Lorena Boda CPA

Estate and Succession Planning

“Planning is bringing the future into the present so that you can do something about it now.”

Alan Lakein

Estate planning is the process of determining the goals that one would like to accomplish, along with undertaking certain actions to set the path forward for achieving these goals. Wealth accumulation and passing of the estate to loved ones is a very important and rewarding aspect of ensuring that the loved ones are taken care of and obtaining the piece of mind that the finances are managed according to one’s wishes.

During an individual’s lifetime, he or she may have certain objectives, such as saving for retirement, buying a family cottage, investing in passive assets, starting or growing a business or arranging for a family member to be involved in the family business and eventually take over the business. Financial planning at an early age is very important to achieve certain retirement goals for example.

For income tax purposes, a Canadian resident is deemed to dispose of their assets at death triggering income tax implications that should be anticipated in advance to minimize and manage such consequences. This estate planning process starts with taking an inventory of all assets and liabilities expected, determining the estate distribution objectives, estimating the tax liability at death, analyzing tax minimization strategies and solutions, assessing the liquidity of the assets held, and funding the tax liability and other liabilities, and implementing the estate plan and other strategies, including the preparation of a Will. To achieve the best plans and outcomes, all professionals, such as financial planners, accountants and lawyers engaged in an estate plan should work together to ensure the plan is appropriately implemented.

Let’s take a look at a case study:

Assume Lisa is a business owner who has the following current list of assets and liabilities:

Principal residence: current value of $1,000,000

Cottage: current value of $600,000 (purchased for $400,000)

RRSP accounts: current value of $300,000

Investments: current value of $100,000 (purchased for $50,000)

Business: current value of $1,000,000

Mortgages and other liabilities: current value $200,000

Based on the above assets, the estimated tax liability at death is approximately $495,000 assuming Lisa is already at the top tax bracket of 53.53% for Ontario. This means that Lisa’s estate will need to fund a tax liability of $495,000, plus the $200,000 of other liabilities and other costs, such as probate fees (being 1.5% of the total value of the estate in excess of $50,000), funeral costs, professional fees, and other costs. The executor of the estate will then need to decide which assets will be sold to satisfy the liabilities before any distributions are made to the beneficiaries of the estate. The executor of the estate holds a fiduciary duty to ensure the estate is appropriately administered and managed and should obtain a clearance certificate for income tax purposes to avoid being personally liable for unpaid taxes, interest, and penalties owed by the estate.

Some examples of tax planning strategies and considerations to discuss with the accountant and other professionals would be as follows:

  • Principal residence designation across multiple properties (i.e. assessing which property would be most beneficial for income tax purposes);
  • Spousal rollover (i.e. transferring of assets to a surviving spouse to defer the income tax liability at the first-to-die);
  • Gifting or transferring of property during lifetime (i.e. although this action may accelerate the tax liability, it fixes such liability and shifts the growth of the asset to someone else);
  • Charitable donation planning;
  • Registered accounts designations and depletion of such accounts while using up the graduated tax brackets during lifetime;
  • Estate and succession planning for the business (i.e. estate freezes to fix the tax liability and allow a family member to be a successor in the business in a tax-efficient manner);
  • Using up of available tax attributes, including the lifetime capital gains exemption and the capital dividend account of a corporation to distribute funds in a tax-efficient manner);
  • Life insurance to fund the tax liability and other liabilities at death;
  • Separate Wills to minimize the probate fees at death for shares of a private corporation;
  • Power of Attorney for personal care and property;
  • Graduated rate estates tax filings up to 36 months after the date of death to access a second set of graduated tax rates. Certain tax filings and deadlines must be met to ensure certain objectives are attained.

Holding shares of a private corporation at death poses the risk of double taxation unless certain specific tax planning strategies are implemented to avoid double taxation. These rules are complex and should be discussed in detail with the accountant for each specific situation.

At Lorena Boda CPA Professional Corporation, we would be happy to assist with your estate planning needs.