Know the tax implications
Upon your death, 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- withdrawn all funds from registered retirement plans (RRSPs, RRIFs, etc.), and
- sold all capital property (cottage, income properties) at fair market value,
the value of all registered retirement plans and the profits and losses resulting from the presumed sale of your capital property must be included in your 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.
Steps to reduce the tax consequences of death
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Transfer your RRSPs and RRIFs |
Transfer your RRSPs or RRIFs to your spouse or dependent handicapped child. This type of transfer is not taxed.
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 children who are not dependents, it will have to be added to your income. |
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Transfer your primary residence |
Capital gains on the sale of a primary residence are not taxable for the owner.
Leave your primary residence to the person who will continue to live in it after your death, such as your surviving spouse. By doing so, it retains its status as a primary residence.
You may also bequeath your primary residence in usufruct, (the use of an asset by someone other than the owner) to allow, for example, your surviving spouse to continue to live there while your children retain ownership. In this way your heirs can eventually sell the residence without paying taxes. |
Transfer other assets |
Bequeath other assets to your spouse directly or through a trust. This way, 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. |
Assets held outside the country |
To ensure a smooth devolution of property, it's important to prepare a second will in compliance with the country's laws and in the language used there. If you own property in the U.S., for example, it is recommended that you
make a will in English that applies only to these assets and that complies with the laws of the state in which the assets are located. |
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