Breakthrough Wills and Estate Planning Answers

#11 Income Taxes: Much Ado About Lots PART 2

I explain these key Canadian income tax concepts to help you plan your estate.

Read part 1 of my post, #10 Income Taxes: Much Ado About Lots.

Do you remember the DTT from my previous post? Here are the three fundamental income tax concepts, “DTT”, you must know to plan more effectively.

1. Deemed dispositions create income tax liabilities on some of your assets at death. Yes, even if you give everything away, like your summer home, and get no money in return, your estate still could have an income tax bill.

These tax rules force you to include a percentage of all unrealized capital gains in your statement of income. Since it is only a deemed disposition, it does not involve any actual sale proceeds unless there is a sale. If you are gifting the summer home in your will, your estate still needs to pay the income taxes on the summer home. Regardless, your executor must pay income tax from your estate.

There may be a problem paying the tax because your executors may have access only to assets covered by your will. Will they have enough money to pay your bills?

2. Tax rollovers provide advantageous income tax deferrals when you transfer assets to qualifying beneficiaries.

Use these in planning your estate distribution. For example, assets with tax consequences can be left to your spouse to take advantage of the rollover rules. Spouses or a minor child can inherit RRSPs or RRIFs with tax-deferred transfers. Financially dependent grandchildren can also qualify.

3. Tax exemptions may exist for certain specific assets you own, such as life insurance, your personal residence or qualified small business corporation shares.

The capital gain from your principal residence can be tax free. Since 1983, you can designate only one home as your principal residence. Life insurance proceeds are also usually tax free.

If you own an incorporated business, the shares may qualify for lifetime capital gains exemption. The tax-free proceeds realized from these assets have advantages that can be used to benefit loved ones.

Tax rollovers – provide a tax deferral by transferring the property to a qualifying spouse or a spousal trust without triggering the built-up tax liability. The cost base of the property follows the property when a further disposition or sale is made.

Deadly Tax Collection Tricks

Don’t worry about paying Ottawa. It has its ways to collect income taxes from your estate. It makes your estate executor or trustee personally liable for all your income taxes. That means that to protect themselves from your income taxes, your executor needs to request an income tax clearance certificate from the CRA. This clearance protects executors from liability in certain circumstances.

Do you need help understanding income taxes? Want to make your will but not sure where to start? I can help. Contact me for a meeting.

I am a Certified Specialist in Estates and Trusts Law.