How to Leave a Bigger Legacy, Part 2
When planning a will, most people focus on “who gets what.” Often overlooked is the fact that there’s always a stealthy, unwanted third party to your will, the Canada Revenue Agency (CRA), eager to get as big a share of your estate as it can. In my previous article I looked at some ways to cut the CRA’s tax take, including spousal trusts and testamentary trusts. But that’s not the end of the story. Here are some more ways to ensure tax-efficient will planning.
In most provinces, some fee will be payable to the tax man if your assets go through probate. In Ontario, for example, probate tax of 1.5% of assets will be payable. Alberta, by contrast, imposes fees on a sliding scale depending on the net value of the assets; the maximum is $525 imposed for net value of property of $250,000 or more subject to probate.
However, if you own shares of private companies, you should ensure that you have a secondary will that deals only with those shares. Why? Well, you may be surprised to learn that shares of private companies do not require a probated will in order to effect a transfer to the beneficiaries (unlike bank accounts or real property).
Accordingly, by segregating your private-company shares in a separate will, you can avoid probate tax on the value of your shares.
This can be substantial if the bulk of your wealth is tied up in private-company shares. Therefore, if a secondary will is drafted to deal with your shares, then the application for probate will only be made in respect of your assets in your first will.
I mentioned above that a probated will would be required in order to transfer real estate to your beneficiaries. However, it is possible to save on probate fees on your home or other personally-owned real estate by having a bare trustee company on title; the shares of such bare trustee company can be dealt with under the secondary will.
Since you won’t need to change title to the property on your death (as it will continue on in the name of the bare trustee company), a probated will is no longer required for that purpose.
RRSPs and RRIFs
I recommend that you designate a beneficiary of a Registered Retirement Savings Plans (RRSP) or Registered Retirement Income Funds (RRIF) directly with the custodian itself rather than in a will.
This will do more than avoid probate fees. If you designate your spouse as a beneficiary (which I highly recommend), the value of your RRSP or RRIF will not be included as income in your final return, because there is a deferral of tax for transfers to spouses.
If your spouse passes away before you, or you get divorced, you can designate a child or grandchild who is “financially dependent” on you, so that the RRSP will be taxed in the hands of the child or grandchild with a low tax rate. (Note the financially dependent child or grandchild can also specify a special annuity which will enable them to defer this tax while they are minors or indefinitely if they are mentally or physically disabled).
“Financially dependent” usually means that the child or grandchild’s income does not exceed the basic personal amount.
Your will can provide for gifts to registered charities, which, done in the year of death, qualify for tax credits of up to 100% of your net income.
Although this sounds like a great tax-planning opportunity, there are pitfalls that abound in this area. Care must be taken when drafting your will. I say this because the CRA used to be of the opinion that if the executors had discretion to choose between the value of the bequest and which charity would receive the gift, the donation would not qualify for the tax credit.
Although this position is no longer valid, I would highly recommend that you speak with your advisor to ensure that an amount to be donated is determined (whether a specific amount or a percentage), and that it is clear from the terms of the will that the executor is required to make the donation to a qualified donee.
You might also consider two other tax-saving strategies for your will:
* Principal residence. Leave your residence to a beneficiary who will be able to claim the principal-residence exemption.
* Forgiving debts. If someone owes you money and you wish to forgive the debt, the best way to do this could be in your will, so as to avoid certain debt-forgiveness rules.
By properly tax planning your will by using some of the strategies I’ve outlined, you can at least take comfort that upon your death, you will be leaving a larger inheritance to your family, and a lot less the CRA.
Previously published in The Fund Library on March 1, 2018 by tax and estate planning lawyer, Samantha Prasad.