siblings (the person holding the mortgage would be the beneficiary for tax reasons).

Make sure that your bequests stay in your family.

Deemed dispositions of capital assets at death occur even if an asset is willed directly to an heir. A capital gains tax liability remains in the deceased’s final tax return and reduces the value of the estate. If there is insufficient cash to pay the taxes due on assets your heirs may expect to inherit—such as an old homestead property, a family cottage, a residence, your farm, an art collection, furniture, or business shares—they may have to be liquidated by the estate, perhaps at a loss, to pay the tax liability. Life insurance pays benefits out tax free, circumvents probate, and can cover any estate liabilities that could impinge on bequests that you want to make to your loved ones.

Business Planning Ideas

The family business.

Getting into business is a lot easier than getting out. Many successful family businesses have accrued capital gains in the millions, from the time the owner started years ago. The tax payable is so high that the business cannot afford the liability once the owner dies at least without liquidating. One way to cover the tax liability is to save for it. The problem arises if the owner dies too soon, or the money gets used for an emergency or a new opportunity; or if the savings goal is impossible for the company to achieve. A better method might be to simply buy life insurance to immediately cover the entire estimated liability risk, which is due at the same time the benefit is paid upon the owner’s death (or the death of a surviving spouse). A sole owner may buy enough life insurance to add capital to offer additional financial stability where a wife, son, or daughter goes through the transition to actually run the business.

A business owner’s retirement may depend on an estate plan.

Many business owners base their personal financial stability on the future success of the company. When a business represents the major value of an estate, planning becomes necessary. Yet, many are not convinced that they need to plan their estate or the succession of their business.



Despite the financial importance of their business, most owners do not know what the tax liability would be if both spouses were to die. An estate plan can ensure that these taxes will be paid from one or a combination of the following sources:

· Life insurance.
· The business, from cash flow or liquid assets.
· RRSPs (also taxed when both spouses die).
· Non-registered investments.

Consider taking the time to do some succession training when you are active in the business, passing on what you know, while unifying current action with your estate plan. Sometimes successful business owners, while waiting for the perfect person to take over, run out of time. Determine who will take over the company, and where your retirement income will come from. Revise or complete both your will and power of attorney. Review your personal and/or corporate-owned life insurance, disability coverage, and key-person insurance. In some cases, the payment of relatively small life insurance premiums can entirely solve the estate’s future capital gains tax problems, and/or generate capital to replace the tax that will be payable on your RRSPs when both spouses die. Insurance can also eliminate company debt and help a succeeding son or daughter with new business capital. Finally, it can fairly equalize the division of your estate among all of your heirs.

Planning Ideas For Everyone

Taxation in your final return.

In the year of death, the deceased’s executor (or administrator, if there is no will) must submit a final tax return (also known as the terminal return) to the Canada Revenue Agency (CRA).

All income that dates from your last tax return to the day of your death must be reported, such as:

· Gains on Capital Property Where your property has increased in value above what you paid for it, that gain needs to be reported. In the year of death, one-half of the combined capital gains or losses from capital properties is a net taxable capital gain or a net capital loss. A net capital gain is taxed in the year of death. A net capital loss can be applied against the taxable capital gains of the three immediately preceding years. The balance of the net capital loss can be applied to reduce other income in the year of death and/or the immediately preceding year.

· RRSPs and RRIFs If you intended to pass all the remaining value in RRSP/RRIF holdings to your heirs, think again. The entire amount left in your RRSP or RRIF will be classified as fully taxable income. If your spouse or common-law partner survives you, the money will be rolled over to him/her and later taxed as it is withdrawn or after his or her death. Contributions made prior to death are deductible in the year of death. An executor can contribute to an RRSP of the surviving spouse within the allowable limits and within 60 days of the calendar year-end, and get a deduction against the income of the deceased in the terminal tax return.

· Registered Pension Plans (RPPs) A death benefit of an RPP is fully taxable as income of the recipient estate or beneficiary, subject to rollovers to plans for the deceased’s spouse, common-law partner, or dependent children under the age of 18.

· Regular Income All taxable income from employment, a business, or investments must be included in the terminal return. This will include any accrued income not received prior to death, such as holiday pay from an employer.

· Investment Income This will include interest on term deposits, interest due on money you have out on loan, interest on bonds, and the taxable portion of annuity income accrued to the date of death.

Reduce the impact of income taxes.

Here are some methods to reduce taxes due upon your death:

· Use the spousal (and disabled child) rollover provisions of RRSPs or RRIFs.
· Leave assets that have accrued capital gains to your spouse to defer tax.
· Leave assets without capital gains to other (non-spouse) family members.
· While you are alive, gradually sell assets having capital gains, to avoid dealing with the gains all at once in your estate.
· Purchase life insurance to cover capital gains taxation in the estate. Taxes may be payable on gains in relation to:

- income-producing real estate, a second residence, or cottage.
- any other assets left to surviving family members, such as shares of a business.

· Consider charitable donations to lessen taxes in the estate.
· Hire an estate planning lawyer and make sure your will is updated and includes your estate planning directives.