You've spent your entire life accumulating valuable assets. It's perfectly reasonable to want to leave as much as possible to your heirs. Although you can't avoid paying taxes upon your death, good planning can help you minimize or postpone them.
"That's the key to limiting the tax burden on your heirs," said France Leclerc, a tax specialist and financial planner at Desjardins Wealth Management. "Financial planning helps you review your financial position on a regular basis, estimate taxes owing upon death and your estate's cash position, make retirement projections and plan what you'll leave as an inheritance. Based on that, you can set up a game plan and make the right moves at the right time."
Giving while you're still alive
Cash, real estate, stocks... A gift can take many forms and the tax implications will vary depending on what you decide to give.
Making cash gifts with the cash you have on hand will not lead to additional taxes for you or the gift recipient. Neither will gifting your principal residence, due to the principal residence tax exemption. It could be a different story if you give away your cottage and you've already used the exemption on a former residence or if you want to use it as your current residence. Giving your child the residence that they live in rather than retaining ownership of it will allow the child to use their exemption for the years after the transfer and allow you to save your exemption for the eventual sale of your home. You'll probably opt for paying tax on the capital gain when you make the gift.
"Rather than making a cash gift, parents can choose to contribute to a registered plan in their child's name, such as a registered education savings plan (RESP) or a registered disability savings plan (RDSP), while taking into account the rules that apply to each one, of course," said France Leclerc. "That allows you to use the plans as efficiently as possible and grow the capital. Depending on the plan, it will be the child's responsibility to pay the applicable taxes when they make withdrawals."
Parents can also give children money to help maximize their tax-free savings account (TFSA).
Withdrawing money from your RRSP to make a gift is not the most tax-efficient transaction because the withdrawal will be taxable. "Instead, we advise you to leave your RRSP to your surviving spouse, which will make it possible to defer taxes at the time of death," said France Leclerc.
Even though TFSA withdrawals aren't taxable, we recommend transferring the TFSA to the surviving spouse so that they can continue to save tax-free without affecting their contribution room. It will be a different story if you liquidate your non-registered investments since the capital gain will be taxable. Before you choose either of these options, you should nevertheless make sure you can give away this money without sacrificing your quality of life during retirement.
As a business owner, you could gift shares to the child who takes over the business for you. "An estate freeze for the child or a family trust could be appropriate for transferring future capital gains on assets to the next generation. Parents retain the current value of their shares and defer tax until they are actually sold. They should consider taking out life insurance so the shares can be bought back upon their death," said France Leclerc. Once again, this strategy requires careful planning and a fair assessment of the company's market value.
Creating a family trust: Estate freeze
Family trusts are a vehicle of choice for business owners since they can be used for an estate freeze. The trust then becomes the owner of the company's shares, and consequently of the future capital gains for one or more beneficiaries, making it possible to use a variety of tax strategies.
Some advantages of creating a trust include planning for the transfer of your assets, protecting assets from any creditors and minimizing taxes upon death.
Parents can also determine how shares will be distributed upon their death.
Creating a family trust: Income splitting
This allows you to make a loan to the trust, according to the rules set out by tax authorities, for the benefit of one or more beneficiaries. Doing so gives you access to a variety of tax strategies. "To make it worthwhile, it's advisable to put at least $500,000 into the trust since it requires significant administrative management," said France Leclerc.
Aside from minimizing taxes, family trusts can be used to pay some of your children's expenses.
The trust will be taxed on the income it generates. That income can nevertheless be passed on to family members, allowing the parent/lender to reduce their own tax burden by using an income splitting strategy.
There are other kinds of trusts, such as trusts for the benefit of a spouse or child, that each have their own requirements. Make sure you get good advice to help you make the right choice.
With estate planning, there's no one-size-fits-all solution. "Everyone has their own financial situation and requirements. A personalized plan is needed to implement the tax-optimization strategies that are right for each person," said France Leclerc. That's why it's important to talk to the right specialists.