Lynne Butler , BA , LLB is a senior Will and Estate Planner for Scotiabank , with an extensive background in elder law in Alberta . Her blog is at www . estatelawcanada . com .
Lynne Butler
What Do I Need to Know About Tax on My Estate ?
Tax is the area of estate planning that many find to be the most confusing of all . There is a great temptation simply to push all tangled thoughts of taxation aside for the accountants to worry about later . However , doing so would be bad news for those we leave behind . When we do not understand how taxes will affect our estates , we leave our loved ones holding the bag . Overlooking taxation is one of the most common mistakes made by individuals .
I hope to clarify some of the tax concepts and rules that are important to your estate planning . I hope you will find that you can apply what you read here to your own situation .
Canada does not have a specific tax that is levied against beneficiaries inheriting under an estate . You may leave money to any individual in Canada without their having to pay tax on it . There is no specific tax on dying either . So , you may be wondering why , if there is no inheritance tax or death tax , there is so much talk about planning ahead to minimize and pay for taxes in an estate .
There are two major sources of tax in an estate . They are income tax and capital gains tax . Both of these apply to almost all of us .
Income Tax
There are plenty of tax consequences when a person passes away . This is largely because of the fact that a person ’ s assets are deemed by law to have been disposed of by the deceased immediately before he or she died .
For example , everyone who owns an RRSP or RRIF likely knows that we do not pay tax on the money we put into our plan until we take it back out . In other words , the money is not tax-free : it is tax-deferred . The deferral refers to the fact that tax is not paid on the funds until we take them back out again .
Every time we take out a portion of the funds , we pay the tax on that portion . So if you were to dispose of your entire estate one minute before you died , and as part of doing so you took all of the money out of your RRIF , then you would have to pay the taxes on all of it .
In reality , your estate would pay those taxes , even though the person named as the beneficiary of your RRSP or RRIF may not be your estate . For example , you could own a RRIF worth $ 100,000 and have designated your son as the beneficiary of the plan . When you pass away , your son would receive $ 100,000 . Interestingly , it is not the son who pays the tax on that . Let us say the tax on your RRIF will be $ 30,000 . This $ 30,000 will come out of your general estate , not out of the RRIF ( though if there is not enough in the estate to pay the tax , Canada Revenue Agency might well pursue the son to pay the rest of the tax ).
You can defer paying those taxes if the beneficiary you designate is your spouse or a disabled child . If you named your spouse as the beneficiary of that same $ 100,000 RRIF , the entire RRIF could roll over to your spouse with no tax
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ALBERTA RETIRED TEACHERS ’ ASSOCIATION News & Views Volume 19 21 , No . 32