The subject of this blog is of vital importance to anyone thinking about the disposition of their inheritance. To some, the word ‘inheritance’ suggests a mega-million-dollar fortune, but the truth is that for most of us it’s more typically a relatively modest sum.
Whatever the amount up for potential distribution, we all have a simple choice to make. It’s usually between family members – notably your children – or the Canada Revenue Agency. In short, your kids or the taxman?
A no brainer in principle but a puzzle in practice.
However, with a little smart pre-planning and some informed help from a financial advisor, most retirees can reduce their lifetime tax payable and also minimise the potential tax payable by their estate.
3 Financial Concerns
If we had to itemise the major financial encumbrances from which an estate suffers, it would be the following three:
- Income tax
- Estate settlement
A recent article in the Financial Post written by Jason Heath (CFP), the managing director of Objective Financial Partners, offered a comprehensive analysis of this challenge with a focus on income tax. As Mr. Heath states: “The most common income tax related estate assets that come into play are: Registered Retirement Accounts, Tax Free Savings Accounts and non-registered assets.”
Mr. Heath added: “The good news is that for married and common-law couples, income tax can be largely deferred on the death of the first spouse. And with proper planning in advance of death or even afterwards, taxation can be mitigated and potentially even eliminated.”
Here’s a bit more information about various investment options and their taxation.
Registered accounts inlcude RRSPs, RRIFs, defined contribution pensions, LIRAs (Locked-In Retirement Accounts), and LRIFs (Locked-In Retirement Income Funds). While all are characterized by powerful tax-deferral capabilities, understanding precisely how those capabilities favor you can be tricky – unless you are very confident of your tax management skills. Our advice? Seek clarification and guidance from a qualified advisor at your credit union.
A TFSA is, as defined by its name (Tax Free Savings Account), tax-free during life and upon death. Again, it is encumbered by eligibility issues, though it is fair to say that an important planning strategy for a TFSA is to maximize it—or minimize withdrawals from it—to the extent possible. As you are probably aware if you are invested in a TFSA, contributions should be made in January to maximize growth over the year. As with Registered Accounts, seek further clarification and guidance from an advisor at your credit union.
These include non-registered investments, vacation properties, real estate used as an income property, private company shares, and other taxable capital assets that can generally be left to a surviving spouse upon death with no capital gains tax immediately payable.
It is likely that while you may enjoy ownership of one or more of these assets, you are unlikely to own them all. It’s fair to say that in general, retirees with significant non-registered assets can consider proactive strategies like gifting to family members or to charities during their lives instead of upon their death.
For example, discretionary family trusts can be a tool to have non-registered investment income and capital gains taxed to other lower income family members such as children or grandchildren to reduce annual taxation, as well as tax on death. Private corporations, too, if you own private company shares, can have complicated tax implications. An advisor at your credit union will be able to help with either or both issues.
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As Mr. Heath states in his article: “Talking about dying can be uncomfortable, but as I prepare to file my late mother’s final tax return, it is a stark reminder that death is a part of life. So, too, is income tax, and with a little planning, retirees can reduce their lifetime tax payable and minimize the potential tax payable by their estate.”
To get the ball rolling, consider using the commentary expressed in this blog as talking points in a conversation with your credit union advisor. The discussion could save you considerable anxiety and a great deal of money. If you haven’t already got a financial advisor working on your behalf, you may want to think about making an appointment with one of Everything Retirement’s credit union partners at: