I read an article last week in one of our national papers calling for a so-called “death tax” – a dedicated tax on one's estate, much like the system south of the border. The article raised a number of interesting points and a fair bit of commentary, both positive and negative.
The piece got me to thinking about estate-related taxes. Even though Canada doesn't have an estate tax in the strict sense of the word (yet), there are still a variety of fees, taxes and costs that have to be paid when you die. This can be a serious concern for high-net-worth business owners and ex-owners.
Thankfully, you can easily reduce estate taxes by organizing your affairs and taking advantage of certain financial strategies and structures. Let's review some of them.
Gifts and transfers
Obviously, if there are fewer assets in your estate at the time you pass away, there will be less to tax; given enough time, this is a simple and effective way to eliminate fees and taxes. Be aware, however, that there are limits to what you can give away tax-free in any one year. Exceed those limits and you may have to pay up.
Life insurance
Life insurance is first and foremost a tool to protect your family. But it can also be an effective estate-planning tool. Under government guidelines, proceeds from a life insurance policy pass tax-free to heirs. This can help offset taxes owing on other estate assets. And because life insurance doesn't have to be passed through the estate, the payouts aren't subject to probate, and they aren't part of the public record.
Joint ownership
If you own assets jointly with another person, when you die, those assets pass to the other person automatically without having to go through probate. But be careful: transferring assets into joint ownership usually results in a deemed disposition for the original owner. Also, joint ownership means giving up control over a portion of the asset and exposing that asset to the creditors of the other owner, including ex-spouses. Something to keep in mind, particularly if you're considering owning shares of a corporation or similar business asset jointly.
Charitable gifts
A donation to a registered charity can result in a tax credit of up to 75% of your net income while alive and 100% of your net income when the gift is structured through a will. Unused tax credits can be used over the following five years if the gift was made while alive, or applied against tax owing in the previous year if the gift was made through a will, up to a maximum of 100% of net income in that year.
Trusts
Properly structured, a trust can be an effective way to reduce the taxes and fees owing upon your death. Depending on the type, a trust can help you initiate an estate freeze (see below), avoid probate taxes or split income with members of the family.
Estate freeze
An estate freeze is a sophisticated financial strategy that allows the owner of an asset to lock in (“freeze”) the value of an asset in the present, retaining ownership rights but transferring future growth (and taxes on that growth) to the next generation. This is an ideal strategy with business assets, but it can be very complex – make sure to seek out professional advice if you're interested.
Estate planning can be complicated enough. Throw tax planning into the mix and it can be even more so. So make sure to talk to a qualified taxation professional before implementing any of the strategies above. •
