What do I need to know about tax on my estate?

Some of you may already know that I write a quarterly column for News & Views, the magazine published by the Alberta Retired Teachers' Association. I'm attaching a link here to the winter 2012 issue, in which my column was called "What Do I Need to Know About Tax on my Estate?". Click here and scroll down to page 12.

Income tax on inheritance

Are you wondering about a potential tax hit if you inherit money or property? If so, you're not alone. This remains one of the consistently asked questions here on this blog. Today I'm linking you to a blog post by Mark Goodfield, a Toronto accountant also known as The Blunt Bean Counter. To read his post about income tax on inheritances in Canada, click here.

How to minimize the tax hit when you face the final curtain

Everyone wants to know how to save taxes, don't they? This is especially true of those doing their estate planning - every discussion of wills and estate planning must include a discussion of taxation. This article from the Globe and Mail has several tips for reducing your final tax bill. Not every tip will suit every person, of course, but click here to read the article and perhaps pick up some new tax-saving ideas. Both the article and the attached photo are from theglobeandmail.com.

RRSP contributions in the year of death

This article from tax advisor Derek de Gannes reveals how the executor can reduce tax in the year of death by contributing one last time to the deceased's RRSP. Tax savings ideas are always welcome! Click here to read the article.

6 Ways To Lose Your Estate

If you'd like to learn 6 Ways To Lose Your Estate, click on the link to read this article from Investopedia. It's packed full of good advice and common sense.

Does Canada have death taxes or inheritance taxes?

Readers please note: Due to the number of comments added to this thread, the site won't let me read all of the questions. 200 comments seems to be the limit. I would like to see your comments and questions though, so please feel free to add them to any thread on this blog 
- lynne. 

No, Canada does not have a specific tax that is levied against beneficiaries inheriting under an estate.

So if there is no death tax, why is there so much talk about planning ahead to pay for taxes in an estate?

There are plenty of tax consequences when a person passes away, even if there is no specific tax on dying. This is because a person's assets are deemed by law to have been disposed of by the deceased one minute before he or she died.

For example, everyone who owns an RRSP knows that we do not pay tax on the money we put into our RRSPs until we take it back out. In other words, the money is not tax-free, it is tax-deferred. 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 that you took all of the money out of your RRSP (or RRIF), then you would have to pay the taxes on it.

In practice, your estate would pay those taxes, even though the person named as the beneficiary of your RRSP or RRIF is not your estate. You can avoid paying those taxes if the beneficiary you designate is your spouse or a disabled child.

Another tax liability that arises when a person passes away is capital gains tax. This is a tax on capital property (some examples of which are real estate and shares in private corporations) that has increased in value since the day you acquired it.

For example, if you bought a cabin at the lake for $50,000 years ago, and by the time you die the cabin is worth $90,000, then the value of your property has gained $40,000. Half of that gain is taxable. Your executor would then have to include $20,000 (half of the gain) on your last tax return as income.

This tax is also payable out of your estate.

There is an exception to this rule as well. Your estate does not have to pay any capital gains tax on your residence. This is referred to as a capital gains exemption. If you have a home and a cabin, or a home and a rental property, you can claim the exemption only on one property, that being your usual place of residence.

There are some tools that can be used to address tax liability, such as life insurance policies, beneficiary designations, trusts and restructuring of the ownership of assets, depending on your situation.

For this reason, it's worthwhile to sit down with an experienced estate planning lawyer to make sure that you're aware of all of the possible tax consequences of your death and that of your spouse.,You also want to make sure you're aware of ways to reduce taxes and to have cash flow to pay the portion that can't be reduced.