For tax-efficient wealth transfers, plan early and revisit often

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Nothing is certain except death and taxes. That immutable truth was first uttered by Benjamin Franklin, and is duly enforced by the Canada Revenue Agency (CRA). With upward of $1-trillion in assets passing between Canadian estates and beneficiaries this decade, the significant tax implications require careful planning.
Canada doesn’t have an inheritance or death tax, but that doesn’t mean there are no taxes due upon death. Here, the estate is taxed rather than the beneficiary. How assets are taxed depends greatly on the type of asset and to whom it’s bequeathed.
“We stress that once death occurs, there are dispositions and taxes owed,” says Tannis Dawson, high-net-worth planner with Napper Wealth Management Group at TD Wealth Private Investment Advice in Winnipeg.
For spouses, the law generally allows for the rolling over of assets on a tax-free basis. However, for children and other beneficiaries, there are only a couple of exemptions, such as zero taxation on a principal residence and the gifting of cash. “On everything else, there’s a tax consequence,” Ms. Dawson notes.
That’s why it’s critical to create and review a wealth plan routinely that offers the best path to an efficient wind-up of the estate. The right plan maximizes asset values while minimizing taxation.
Financial advisors play a key role in preparing clients and their families to make the best use of the tax rules so they can keep more of the assets and to understand the tax effects of various types of asset classes.
“The wealth plan is the best way to determine what tax consequences exist. We do a draft tax return to show cash flow, what would be owing, how we would execute the estate plan and how taxes would be funded,” Ms. Dawson says.
Advisors should review the plan with their clients at least every two to three years, she says, as circumstances and goals can change.
A comprehensive wealth plan not only lays out the disposition and tax strategies at death but also the steps to consider beforehand, says Clark Lowry, senior wealth advisor with Lowry Wealth Planning at Wellington-Altus Private Wealth Inc. in Calgary.
He uses the example of capital gains taxes on proceeds of more than $250,000, for which the inclusion rate rose to 66 per cent from 50 per cent on June 25 becuase of changes introduced in the federal budget. An effective plan will likely contemplate selling down a portion of positions sooner and in stages, allowing those proceeds to remain under the taxable threshold.
“It makes sense to start realizing some of those gains ahead of time so that it doesn’t all need to be realized at that higher inclusion rate at death,” Mr. Lowry says.
For clients with multiple properties, the plan should also contemplate assigning the property with the biggest capital gain as the primary residence. Mr. Lowry points to a cottage that was purchased for $100,000 but has appreciated by $500,000 compared with a home that was purchased for $300,000 and rose by $400,000.
While the home has a higher market value, its capital gains exposure is lower because it has appreciated by less and is therefore subject to lower taxation. “You’re allowed to select which one is more beneficial for you,” Mr. Lowry says.
An increasingly popular route to minimizing taxation is to gift assets to beneficiaries and heirs, as there’s no gift tax in Canada. Helping children with a real estate down payment, renovation or other big-ticket expense is suitable, Ms. Dawson says. Yet, she feels anything more significant isn’t advised, as most people don’t hold large cash positions so they would need to liquidate holdings.
“Clients aren’t sitting on cash but in assets that have unrealized gains. By gifting those proceeds, we’re creating a tax liability. Why would we create a new tax liability ahead of time when we could defer it?” she says.
For significant sums transferred to children, she says clients may be better off making a loan with an agreement of repayment. “We have that discussion to protect yourself in case there’s something like a marriage breakdown.”
A total loss of control over that money is something else to consider. “You have to be comfortable never seeing that money again, and being okay with what the beneficiary does with that,” Mr. Lowry adds.
He cautions that when it comes to substantial amounts of money being gifted, clients can run afoul of the so-called general anti-avoidance rules. The provisions empower the CRA to assess taxes in cases in which a taxpayer followed the “letter” but not “spirit” of the law, “causing a misuse or abuse of the Income Tax Act,” the CRA says.
“You have to be careful,” Mr. Lowry says. “If you’re doing something deliberately to avoid paying taxes, you can be penalized for that. There has to be a reason for what you’re doing that is not specific to avoiding taxes.”
He says one option that can benefit both the receiver and the estate, and by extension, its beneficiaries is gifting shares to charity in exchange for a tax credit.
“If you do want to gift money, sometimes gifting shares or investments in kind can be more beneficial than selling them and giving cash,” Mr. Lowry says.
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