What Taxes Will be Applied to Your Assets When You Pass Away?

When we think of estate planning, it's crucial not to overlook the tax consequences. So, in part one of our two part series on estate planning, we're answering this question: 

From strictly a tax perspective, what happens to my assets when I die? 

Here's a simple way to look at it. Just pretend that, immediately before your death, you've sold everything you own for what it's worth. You've now triggered the appropriate taxes, just like anyone else who sells off their assets. Effectively, this is how the CRA treats the situation, even though your assets haven't actually been sold yet.

Your assets are now subject to two kinds of taxes: Income tax and probate fees.

Income Tax

The CRA won't tax your assets on their overall worth. But it will tax the growth in their value. For example, let's say you owned shares in a publicly traded company and you paid $5000 for them. Then, on the day of your death, the shares have grown in value to $40,000. At that point, you will trigger the capital gains tax on that extra $35,000 increase in value.

The same holds true of most other assets that either show inherent gains or haven't been taxed before.

So, as you can see, it's a highly taxable situation. 

But there are exceptions that can help you with planning, and the main one is a rollover. A rollover is basically when an asset passes from one taxpayer to another without any tax consequences. 

When discussing death and taxes, the most important rollover involves leaving assets to a surviving spouse (legally married or common-law). When you leave all of your assets directly to your spouse, there is a complete deferral on the tax. So everything passes over, as is, and no tax is triggered. 

But let's say you have a spouse and two children. If your spouse one day remarries, it's possible they may set up their own will so that everything is left to their new spouse. 

You do also have the option of leaving your assets to your spouse by way of a trust. You'll still get that rollover and tax deferral, but you'll now have a little more control and ability to direct things, ensuring that—upon your spouse's passing—any remaining assets go to your children. 

There is one other less common exception. If you have an RRSP, you can leave it to a disabled child or grandchild who's financially dependent on you and you will get that same tax deferral.

Probate Fees (Estate Administration Tax)

When your family presents your will to a bank or financial institution, looking to remove the money that's been left to them, the bank will often insist the will be probated first. This means the will goes before the courts to be certified as valid and current. Once the will is probated, the bank will release the money. 

Naturally, there's a fee for this service. Not all provinces have probate fees but, here in Ontario, we do. The fee is 0.5% of your first $500,000 worth of assets and 1.5% on anything above that. 

So, along with everything else it brings, death can be an extremely taxable event, especially if you don't plan for it.

We discuss more on these topics, along with terminal returns, estate returns, and how Canadians can be exposed to U.S. estate tax in EPISODE 10 OF THE VAIVE AND ASSOCIATES TAX PODCAST.