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How to Manage Estate Tax in Canada

estate tax

Canada does not have an “estate tax”, unlike some other jurisdictions such as the United States. However, you may not realize that there is a “deemed disposition tax” that applies at the time of your passing.

There are ways to structure your estate plan and/or your will so that this tax can be managed, enabling your beneficiaries to receive the maximum amount possible.

What is “Deemed Disposition Tax”

When a person dies, the Income Tax Act deems that for some of their assets, that they were sold at market value on the date of their death.

This tax is applied before the estate is distributed as if the deceased were being taxed instead of the beneficiaries. Therefore, it is somewhat similar to “estate tax” as it is applied at the estate level.

Taxes are applied to the estate on deemed dispositions, deemed withdrawals (of registered savings plans), and earned income during the year of death.

Calculation of Deemed Disposition Tax

The proceeds of a deemed disposition is used to calculate the capital gains (the difference between the original purchase price and the market value at the time of death). These proceeds are then taxed, with tax being deducted before they are distributed to your beneficiaries.

How to Manage Taxes on Your Estate

In Canada, several strategies can help you reduce the tax burden on your estate. Some of these strategies are:

  • Have a Will: A will ensures that your financial affairs are managed according to your directions once you have passed.
  • Rollover to Surviving Spouse: A deemed disposition does not apply to property transferred to an eligible spouse. Assets left to a spouse or that are jointly owned automatically rollover to the spouse. They will not be taxed until the death of that spouse.
  • Exemption for Principal Residence: The capital gains from a deceased person’s principal residence are not taxable.
  • Life Insurance: The death benefit paid to beneficiaries of a life insurance policy is not taxable.
  • Registered Savings Plan Assets. Assets transferred from your Registered Retirement Savings Plan (RRSP), Registered Retirement Income Fund (RRIF), and Tax-Free Savings Accounts (TFSA) can be transferred to the equivalent registered accounts of your spouse without any taxes being incurred until withdrawals are made.

To ensure that your assets are distributed the way you want, you will need at a minimum a last will and testament. To manage the taxes on your estate you should consider a fully comprehensive estate plan.

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This content is provided for general informational purposes only and does not constitute financial, investment, tax, legal or accounting advice nor does it constitute an offer or solicitation to buy or sell any securities referred to. Individual circumstances and current events are critical to sound investment planning; anyone wishing to act on this content should consult with his or her financial partner or advisor.

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