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Nothing is certain except death and taxes. This irrefutable truth was first uttered by Benjamin Franklin and is duly enforced by the Canada Revenue Agency (CRA). With over a trillion dollars worth of assets passed between Canadian estates and beneficiaries this decade, the significant tax implications require careful planning.

There is no inheritance or death tax in Canada, but that doesn’t mean there are no taxes when someone dies. Here, the estate is taxed, not the beneficiary. How assets are taxed depends greatly on the type of asset and who it is left to.

“We emphasize that dispositions must be made and taxes owed upon death,” says Tannis Dawson, high-net-worth planner at the Napper Wealth Management Group of TD Wealth Private Investment Advice in Winnipeg.

It is generally legal for spouses to transfer assets tax-free. However, there are only a few exceptions for children and other beneficiaries, such as zero taxation of the main residence and gifts of cash. “Anything else has tax consequences,” notes Ms Dawson.

That’s why it’s important to regularly create and review an estate plan that provides the best path for an efficient settlement of the estate. The right plan maximizes asset value while minimizing taxation.

Financial advisors play a key role in preparing clients and their families to make the most of tax rules so they can keep more of their wealth and understand the tax implications of different types of asset classes.

“The estate plan is the best way to determine what the tax consequences are. We prepare a draft tax return to show cash flow, debts, implementation of the estate plan and funding of taxes,” says Ms Dawson.

Advisors should review the plan with their clients at least every two to three years, she says, because circumstances and goals can change.

Expect capital gains

A comprehensive estate plan not only lays out disposition and tax strategies upon death, but also the steps to consider in advance, says Clark Lowry, senior wealth advisor at Lowry Wealth Planning at Wellington-Altus Private Wealth Inc. in Calgary.

He cites as an example the capital gains tax on earnings over $250,000, for which the tax rate rose from 50 percent to 66 percent due to changes in the federal budget on June 25. An effective plan will likely involve selling some of the positions earlier and gradually so that those earnings stay below the taxable threshold.

“It makes sense to realize some of these gains up front so that not all of them have to be realized at the higher inclusion rate at the time of death,” says Lowry.

For clients with multiple properties, the plan should also include designating the property with the largest capital gain as the primary residence. Mr. Lowry points to a cottage that was purchased for $100,000 but has increased in value by $500,000, compared to a house purchased for $300,000 that has increased by $400,000.

While the house has a higher market value, its risk of capital gains is lower because it has increased in value less and is therefore subject to lower taxation. “You can choose what is more advantageous for you,” says Mr Lowry.

Be careful when giving money

An increasingly popular way to minimize tax burdens is to gift assets to beneficiaries and heirs, as there is no gift tax in Canada. Helping children with a down payment on a property, renovations or other large expenses is a good option, says Ms Dawson. However, she advises against giving large amounts, as most people do not have large cash holdings and would therefore need to liquidate their holdings.

“Clients are not sitting on cash, they are sitting on assets with unrealized gains. By giving away these proceeds, we are creating a tax liability. Why create a new tax liability up front when we could defer it?” she says.

For large sums of money being transferred to children, customers may be better off taking out a loan with a repayment agreement. “We have these discussions to protect ourselves in case of a divorce, for example.”

A complete loss of control over the money is another aspect to consider. “You have to accept that you will never see the money again and you have to not care what the recipient does with it,” adds Mr Lowry.

He warns that when giving large amounts of money, clients may violate what are known as general anti-avoidance rules. These provisions empower the CRA to assess taxes in cases where a taxpayer has followed the “letter” but not the “spirit” of the law, which “resulted in an abuse or disregard of the income tax law,” according to the CRA.

“You have to be careful,” says Lowry. “If you intentionally do something to avoid paying taxes, you can be penalized for it. There has to be a reason for what you’re doing that isn’t just related to tax avoidance.”

He says one option that could benefit both the recipient and the estate, and therefore its beneficiaries, is to gift shares to charity and receive a tax credit for doing so.

“If you want to give money, it can sometimes be more beneficial to give shares or fixed assets rather than selling them and giving cash,” says Mr Lowry.

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