Planning for tax minimization and tax deferral on death

Upon your death, the estate has to pay an estate administration tax, which is calculated on the total value of the deceased's estate, and income tax returns must be filed by your trustee(s) in your name. Your trustee(s) should be familiar with the Tax Information for Estate Trustees.

The tax return must include your:

• • employment and business income
  • investment income (interest, dividends, capital gains) 

In addition, since it is considered that the deceased person has:

• • withdrawn all funds from registered retirement plans (RRSPs, RRIFs, etc.)         before death, and
  • sold all capital property (cottage, income properties) at fair market value before death,

the value of all registered retirement plans and the profits and losses resulting from the deemed disposition of assets must be included in the income tax returns.

Because of these tax rules, the deceased's tax burden can be as high as 50% of taxable income. Nevertheless, there are steps that can be taken to reduce or defer estate taxes. All it takes is planning.

How to minimize or defer income taxes

A. Transfer your RRSPs and RRIFs

• • Transfer your RRSPs or RRIFs to your spouse (legal or common law) tax-free.

  • Transfers to minor children in your care may also be a good solution. They      will be taxed, but at a lower rate. However, if an RRSP or RRIF is left to minor or adult children who are not dependents, it will have to be added to your income.

  • Purchase an annuity, which can be paid to minor children in your care until     they turn 18 and spread the taxes due over the duration of the annuity. 

B. Transfer assets to your spouse

• • Taxes on capital gains are deferred until the surviving spouse disposes of them    or dies. The gains will be calculated in view of the fact that they were acquired         by the surviving spouse at your tax cost.

C. Set up a trust for a spouse

• • Setting up a trust for your spouse is a way to defer taxes. A trust ensures your spouse of an income during his or her lifetime, while leaving capital or assets to other beneficiaries like children or grandchildren.

D. Assets held outside the country

• • If you own assets abroad, it's important that you check the estate taxes and succession duties that apply in that country to determine the best way to deal       with them.
  • It is also prudent to draw up a second will in the language used there.