Breakthrough Wills and Estate Planning Answers

#10 Income Taxes: Much Ado About Lots PART 1

Q:      Can I avoid paying my income taxes by dying?

A:      Afraid not. The government has a way of getting their money even if you don’t make a will. The government gives you a will that requires all creditors, including the CRA, to be paid first.

Here’s what you need to know about Canadian income taxes. I’ll try to keep this short, so read on…

In Canada we do not have an American-style federal inheritance tax on the total size of your estate. However, upon death, income has an expanded definition in Canadian income tax. Assets get different treatment for Canadian income tax purposes because of the deemed disposition rules that I explain here.

Like it or not, Ottawa is a beneficiary or silent partner in every estate. You can, however, reduce how much this partner will share in your estate, paying fewer dollars in income tax. This will leave more for the people and causes that are important to you. 

How Income Tax Planning Works

You may own assets for several years that appreciate in value, such as RRSPs, RRIFs or a summer home. When you are gone, these assets generate tax liabilities based on fair market values.

They are subject to income tax at their fair market value immediately before your death in your last return.

Your executor reports capital gains arising from deemed dispositions of capital property and income earned to the date of death in your final tax return.

However, if you transfer these taxable assets to your qualifying spouse, you may defer these income taxes.

Anything that allows you to defer taxes is a good thing.

Taxes When Dinosaurs Ruled

When dinosaurs roamed the Earth in prehistoric times, they didn’t have to pay income taxes. They may have been the last creatures on the planet that didn’t have to worry about income taxes.

In my next post, you will discover the three key concepts you must master to save taxes. I use the memory aid, “DTT” (“Dinosaurs had no Tax Troubles.” This reminds me to make sure clients take care of these three items in their planning.

If you remember the DTTs, the three fundamental income tax concepts, you will see the need to plan more effectively.

Do you need help understanding death and taxes? Want to make your will but not sure what’s involved? I can help you. Contact me for a meeting.

I am a Certified Specialist in Estates and Trusts Law.