Preserving Wealth: Strategies for Minimizing Inheritance Taxes

One trillion dollars. That is the staggering amount that is forecasted to change hands from one generation to the next in Canada in the ten years leading up to 2026. With so much money expected to be left in the form of inheritances in the near future, money that has been hard-earned by scores of Canadians, it’s no wonder that many are concerned about the best way to reduce the tax burden that can come along with these bequests.

What is the Process Around Inheritance Taxation in Canada?

“Estate tax, or inheritance tax, is actually an American term and tax regulation,” Jordan Tanner, Senior Insurance Advisor with WealthCo, explains. “Things work very differently here in Canada. South of the border they simply add up your assets and impose an estate tax based on the total value of the estate. While there is relief on the first $12.92M per taxpayer, any balance over this amount is subject to tax. In Canada when we die, there is a deemed disposition of our property on the date of death. Tax is then determined based on the type of property we own. While our principal residence or a Qualified Farm Property can be tax free, capital property – such as non-registered investments, shares of a private business, or interest in a partnership – are all subject to tax, usually in the form of a capital gain.”

In Canada, capital gains are taxed on 50% of the realized capital gain (e.g. the growth in value over and above the purchase price of the asset). This means that only half of the capital gain is subject to taxation at your applicable tax rate. Tax rates will vary depending on which province you reside in.

Probably the biggest surprise to many clients is that anything remaining in their RRSP at death is taxed fully as income in the year of death. As an example, if someone living in Alberta died with $1,000,000 remaining in their RRSP, and assuming that was their only asset other than their primary residence, the tax in the year of death on the RRSP would be over $440,000.

And then there is probate. Probate is the process of the courts formally validating a will. If you die without a will, your estate still needs to go through probate and will be distributed according to the laws of the province.

“Another factor that comes into play in Canada around estates is the provincial probate fee,” Tanner explains. “Probate fee, or probate tax, varies from province to province – most apply a percentage to the total remaining estate assets (for example, anything after $50,000 will be taxed at 1.5%). In Alberta, our maximum probate fee is $525, no matter how large your estate is. However, in BC, the calculation is based on a percentage of total assets in the estate.”

Ensuring that your will is current, and that you are working closely with qualified estate planning professionals, is critical.

Savvy Estate Planning Can Minimize the Tax Burden on Beneficiaries

Minimizing the tax burden on your beneficiaries requires careful estate planning and the use of various strategies to legally and effectively reduce the taxes owed. Here are some key strategies to consider.

Your Primary Residence is an Effective Tax Tool

As long as the property in question is designated as your principal residence it is able to be sold, or passed along to beneficiaries, tax-free. While subsequent properties are subjected to capital gains taxes, including vacation properties and rental properties, your principal residence is not, no matter what its value may be.

Maximize Your Tax-Free Savings Account

Tanner strongly advocates for maximizing your tax-free savings account (TFSA) as part of your estate planning process.

“Your TFSA is treated the same as your primary residence – it can be passed on to your beneficiaries without any capital gain taxes.” So, if you don’t need these funds for your retirement, they are the perfect asset to pass on to your beneficiaries.

Funds withdrawn from a TFSA do not incur any tax, even if there has been a lot of growth in the accounts. This makes the TFSA an excellent place to make lump-sum withdrawals. If a client wanted to give money to their children or grandchildren while they are alive, the TFSA can be an excellent place to start this living legacy with their families.

Consider Life Insurance

“Life insurance is the third silver bullet for passing along an inheritance with zero taxation.” Tanner shares.

Life insurance is tremendously valuable when it comes to estate planning. Life insurance death benefits are received by beneficiaries tax-free, meaning that the payout from a life insurance policy is not subject to income tax or capital gains tax. Life insurance can provide immediate cash when your estate may be subject to significant taxes and administrative expenses, ensuring that your heirs have the necessary funds to cover these costs without having to sell assets or incur debt.

Insurance planning can also be an excellent way to equalize estates in the situation where one or more children might be inheriting the family business or farm while other children are not involved.

Take the Time Today to Prepare for Tomorrow

“People get busy with their careers and may find estate planning low on their priority list,” Tanner states. “We encourage having this important conversation sooner rather than later and we promise to make the process seamless and straight-forward.” 

Are you interested in minimizing your estate tax burden? Our insurance advisory team is available to discuss your various options.

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Jordan Tanner is a Senior Insurance Advisor at WealthCo, who lives by the motto, “it’s not how much you make, it’s how much you keep.” With a career spanning two decades, Jordan uses insurance-based tax, estate, and retirement planning solutions for business owners, professionals, executives, and retirees. Jordan firmly believes that your professional advisory team should work together, not independently, in order to help you develop the most efficient tax, legal, and financial structures based on your unique requirements and goals – the same philosophy that is driving the Integrated Advisory Network.

The Integrated Advisory Network consists of progressive CPA firms, along with best-in-class professional advisors, service, and product specialists, who work together to deliver an elevated and holistic client experience. One that optimizes both their personal and professional lives with an integrated financial strategy designed to help clients reach their goals.