4 Estate Planning Strategies to Help You Reduce the Tax Impact for Your Heirs
Willful
December 19, 2022 | 4 Min Read
Updated for tax year 2022
Canadians file their tax return every year, but we might not think about what that looks like after we pass away. According to an AngusReid study commissioned by our partners at online will platform Willful, two-thirds (65%) of Canadians don’t know how their estate would be taxed upon their death.
When you pass away, your executor—the person in charge of wrapping up your estate—is responsible for putting the wishes in your will into action, as well as paying off debts, filing for probate and paying associated probate fees, and filing your final tax return. How much tax is paid after your passing is impacted by several things, including where you live and what type of assets you owned at the time of your death.
Here are 4 estate planning tips that can help you minimize the future tax impact for your loved ones after you pass away.
Key Takeaways
- There is no inheritance tax in Canada, which means your beneficiaries won’t pay any taxes on your gift.
- Understanding how your estate is taxed can help you structure your assets, insurance policies, and registered accounts in a way that minimizes financial stress for your loved ones.
- Leaving a charitable donation in your will can reduce your taxable income on your final tax return, which means more money for your beneficiaries.
1. Understand how you’re taxed after you pass away
You might be surprised to learn that you still have to pay taxes after you pass away before your beneficiaries receive their inheritance. This is known as filing your final tax return, which is done by your executor.
Some things that will be on your final tax return can include:
- Any outstanding income until the day of death
- Capital gains taxes on any assets you own. These are considered to be ‘sold’ on the day of your death.
- Capital gains on properties outside of your principal residence
There are several ways to avoid triggering capital gains taxes on your assets, including:
- Joint ownership of assets
- Gifting assets while you’re alive
- Using trusts to pass on assets
2. Recognize which assets aren’t covered by your will
Your legal will is key to making sure your belongings end up in the right hands after you pass away. But not every asset is covered by your will. Setting aside some time to figure out which assets flow through your will can help you understand how your estate and money is taxed.
For example, when you pass away, any jointly-owned assets (i.e. homes, bank accounts, or investments) will automatically transfer to the other remaining account or property holder, and will not flow through your will. Financial assets like pensions, registered savings accounts like RRSPs, and life insurance policies often have named beneficiaries, which means they also aren’t covered by your will. Since they don’t pass through your will, you can avoid certain fees like probate tax. But keep in mind there may still be some other tax implications.
By identifying which assets aren’t covered by your will, or by changing account ownership and/or naming individual beneficiaries on accounts, you can minimize any additional or unexpected taxes and/or probate fees when you pass away.
3. Leave a legacy gift
When you leave a legacy gift to a charitable organization in your will, this contribution is tax deductible—similar to a charitable donation when you’re alive. This can be added as a tax credit on your final income tax return, which reduces your overall taxes.
Because there are less taxes to be paid, more of your remaining assets can be passed on to your beneficiaries.
An online estate planning platform like Willful makes it easy to leave a charitable donation to any cause you care about in your will, either by leaving a cash gift, or a percentage of your estate.
4. Understand how gifts to your beneficiaries will be taxed
In Canada, there’s no inheritance tax. That’s good news for your beneficiaries—it means that by the time a gift gets to your beneficiaries, the taxes have already been paid by your estate! For example if you leave your cousin $5,000 in your will, they receive that $5,000 free and clear and don’t have to pay taxes on it.
But because the taxes need to be paid first, the overall pool of money shrinks before it gets distributed to your beneficiaries. So it’s important to think about how this impacts the total of your gifts. In many cases, this can be your largest tax amount owing because of deemed disposition of your assets.
With some planning, you can minimize the taxes at death, and ensure that you are passing more assets to our beneficiaries. For example, in addition to leaving gifts in your will, you may also want to consider learning what’s called an “inter vivos” gift – a gift while you’re alive. Or, you may want to consider leaving a gift through a trust, which would delay triggering capital gains taxes.
If you’re comfortable with it, you can sit down with your beneficiaries and make sure they understand how gifts will flow to them when you pass.
Making a will can reduce a lot of the stress for your loved ones during a difficult time. Putting a plan in place can also minimize your tax impact, so that more of your assets can be passed down to your beneficiaries.
If getting a will is on your list for 2023 you can get one online via our partners at Willful – save 20% on any Willful plan by visiting this link.
Creating a will and advanced tax planning are part of your overall financial health. You can create your legal will online in as little as 20 minutes with a platform like Willful. Enjoy peace of mind knowing you’ve put a solid financial plan in place for your loved ones.
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