Upon your death, the estate has to pay an estate administration tax, which is calculated on the total value of the deceased’s estate, and income tax returns must be filed in your name.
These must include your:
- employment and business income
- investment income (interest, dividends, etc.)
In addition, since it is considered that the deceased person has:
- withdrawn all funds from registered retirement plans (RRSPs, RRIFs, etc.) before death, and
- sold all capital property (cottage, income properties) at fair market value before death,
the value of all registered retirement plans and the profits and losses resulting from the presumed sale of assets must be included in the income tax returns.
Because of these tax rules, the deceased’s tax burden can be as high as 50% of taxable income. Nevertheless, there are steps that can be taken to reduce or defer estate taxes. All it takes is a little planning.
How to minimize income taxes or defer payment
1- Transfer your RRSPs and RRIFs
Transfer your RRSPs or RRIFs to your spouse (legal or common law) tax-free.
Transfers to minor children in your care are also a good solution. They will be taxed, but at a lower rate.
You could also purchase an annuity, which can be paid to them until they turn 18 and spread the taxes due over the duration of the annuity.
However, if an RRSP or RRIF is left to minor or adult children who are not dependents, it will have to be added to your income.
2- Transfer assets to your spouse
Taxes on capital gains are deferred until the surviving spouse disposes of them or dies. The gains will be calculated in view of the fact that that they were acquired by the surviving spouse at your tax cost.
3- Set up a trust for a spouse
Setting up a trust for your spouse is a way to defer taxes. A trust ensures your spouse of an income during his or her lifetime, while leaving capital or assets to other beneficiaries like children or grandchildren.
4- Assets held outside the country
If you own assets abroad, it’s important that you check the estate taxes and succession duties that apply in that country to determine the best way to deal with them.
It is also prudent to draw up a second will in the language used there.