Unfortunately there are many people who underestimate the slice that CRA could take when they die due to the imbedded tax liability in their final estate. For single people this happens when they die, but for couples, all those imbedded taxes come due on the last spouse’s death.
RRSPs or RRIFs: Take a couple with $350,000 between them in RRSPs or RRIFs. There’s no tax issue on the first death, but on the last death they are deemed sold and fully taxable as income at the top marginal rate of 39%. This triggers an estate tax liability of $136,500, and CRA wants it paid as quickly as possible. Add to this the potential that the value of the assets had declined in a market downturn, plus surrender costs in some cases, and the overall hit can be devastating.
Stock Portfolios: For older clients with long term investments there can be significant embedded capital gains which would get taxed based on their terminal return’s marginal tax rate. 50% of that capital gain would in most cases be at the top marginal rate of 39% in Alberta.
Lake cottages, holiday condos, 2nd homes, rental property: These are all ticking tax liability time bombs, as CRA considers them to have been deemed disposed of on death at their current fair market value. So that lake property you bought in the 70s for $40,000 which is now worth $300,000 would be subject to $260,000 of capital gains net of any improvements made along the way. For instance, if you built a pier for $3,000 and did $27,000 worth of upgrades to the cottage, the gain would net out at $230,000, meaning $44,850 is owed to CRA.
Farmers or business owners today could have huge tax issues on death: Take land around Stettler today worth $4,000 an acre which was purchased in the 50s for $250 an acre. That’s $3,750 capital gain on every acre. For a section of land that’s $2,400,000 of capital gain. Even with the new $1 million of life-time personal capital gains exemption it still means a tax bill of $270,000 plus the alternative minimum tax that would be triggered as well. For business owners, the increase in corporate share values over time also can have significant imbedded tax liability, requiring some proactive planning to minimize or offset the tax that would be owed.
Recapture on the sale of machinery and fixed assets: CRA allows farmers and business owners to depreciate equipment and buildings etc., often at a pretty aggressive rates. When sold it can trigger significant recapture of depreciation and the related tax issues.
So if you don’t want CRA to be the big beneficiary when you pass away, start the process today to minimize or offset the tax hit. Don’t wait until forced to do so by accident, injury or premature death. To be effective, most strategies take time to implement.
None of us like to think about our ultimate mortality, but just as urgent is the possibility of disability or premature death, both of which present different issues to deal with and different planning strategies. Starting into a planning process too late significantly reduces the opportunities we have available to deal with them effectively.
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