Many Canadians haven’t taken the most basic estate planning step which is writing a will. Without a will, your estate doesn’t automatically go to your spouse and children, but ends up being distributed according to the rules of your province. In addition, without proper planning, almost half the value of your assets could disappear to cover capital gains taxes and probate fees.
Discussing estate planning issues can be challenging, but it is an important step. Disagreements or disputes after you’re gone can be costly — both in terms of money and family harmony.
Income tax on the estate
When a person dies he is deemed to have disposed of all assets for proceeds equal to their fair market value for tax purposes. In the case of people who are married or in common-law
relationships, certain assets, such as registered retirement savings plans, can be rolled over to the surviving spouse tax-free, deferring taxation until funds are withdrawn on the death of the second spouse.
It is usual for individuals and corporations to use life insurance to provide funds to pay taxes on the taxable portion of capital gains due at the time of death where the objective is to maintain ownership of an asset within a family or among surviving shareholders.
Income tax payable on the death of a registered plan owner
A registered retirement income fund (RRIF) is often the largest financial asset an individual may have. Assuming the owner does not have a spouse, the value of the plan at the time of death must be taken into account as income and is taxable in that year. Depending on the size of the RRIF at the time of death, the amount could be taxable at the highest marginal tax rate in the deceased’s province of residence.
Some individuals use life insurance so that their estates have sufficient funds to pay the tax,
allowing the beneficiaries to receive the full value of their RRIF should they die in their early years.
Estate taxes & Probate fees
Canada does not impose estate taxes on the death of a taxpayer. While certain assets are
deemed to be sold on a taxpayer’s death and taxable as income or taxable capital gains these are not estate taxes. However, a deceased’s estate may face estate taxes on property the deceased owned in the U.S.
probate fees do not apply to life insurance death benefits where the policies have named beneficiaries. Probate fees also do not apply to insurance company investment products such as annuities, including segregated funds where there are named beneficiaries. In contrast, mutual funds and savings instruments issued by banks would be subject to probate at death (outside of Québec).