The two certainties of life.

There is a saying that death and taxes are the two certainties in life. Taxes, debts, funeral and testamentary expenses are the first items to be paid out of an estate before determining what is left over to distribute to the beneficiaries. There are at least four types of taxes to take into account when preparing an estate plan: 

Probate Taxes – Discussed above, this is a tax, which equals roughly 1.5% of the value of the assets of your estate payable when applying for probate.  There are many ways to minimize or delay this tax by careful planning.

Capital Gains – When someone dies, the government deems him or her to have disposed of all their assets at fair market value on the day prior to their death. Certain types of properties, such as a principal residence and qualified shares of a small business corporation can qualify for an exemption to this tax, but this can have significant tax consequences for cottage properties, RRSPs/RIFs, and investments when they are not being passed to a spouse. Any capital gains must be declared on the terminal income tax return filed on behalf of the estate and included in income in the year of death.

Income Taxes – An executor should consult an accountant and file a terminal income tax return for the deceased person within certain time frames following death.  This tax return declares both the person’s income for the year of death as well as any capital gains or other tax liabilities triggered by death. Generally, an executor should wait to distribute any assets from an estate until this tax return has been filed and a Notice of Assessment is issued confirming the amount of tax liability payable by the estate. The executor can also apply for a Clearance Certificate from CRA, confirming that there are no taxes owing.

Taxation of Testamentary Trusts - If a Will creates one or more trusts for beneficiaries including minors, then the trust will have to file annual tax returns declaring income received by the trust and payments out to the beneficiary in that year. This is a complex area and requires the advice of an accountant and a lawyer.

While it is not possible to avoid all types of tax that may be payable on an estate, your lawyer should be able to create a balanced plan for your estate that respects your intentions for your estate in the most tax-efficient manner possible.