How are we taxed at death in Canada?
Many people are under the impression that death is the end of taxes. They are wrong! In Canada, there is a “deemed disposition” of all of a deceased’s assets at the date of death. Some examples of assets that are deemed to be disposed at this point include: RRSP, RRIF, Rental properties, shares in private corporations, stock portfolios, the primary residence and many more.
As a result, all unused capital gains and losses are triggered at the time of death. Once this is done, an individual’s net capital gain (capital gains – capital losses) is added to his or her revenue.
Estate planning that takes into account an individual’s family and financial situation may help minimize this tax burden and ensure an adequate estate for the deceased’s heirs in accordance with their wishes.
What is a will or last testament?
A will is a legal document that sets out an individual’s wishes relative to the disposition of his or her property once they pass away. In the absence of a will, the provisions of the Civil Code of Quebec sets out the default rules of succession called intestate succession.
As a result of the intestacy rules, an individual’s common-law partner could be deemed a beneficiary of the estate and could be entitled to inherit certain assets or part thereof.
Writing a will allows an individual to put aside this legal regime and to decide for himself to whom their property should go at the time of death.
In many cases, a testamentary will creating testamentary trusts should be considered.
What is a testamentary trust?
The testamentary trust is created at the testator’s death. The deceased wills his or her property to the trust for the benefit of the heirs. As a result, the estate property is held by the trust and not by the heirs directly. Since the trust is an independent legal entity separate and apart from the patrimony of the heirs, the testamentary trust offers numerous legal advantages.
What are examples of situations where a testamentary trust can be useful in estate planning?
A testamentary trust allows an individual to will a piece of property to a surviving spouse while assuring that the property is in turn transferred to the children of a prior marriage at the time of that spouse’s death.
In his will, Victor leaves his second spouse, Mary, a rental property in a testamentary trust to her benefit. Up to the time of her death, Mary may benefit from the revenues generated by that property. When Mary dies, the property would be excluded from her estate and would be transferred to children from Victor’s first marriage.
PROTECTION OF ESTATE ASSETS
A testamentary trust may protect an estate against your heirs’ current or future creditors, for example, in case one or more of them become bankrupt, get divorced or are sued.
Your son declares bankruptcy shortly after your death. His creditors would be unable to seize the property you left him in your will because the legal title to that property would not be in his name, but in the name of the testamentary trust.
MINOR AND INCAPABLE ADULT CHILDREN WITH BEHAVIORAL ISSUES (DRUGS, ALCOHOL, EXCESSIVE GAMBLING)
In willing one’s property to a testamentary trust in favor of his or her heirs, the testator may provide for the needs of the latter without depleting their inheritance. This may be done by providing for regular payments to the heir from the interest of the property without giving the heir access to the capital until an appointed time.