Many Canadians have been very successful in building their assets through investments, business, real estate, or tax-sheltered plans such as RRSPs. But with that success they are also likely increasing their deferred tax liability.
Will the bulk of your estate go to your loved ones or the government? Good question. There are two major areas of taxation that will occur at the time of death:
tax on capital gains from any real estate or unregistered real estate holdings
tax on any RRSP/RRIF balances
If there is a surviving spouse, assets can be transferred tax-free and tax-deferred until the surviving spouse passes. However, if there is no surviving spouse, or assets are left to a non-surviving spouse beneficiary, a tax liability occurs on the date of death of the asset owner.
Taxation on capital gain assets occurs when the assets are passed on to a non-spouse beneficiary (ex. children) at death. 50% of capital gains are taxable, so if the estate tax rate is 40%, then it would be taxed at a rate of $20,000 for every $100,000 of capital gain.
Assets in an RRSP or RRIF are taxed when the balance is transferred to a non-spouse beneficiary (ex. children) at death. These assets are taxed on the entire balance, based on the estate tax rate. If the tax rate is 40% then the tax would be $40,000 for every $100,000 RRSP/RRIF balance.
A sudden – and potentially large – tax bill could be a big surprise to an unsuspecting beneficiary. So, where does the money come from to pay the taxes?
There are several options:
sell some or all of the assets
borrow money to pay the taxes
plan ahead now and purchase a low-cost life insurance policy to cover any taxes so your estate passes to your loved ones intact
If you would like to explore the possibility of buying a life insurance policy as part of your estate plan, it may be time to speak to a financial services professional.
Dan White is a Meaford-based Life and Health Insurance and Mutual Funds Advisor with Desjardins Financial Security Independent Network. If you have questions about financial issues that you would like Dan to write about, send him an email at: firstname.lastname@example.org This article is for general information purposes only and should not be construed as insurance, investment, or tax advice. The information contained herein is based on sources and materials believed to be reliable, but are not guaranteed.