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Understand financial planning and estate planning will ensure your family is cared for should something happen to you and that your money will go where you want it to. The taxes payable on investment income considerably reduces the value of the net estate you want to leave to your heirs. Investment income is derived from interest, dividends, and capital gains. For every type of investment income, you earn there is a tax bill to be paid. However, it’s possible to set up taxation strategies that will minimize the final tax bill.
Have you foreseen/provided for how your heirs are going to pay your tax bill upon your death?
To begin your financial planning and estate planning you should enlist the help of your accountant, financial planner, lawyer, financial advisor, insurance broker and your family. Establish the bequest of assets to your spouse (married or common law). Assets can be transferred without tax consequences, thanks to the rollover of assets to a spouse. These assets are deemed to be disposed of by the deceased, at an adjusvted cost base. This transfer postpones the payment of taxes to the time when the surviving spouse sells these assets or dies. RRSPs and RRIFs can also be transferred to a spouse without taxation. A TFSA transferred to a spouse is added to the spouse’s TFSA.
Advance estate planning can help cover or minimize costs you may not have considered. For the first 36 months after the death, the estate benefits from a progressive tax rate, like that for individuals, which allows the income to be split thereby reducing the taxes payable. After the first 36 months, the applicable tax rate becomes the maximum marginal rate.
Income-generating assets are best (rental property, shares, etc.) for the estate during this period to benefit from a progressive rate rather than taxing the income received by heirs.
If the value of the estate is high enough estate administration fees are generally offset by the taxation savings.
This strategy lets you plan the management of capital and issue instructions for its use (practical for minor children).
If you want to designate someone in addition to your spouse as a beneficiary, you should be aware of the fact that taxation could diminish the inheritance.
You can, however, minimize the tax payable by assigning to your spouse the assets whose values have appreciated the most.
They are thus free to transfer to the beneficiaries of their choice other assets with low or no capital gains, such as GICs and money market funds.
See Ontario tax table 2019 https://www.rcgt.com/en/tax-planning-guide/tables/ontario/tax-table/
Governments increasingly encourage donations to charitable organizations by granting significant tax advantages in the form of tax credits for individuals. Estate planning may sound intimidating but it is an important exercise you undertake to preserve your wealth for your family.
Probate is a fee or tax administered by the province on the value of the assets of an estate. How probate is determined depends upon the asset value and disclosure requirements for each province.
In Ontario, a deceased’s estate has to pay probate fees on the gross value of the deceased’s property. The fees are equal to $5 per $1,000 for the first $50,000 plus $15 per additional $1,000. With certain exceptions, an Estate Information Return must be filed with the Ministry of Finance within 90 days following the issuance of the Certificate of Appointment of Estate Trustee.
Not all estates require probate. Only those where a party such as a financial institution request it or where the validity of the will may be in question or there is litigation over the estate. The probate process determines the validity of a will. If found to be valid, the executor will also be confirmed. Probate fees will also apply to an application brought because there is no existing or valid will. This is known as intestacy.
If assets exist within a particular province, probate will be required in that province. As a result, the estate may end up paying probate fees in more than one province. There is no reduction or credit for fees paid in another jurisdiction.
Ontario law allows for multiple wills. It is necessary to have a properly drafted will for assets affected by probate fees and another for non-probate assets. Ensuring it doesn’t revoke the other.
Avoid probate fees on your RRSP and RRIF assets by designating beneficiaries under those plans. Likewise, the death benefits of any insurance policies on your life will sidestep probate fees if you name beneficiaries.
This strategy would result in the triggering of capital gains in respect of the transfer of those assets which have appreciated in value but will reduce your estate value thus reducing the level of probate fees at the time of death. Make sure the transfer does not hurt your ability to provide for yourself.
Assets held jointly, with right of survivorship, will pass outside of your estate directly to the other joint owner(s) at the time of your death and probate fees will be avoided. However, transferring may have consequences. Speak to your accountant.
Assets held in a trust will be dealt with under the terms of the trust and not the estate.
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