How To Pass Money To Heirs While Minimizing Taxes In Canada
Grandparents or parents of high-net-worth families who have amassed wealth beyond their personal needs may at one point or another contemplate how to pass money to their heirs, while minimizing taxes.
If this sounds like you, you are not alone. Over the coming decade, Canadian inheritances could hit $1 trillion. Some Canadians focus their attention on estate strategies to transfer their wealth after their passing, while others are keen to give during their lifetimes—but in both cases, wish to keep as much of their wealth intact as possible and shield it from taxation.
As we enter an age of unprecedented wealth transfer, you should be prepared. In this article, we highlight 4 ways to transfer wealth while minimizing the tax bite in Canada.
1. Using Life Insurance To Minimize Taxes When Passing Wealth
Life insurance is one of the most powerful tax minimization strategies in Canada because proceeds are paid out entirely tax-free to the named beneficiary(ies). Life insurance also allows funds paid out to bypass the estate, allowing for greater privacy and avoiding probate fees.
As such, life insurance is often the method of choice for cascading wealth: the incumbent generation (whether parents or grandparents) use the funds they have identified as surplus to make premium payments for these policies, with their children or grandchildren named as beneficiaries, triggering a direct transfer of wealth upon their passing.
A type of insurance known as “participating whole life” insurance is an example of how a life insurance policy can be structured as an investment vehicle. This structure can include policy dividends which grow tax-sheltered and combine with the face value of the policy for a greater payout upon the death of the insured.
Life insurance can also be used to cover estate tax liabilities such as capital gains and probate. For example, a property that is being passed on to your heirs is deemed to have been sold the day before passing. Given the strong appreciation of real estate this may lead to a sizeable capital gains tax liability for the estate. To avoid having to sell the cottage to the pay the taxes and keep the cottage as a legacy asset for future generations, life insurance can be used as an effective tool to mitigate unintended consequences.
2. Gifts Of Cash To Minimize Taxes When Passing Wealth
Back to the basics—it is noteworthy that gifts of cash made to family members are not subject to any tax nor limits on amount. Cash is often tied up in investments and businesses, making this approach viable only in certain situations, but it does represent the most direct and tax-free way to transfer wealth.
3. Timely Gifts Of Appreciated Assets To Minimize Taxes When Passing Wealth
Appreciated assets are assets that, for tax purposes, have increased in value since they were acquired. When gifting appreciated assets to heirs, the Canada Revenue Agency (CRA) deems that the assets were sold at fair market value at the time of the gift, regardless of whether a lower amount was actually received or whether the asset has been gifted outright without any payment at all. This results in a capital gain—the difference between the fair market value and the cost. You, the owner of the asset, would have to include 50% of the capital gain in your taxable income.
To mitigate this, you may wish to consider timing this gift to coincide with a tax minimization opportunity created elsewhere within your wealth plan. For instance, through tax loss harvesting (or crystalizing a loss in a given investment while reinvesting in a similar but not identical vehicle, providing a capital loss which can be used against future gains), you may find yourself with the ability to transfer an appreciated asset and use this crystallized loss to offset the capital gain triggered on the appreciated asset.
4. Utilizing A Family Trust To Minimize Taxes When Passing Wealth
If you are a business owner, a significant portion of your wealth transfer may be made up of the proceeds from the sale of your business. Shares of a business that has grown in size and value over many years will more than likely carry large capital gains, with the disposition of these shares potentially creating a large tax liability for yourself, as well as for your heirs if they are shareholders as well. However, if you use a family trust you may be able to minimize much of the tax liability which would otherwise arise.
The family trust would hold the shares in your business and sell them on your passing. As long as the business qualifies as a Qualified Small Business Corporation, using the family trust would allow for the multiplication of the Lifetime Capital Gains Exemption for each beneficiary of the trust, sheltering up to $892,218 (as of 2021) in capital gains for each beneficiary. This could result in hundreds of thousands of dollars in taxes saved on the transfer of this wealth. Note that this strategy does involve specific criteria for eligibility, so you may wish to consult with your tax professional to ensure correct execution and appropriateness for your personal situation.
Passing money to heirs while simultaneously trying to minimize taxes can be challenging but with careful planning it can be done, thereby leaving more money in the hands of your heirs.
Bloom Investment Counsel, Inc. Can Help You and Your Family Preserve and Build Wealth
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Established in 1985, Bloom Investment Counsel, Inc. is a Toronto-based independent, privately-owned boutique investment management firm specialized in providing actively managed, customized dividend-paying portfolios for wealthy individuals, family offices, foundations, corporations, institutions, and trusts.
Our investment approach is centred around our belief in the long-term benefits of investing in income generating investments, specifically dividend-paying stocks, which has helped provide our clients with comfort to invest in the stock market.
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For high-net-worth individuals and families, our investment approach can not only protect and preserve net worth, but also provide income that can be used for retirement, philanthropic ambitions, and more, without the need to withdraw from capital.
For endowments, foundations, corporations, institutions, trusts, and more, our investment approach can provide a more tax-efficient strategy as dividend-paying stocks have a lower tax rate. Income can also be used to fulfill the mandatory disbursement requirement for a foundation.
If an additional income stream is not necessary, we will reinvest the generated income, with the portfolio continuing to grow through our long-term investment approach.
Established in 1985, Bloom Investment Counsel, Inc. is a Toronto-based independent, privately-owned boutique investment management firm with experience in managing in excess of $2.5B in assets over the years.
We provide actively managed, customized Canadian and U.S. dividend-paying portfolios for wealthy individuals, family offices, foundations, corporations, institutions and trusts.
Since our inception, we specialize in one thing and strive to be the best at it—investing in income-generating investments, specifically dividend-paying stocks.
Are you looking for a personal investment management service that can help you generate income, if needed, and growth? Let’s Talk. Call us at +1-416-861-9941 or email us at email@example.com
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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.