Death and taxes may be certain, but for those willing to look, there are usually several ways to minimize the final tax hit.
That's where tax planning comes in, particularly for your estate, says Douglas Gray, co-author of The Canadian Guide to Will and Estate Planning . There are steps you can take now that will significantly reduce the amount of tax that leaves your estate upon your death.
Mr. Gray cautions, however, not to try implementing your estate planning strategies without professional help. While it's fine to read up on the subject in order to identify strategies that might work in a given situation, "this is not something that anyone should take on as a do-it-yourself project," he says.
Here are some other things to consider when planning to minimize the tax hit on your estate:
1. Consider your spouse. Have your will written in such a way that if your spouse survives you, assets such as real estate, the family business and unregistered investments will pass outright to your spouse or in trust, so that there will be a deferral of the taxable capital gains that would otherwise be triggered upon your death.
2. Avoid probate fees. There are several ways to minimize or avoid provincial estate administration taxes. Joint ownership of certain assets with your spouse is one method. Also, if you are 65 or older, you can set up what's known as an "alter ego trust" or a "joint partner trust" to hold legal title to certain assets that you own.
3. Use your RRSP. Arrange with your estate administrators to consider whether it would be beneficial to make an RRSP contribution in the year of your death if you die before your spouse. This would reduce the income tax otherwise payable in your final income tax return.
4. Claim medical expenses. Survivors might be able to claim medical expenses and even a disability tax credit in a deceased's final tax return if the person was confined to bed for a substantial period of time before dying.
5. Set up trusts. Testamentary trusts receive favourable income tax treatment and provide an opportunity for income splitting. You can set them up for your children or grandchildren under the terms of your will.
6. Reduce capital gains. If you are a business owner, make sure that you take advantage of a special $750,000 capital gains exemption. This exemption will reduce or eliminate the capital gains that would otherwise arise on your death, if the ownership of your business is to be sold or passed down to one or more of your children.
7. Freeze your estate. If you are a business owner or if you own commercial real estate, consider doing an estate freeze in favour of your children as a way of limiting the amount of future capital gains tax arising on your death.
8. Use tax exemptions. If you have your own home or vacation properties, make sure that you or your executors take advantage of the "principal residence exemption" to reduce or eliminate the capital gains that arise on your death.
9. Donate cash. Consider mentioning specific charities in your will. Such donations reduce taxes payable in your final tax return.
10. Donate stocks. Consider making charitable "donations in kind" in the form of publicly traded stocks that have gone up in value, instead of cash. You'll get the same tax credit as for cash donations, plus the capital gains taxation on the public company shares is eliminated.