Estate Planning and Post-Mortem Tax Planning
Canada does not have an estate or inheritance tax regime, but when a Canadian resident dies, a number of tax consequences arise. These include deemed dispositions of property, reporting of income in the year of death, and potential estate and income tax on foreign property. For an individual who holds significant wealth, advance planning and post-mortem techniques may be used to reduce tax owing on death, and maximize distribution to family members and other beneficiaries. Ideally the planning should be implemented in advance, and it is especially critical that the last will and testament be drafted with a view to reducing tax on death, and avoiding negative tax consequences. However, if tax advisors were not consulted in the course of estate planning, the executor and beneficiaries may still be in a position to reduce the amount of current and future tax payable by the deceased, estate, and beneficiaries.
With early planning, tax on death may be reduced through timely corporate reorganizations, estate freezes, insurance planning, changes of residency, and providing for tax-deferred transfer of assets to a spouse, common-law partner, or (in the case of certain investments) a dependent child or grandchild.
Post-mortem strategies that may reduce tax include claiming available exemptions (including the lifetime capital gains exemption for certain shares or farm/fishing property), “pipeline” transactions to step up the cost base of corporate-owned assets and reduce or eliminate tax on subsequent sale, loss-carrybacks to reduce or eliminate capital gains tax on shares of a corporation, accessing corporate tax refunds, filing separate tax returns to double up tax credits and use lower marginal rates, payment of death benefits, and various other techniques that comply with the rules under the Income Tax Act.
It is important to again emphasize that the last will and testament must be drafted with awareness of applicable tax rules, to preserve and enhance the value of the estate.