Preserving Wealth: Strategies for Minimizing Inheritance Taxes
With an estimated one trillion dollars set to change hands from one generation to the next in Canada over the next decade, effective estate planning has never been more critical. As we anticipate significant inheritances, it's essential to understand how to minimize the tax burden on these bequests.
Understanding Inheritance Taxation in Canada
“Estate tax, or inheritance tax, is actually an American term and tax regulation,” explains Jordan Tanner, Senior Insurance Advisor with WealthCo. “In Canada, things work differently. When we die, there is a deemed disposition of our property on the date of death. Tax is then determined based on the type of property we own. While our principal residence or a Qualified Farm Property can be tax-free, capital property—such as non-registered investments, shares of a private business, or interest in a partnership—are all subject to tax, usually in the form of a capital gain.”
In Canada, capital gains are taxed on 50% of the realized capital gain (the growth in value over and above the purchase price of the asset). This means that only half of the capital gain is subject to taxation at your applicable tax rate, which varies depending on your province.
One significant surprise for many is that anything remaining in an RRSP at death is taxed fully as income in the year of death. For instance, if someone in Alberta dies with $1,000,000 in their RRSP, the tax in the year of death on the RRSP would be over $440,000.
The Role of Probate
Probate is the process where the courts formally validate a will. If you die without a will, your estate still needs to go through probate and will be distributed according to provincial laws.
“Another factor in Canada is the provincial probate fee,” Tanner explains. “Probate fees vary by province. In Alberta, our maximum probate fee is $525, regardless of the estate size. However, in BC, the fee is a percentage of the total estate assets.”
Ensuring that your will is current and working closely with qualified estate planning professionals is crucial to managing these costs and ensuring your wishes are honored.
Strategies to Minimize the Tax Burden on Beneficiaries
Effective estate planning involves various strategies to legally and effectively reduce the taxes owed. Here are some key strategies to consider:
Utilize Your Principal Residence
Your principal residence can be passed to beneficiaries tax-free. While other properties, such as vacation homes and rental properties, are subject to capital gains taxes, your principal residence is exempt, regardless of its value.
Maximize Your Tax-Free Savings Account (TFSA)
Maximizing your TFSA is an effective part of estate planning. TFSAs can be passed on to beneficiaries without any capital gains taxes, making them a perfect asset to leave behind. Funds withdrawn from a TFSA are not taxed, even if there has been significant growth in the account.
Consider Life Insurance
“Life insurance is another crucial tool for passing along an inheritance with zero taxation,” Tanner shares. Life insurance death benefits are received by beneficiaries tax-free, providing immediate cash to cover any estate taxes and administrative expenses. This ensures that heirs have the necessary funds without having to sell assets or incur debt. Additionally, life insurance can help equalize estates when one or more children inherit a family business or farm while others do not.
Plan Today for Peace of Mind Tomorrow
“People get busy with their careers and may find estate planning low on their priority list,” Tanner states. “We encourage having this important conversation sooner rather than later, and we promise to make the process seamless and straightforward.”
Interested in minimizing your estate tax burden? Our WealthCo insurance advisory team is here to discuss your options and help you create a robust estate plan. Contact us today to ensure your legacy is preserved and your beneficiaries are protected.
Jordan Tanner, a Senior Insurance Advisor at WealthCo, lives by the motto, “It’s not how much you make, it’s how much you keep.” With a career spanning two decades, Jordan specializes in insurance-based tax, estate, and retirement planning solutions for business owners, professionals, executives, and retirees. Jordan firmly believes that your professional advisory team should work together, not independently, to help you develop the most efficient tax, legal, and financial structures based on your unique requirements and goals. This collaborative approach is the cornerstone of the Integrated Advisory Network, ensuring that all aspects of your financial planning are seamlessly aligned to achieve your objectives.
The Integrated Advisory Network consists of progressive CPA firms, along with best-in-class professional advisors, service, and product specialists, who work together to deliver an elevated and holistic client experience. One that optimizes both their personal and professional lives with an integrated financial strategy designed to help clients reach their goals.