Hello everyone and welcome to the Retiring Canada Podcast. In today’s episode, we're going to discuss "Big Tax vs. Little Tax."
Specifically, we will cover:
- What are the big tax and little tax?
- Two common strategies to minimize the little tax.
- Four advanced strategies for high net worth estates.
- Potential drawbacks and pitfalls to planning for the little tax.
- Your three potential estate beneficiaries.
- The big tax, and three ways retirees can minimize its impact.
- Lastly, a few actions items for you to consider.
Big Tax vs. Little Tax: What Am I Referring To?
The "big tax" refers to estate tax or the income tax liability at death on the taxable portion of your estate, or that of the last surviving spouse. Given the highest marginal income tax rates are over 50% in most jurisdictions in Canada, this is why I call it the big tax.
The "little tax" refers to probate fees applicable at the time of death. These are charged in most provinces and territories and are generally less than 1%, other than in BC, Nova Scotia, and Alberta.
Both of these taxes are crucial in estate planning. This involves structuring your will, joint ownership on properties and investment accounts, trusts, and more.
Estate Planning Concerns
When most people think of estate planning, they are primarily concerned with two things:
1. How will my assets be split among my beneficiaries?
2. How can I minimize the amount of tax paid when I pass away?
Estate Beneficiaries
Who do you want to benefit the most from your estate? There are only three options:
1. Your intended beneficiaries.
2. A charity of your choice.
3. The Canada Revenue Agency (CRA).
Through proper planning, we can address these concerns and help to disinherit the CRA as much as possible.
Common Pitfalls in Probate Planning
One pitfall is the desire to focus too much on the little tax, probate fees, without understanding the impact this planning has on the big tax. Let's start there.
Simple Strategies and Their Pitfalls
1. Adding Joint Owners to Your Assets:
- Bare Trusts: These arrangements now require a T3 tax filing, and failure to do so can result in penalties.
- Deemed Disposition: Adding a joint owner can trigger capital gains tax.
- Intent Alignment: The final ownership after your passing may not align with your true intent.
2. Naming Direct Beneficiaries on Plans and Policies:
- Impact on Social Benefits: Naming a disabled beneficiary directly may disqualify them from public programming.
- Tax Consequences: Non-spousal direct beneficiaries on RRIF accounts can cause tax issues and family strife.
Advanced Strategies for High Net Worth Estates
These strategies are generally applicable to high net worth estates and often involve private corporations. Please consult an estate lawyer before considering any form of implementation.
1. Insurance Trust: Helps address potential inequities in naming direct beneficiaries.
2. Alter Ego Trusts and Joint Spousal/Common Law Partner Trusts: Used to distribute non-registered assets outside of probate.
3. Multiple Wills: One will for assets requiring probate, another for those that do not.
4. Transferring Assets to a Holding Corporation: Reduces the value of assets for probate purposes.
Minimizing the Big Tax
Focusing on minimizing the big tax, income tax payable by your final estate, will be much more impactful.
1. Drawing Money from Registered Accounts: Manage retirement income and taxation to optimize tax brackets while alive.
2. Maximizing Spousal Income Splitting Opportunities: Manage household income and tax.
3. Maximizing TFSA Accounts Annually: Utilize additional tax-paid dollars generated by the first strategy.
Final Thoughts
At the end of the day, ensure that probate planning is justified when factoring in all potential downsides. More often than not, focusing your energy on minimizing the big tax will be more beneficial.
Action Items
1. Be Careful with Probate Planning: Seek guidance to avoid unintended consequences.
2. Understand Your Estate’s Final Tax Bill: Especially important for those who own vacation properties.
3. Enjoy the Rest of Your Summer: When fall comes around, get in touch to optimize your estate and minimize your tax.
Conclusion
For the links and resources discussed, please check out the link in the show notes or visit retiringcanada.ca. If you enjoyed the show, please subscribe and leave us a 5-star review on your favorite podcast app. Be sure to sign up for my weekly Retiring Canada newsletter.
And remember, when it comes to your retirement, don’t take chances.
Make a plan so YOU can retire with confidence.
All comments are of a general nature and should not be relied upon as individual advice. The views and opinions expressed in this commentary may not necessarily reflect those of Harbourfront Wealth Management. While every attempt is made to ensure accuracy, facts and figures are not guaranteed, the content is not intended to be a substitute for professional investing or tax advice. Please seek advice from your accountant regarding anything raised in the content of the podcast regarding your Individual tax situation. Always seek the advice of your financial advisor or other qualified financial service provider with any questions you may have regarding your investment planning.