Succession Tax Planning
CCRA Wants Your Money!
Planners as Catalyete For Successful Succession
The Most Common Myths
There are three basic areas I want to highlight which I have found are most commonly misunderstood or attract the most questions.
There is a common misconception that on death the estate pays 50% to the government. NOT TRUE!
Firstly, on the death of the first spouse, all the estate transferred to the survivor is transferred at no cost.
Secondly, there are NO estate taxes on death in Alberta.
Thirdly, on the death of the survivor, there is an assumption that all assets are sold.
The principal residence is tax free, as it is during your lifetime.
Your personal investments are taxable only on the increase in value since they were bought and the tax rate is approximately 20% of this gain. (At top rate tax)
Fourthly, your RRSP or RRIF is fully taxable, up to a rate of 39% at top rate.
Some thoughts on tax saving strategies
Use of life insurance as a tool to offset the taxes payable is a common defence mechanism to offset the taxes due. A joint last to die policy is best as it is cheaper to fund and the money is available to the estate needing it.
Life insurance can also be used to create a charitable gift, which results in a donation tax credit to offset the taxes payable.
Spend it before you go and leave nothing for the government!!
Many entrepreneurs will leave behind a business, for which they paid very little, which is now worth many thousands or millions of dollars. Or they have sold the business but now own an investment corporation.
Early tax planning is the key to dealing with this problem. Again, use of life insurance as a tax-planning tool is common. An estate freeze is also a useful tool to limit the exposure to tax and transfer the value the next generation.
The most common problem I see in this area is PROCRASTINATION and failure to deal with the issue until it is too late. This is something best dealt with when you are 45 not 75.
US estate duty
Unlike Canada there are estate duties in the US and they can be onerous. The rules do not work in Canadians favour and the best rule is to get all US property out of your personal ownership.
There is a basic exemption, however it is prorated by the percentage of US assets versus total assets and can be minimal.
The definition of US asset is very wide – US stocks, bonds, real estate and businesses are all included.
This is an area that can really surprise the estate.
Get advice on this very complex area.
The most difficult problem with administering an estate is often finding information.
Do you have a list of the adjusted cost base of all your shares?
What is it you paid for the cottage you built at the lake?
Where are all your safety deposit boxes? Can your executor access them?
Make sure that all your assets can be traced easily and you have left records of your tax history. Otherwise the government will get more than they deserve.
My best advice in this area of succession planning is to deal with it. You are going to die and avoiding the issue only creates tragedy for your loved ones.