Every will has an unnamed beneficiary: the Canada Revenue
Agency. And many heirs and beneficiaries are often surprised that
their inheritance has dwindled considerably after the taxman's
take. Luckily there are a number of strategies and tactics you can
use to make your will tax efficient and to ensure your
beneficiaries get the bulk of your estate, not the CRA.
Let's start with one of the most useful will-planning
The spousal trust
Under Canadian tax rules, you are deemed to have sold all of
your assets immediately prior to your death. And if your assets
have increased in value, your estate will be subject to capital
gains tax. At least your beneficiaries get to inherit your assets
with a bumped-up cost base.
But there's one important exception to the deemed capital
gain rule: You can defer your death-tax exposure by making your
spouse the beneficiary of your estate, or better still, by leaving
your assets in a qualifying spousal trust. There is no election
that your estate need make. It's an automatic deferral to the
extent you leave assets to your spouse or a spousal trust.
Specifically, bequests to a spousal trust (or to your spouse
outright) will not trigger capital gains tax on your death because
the transfer of assets occurs on a tax-deferred basis. In this
case, capital gains tax exposure will be triggered only on the
death of the surviving spouse.
The bonus of a spousal trust over an outright gift to your
spouse is that you can choose trustees to protect your spouse
against poor financial decisions. You can also ensure that the
surviving spouse will not be able to transfer assets to undesirable
beneficiaries (for example, a decision to leave your assets to the
new spouse in the case of remarriage).
Once your spouse passes away, the spousal trust would then
provide for the assets to pass to the residual beneficiaries (e.g.,
But you must be certain that the spousal trust qualifies for the
tax-deferred treatment; otherwise, no tax-deferred rollover upon
your death will be available. Specifically, the spousal trust must
meet the following requirements:
The spouse is entitled to receive all of the income of the
trust while he or she is alive.
No other person (including kids) may receive or otherwise
obtain the use of any income or capital of the trust.
Note also that even though no one else is allowed to receive the
capital of the trust, this does not mean that the spouse is
automatically entitled to it. In other words, as long as no other
person received or obtains the use of the capital, the spousal
trust will not be disqualified.
In order to make sure that you do not stray from these
requirements, it's important to get legal help when drafting
your will and specifically any clauses relating to a spousal
For example, a condition allowing the trustees to lend funds to
a relative could be interpreted as allowing someone other than the
spouse to receive or obtain the use of the capital. It may be okay,
however, to lend funds on commercial terms – but you should
first check with your advisor.
A spousal trust can provide for certain testamentary debts to be
paid, e.g., funeral expenses and income taxes payable for the year
of death and prior years.
Until 2014, "testamentary trusts" were an effective
tax-planning tool, as they were were deemed to be "separate
taxpayers," with access to graduated tax rates. You could
leave assets in a testamentary trust for your kids, instead of
giving them outright. This way, the kids could "income
split" with the estate. This opportunity was even more
lucrative because the estate could choose to declare and pay tax on
its income, even though it is actually paid out to beneficiaries.
And the more testamentary trusts you created in your will, the more
you had access to the graduated tax rates.
However, legislation introduced in late 2014 changed all that.
Beginning in January 2016, testamentary trusts will no longer
benefit from graduated tax rates. In addition these trusts are no
longer exempt from making tax installments or having an
As a result, testamentary trusts will now be subject to a flat
top-tax rate. The only exception to this new rule is that the
estate can take advantage of the graduated tax rates for the first
36 months. But after that, the opportunity to income split
disappears (there will still be access to graduated rates for
testamentary trusts whose beneficiaries are individuals who are
eligible for the federal Disability Tax Credit).
The CRA provides new housing rebates for individuals who have purchased or built a new house or have substantially renovated a house or made a major addition to a house who plan on living in it personally or letting a relative live there.
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