Is your Estate Plan Tax Efficient?

By Marie Kazmer 

Earlier this year I wrote about various taxes that may be triggered upon death (read about that here). With these liabilities in mind, this blog will speak to planning strategies that may be leveraged to help defer and/or avoid them. 

“How can I avoid taxes on my death?” This is one of the most common questions I receive from clients who are concerned about the tax burden to their beneficiaries and estate on their passing. 

While it is true that tax and estate planning strategies do exist aimed at minimizing taxes that may arise upon death, particularly capital gains and income taxes, it is important to know that many tactics only defer taxes rather than eliminate them altogether – and sometimes, the hidden costs of such strategies (for example: the costs and effort of administering a trust for decades, ongoing accountants’ fees, the cost of drafting, etc.) and overall compliance and filing requirements can diminish the actual and perceived benefits. 

Ultimately, in every estate and tax plan, a cost-benefit analysis is required and should be undertaken so as to avoid the common approach of allowing the ‘tax tail to wag the dog’ – a phrase most of us need to remind ourselves of in this area of practice. 

That caveat aside, here are some key considerations and strategies for minimizing and/or deferring taxes through estate planning used in Canada and often implemented in my practice:

1. Lifetime Giving: Gifting assets during your lifetime can reduce the size of your estate. Canada does not have a gift tax, or limitations like in the United States, but people should be reminded that ‘gifting’ truly means giving up the beneficial ownership of your wealth – and figuring out the appropriate timing of such wealth transfers can be difficult for most. 
2. Principal Residence Exemption: The sale of a principal residence is generally tax-free in Canada. Maximizing the use of this exemption can reduce the taxable capital gains that might otherwise be realized upon death if the property is sold by your estate.  Many people continue to believe that this exemption persists beyond the death of the homeowner, which is not the case, save for limited exceptions.  Generally, increases in value of one’s primary residence from the date of death to the date of its eventual disposition is treated as a taxable capital gain to the homeowner’s Estate.
3. Spousal Rollover: Capital assets transferred to a surviving spouse (including common law spouses) generally qualify for a tax-free rollover, deferring capital gains taxes until the surviving spouse disposes of the assets. This rollover provision helps preserve family wealth and defer taxes.
4. Tax-Free Savings Accounts (TFSA) and Registered Retirement Savings Plans (RRSP): Assets held within TFSAs are tax-free and assets held in RRSPs are generally not subject to income tax until withdrawn. Both types of plans permit beneficiary-designations allowing the funds to flow directly to one or more beneficiaries on death of the plan holder, bypassing the “estate” and therefore reducing the otherwise probate tax to 0.  Generally, RRSPs are taxed in the year of death subject to leveraging the spousal rollover described above at point 3. It is important to consistently review these assets and your designations as part of your Estate plan.
5. Use of Trusts: Trusts in Canada can serve various purposes in estate planning, including income splitting, providing for minors or individuals with disabilities, and mitigating taxes. Certain types of trusts, such as spousal trusts and alter ego trusts, can offer probate tax advantages by allowing assets to flow outside of your estate and other tax deferral opportunities.
6. Estate Administration Tax (Probate Fees): Some provinces in Canada—including Ontario—impose probate fees, which are based on the value of assets passing through the “probate” process on death. Estate planning strategies may include reducing the assets subject to probate through the use of beneficiary designations, joint ownership, trusts and multiple wills.
7. Charitable Donations: Charitable donations made in your will or during your lifetime can reduce the taxable value of your estate. In Canada, there are incentives such as the charitable donation tax credit, which can offset taxes owing by your estate.

The strategies outlined above provide a foundation for effective tax planning as part of your broader estate plan – but they are not one-size-fits-all! Consulting with a knowledgeable estate planning lawyer and tax advisor is crucial to developing a tax-efficient plan tailored to your specific circumstances.

Disclaimer: I am not a tax lawyer or qualified tax professional, but we consult with and partner with tax experts in our daily practice of estates law. We provide general tax-related information therefore, but not tax advice.