There is currently no official estate or succession
taxes imposed on Canadians at the time of their death. As a result
there is a perceived notion that our estates and / or legacies
will remain intact for future generations. However, if you consider
the income taxes imposed on most Canadians at death, you quickly
realize that this is an illusion.
For most Canadians the primary source of taxes - apart from regular income taxes - triggered on death arises from:
- Tax - sheltered investments
- Capital Gains
- Probate fees
Registered Retirement
Savings Plans are one of today's most attractive savings vehicles
- largely due to the deferral of tax on the amount deposited.
Billions of dollars are currently invested in these vehicles
which can be in either the accumulation or payout stage. These
may include:
- Registered Retirement Savings Plans (RRSP's)
- Registered Retirement Income Funds (RRIF's)
- Life Annuities
The tax impact on death can be significant in that the entire sum of money in the savings vehicle is included in your terminal return and taxed at your marginal tax rate along with all other income. For example, if your investment total is $100,000 and you are currently taxed at a rate of 50%, the taxes to your estate could be $50,000.
You are however allowed a rollover to a spouse (and / or certain qualified dependents) without incurring the tax. This can be done by naming your spouse as the beneficiary of the investment. Using the spousal rollover provision you can transfer your assets to your spouse without triggering any taxation; however, the tax will be incurred on the death of your spouse.
When you die all the capital assets in your estate are treated as if they were sold at their fair market value immediately before death. Your estate is then taxed on 75% of the increase in value of the capital asset from the time of purchase.
While not taxed as severely as income, capital gains taxation can place a significant burden on the estate as it requires liquidity, which may not be available. This could result in the untimely forced liquidation of the asset. The basic method for calculating capital gains is the fair market value less the adjusted cost base (usually equal to the original purchase price) plus selling expenses.
While your principal residence is not subject to this tax, assets that may be include the following
- Other Real Estate
- certain bonds
- shares in a corporation
- interests in a partnership
- mutual funds
Capital gains taxation applies to worldwide capital assets. Therefore, if you have foreign investments, you may not only be subject to the Canadian capital gains tax, but possibly a similar tax by the country in which your asset resides.
Every province
- with the exception of Quebec - imposes probate fees, with Ontario
having the highest by a wide margin. It can be argued that this
is more of a wealth tax than a fee.
Probate is usually required by third parties who seek assurance of the extent of the executor's authority. While probate may only be necessary for certain assets, once it is required, the entire value of the estate could then be subject to probate fees.
Professional advise is recommended, especially for larger estates, as there are many planning tools that can be used to either avoid or reduce the amount of probate fees. However probate does, in many situations, serve a valuable and necessary purpose, and should not be avoided.