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Your Estate Planning
Part 2 of 3-Part Series

Next steps in estate planning would typically include stating your Power of Attorney (POA) and ensuring you have sufficient life insurance to protect your family. POA’s are documents which give the person of your choice the power to make decisions about health, finances and legal matters in the case that you are not able to do so. This could be because of injury or illness or if you are just not able to be present of any reason. For the purposes of this article, we won’t delve into POA or life insurance, but they are an essential part of the planning.

 

Now we’re onto the more technical area of estate planning, how to structure your asset giving to reduce the amount taxes which need to be paid when transferring your wealth to your loved ones. All estates must go through a process called probate, which is your will being legally validated and your executor being approved. However, there is a fee for this and varies quite largely between Canadian provinces. For example, if your estate is worth $500,000 at the time of your death, the probate fee in Ontario would be $7000, while in Alberta it would run you only $525.

 

But there are ways to deal with your estate which will reduce the probate fees regardless of province. If you giftcash to your beneficiaries when you are alive, it is not taxed at the time of gifting. The same applies to donations to charities or organizations if this something you wish to do. The reason they are not taxed is because your estate is considered the assets you own at your death and after gifting, they are no longer part of your estate. For physical property, the easiest and most common strategy is to jointly own it with your spouse or someone else. The property is then passed fully to the co-owner at your death and operates outside of probate. For your RRSP, TFSA, RRIF, life insurance policy, etc., it is best to have a designated beneficiaryor successor holder (for TFSA). This would avoid the probate taxes altogether.

 

It is important to note that in Canada there is no inheritance tax. All taxes would be paid on your estate before it is passed to your beneficiaries, and all the money inherited would be theirs. Estate tax also refers to paying all taxes owing upon your death rather than taxing the actual estate. The government of Canada taxes our income, but not our assets. All those financial gains made during the course of your investments are considered income and therefore taxable which should be paid upon your death. But some income tax can be delayed by strategies such as joint ownership of property and designated beneficiary. However, do remember that probate tax and income tax and two separate things, where something can be deemed outside of your estate for probate tax, but still incur income tax. The strategies to best lower probate tax and income tax are two separate strategies which may have overlapping value. Ultimately, income tax is the much bigger concern than probate tax. The amount owing for income will be much higher and more time must be spent on strategies to lower this tax through the course of your investments and estate planning. We must pay what we owe, but as discussed in previous articles, certain investments yield lower taxes which applies to your final tax return to be filed after your passing.

Part 3 continued next week.