THE LAST YEAR HAS FOUND us really thinking about our mortality and our legacy. How do we provide for our loved ones? For many Canadians out there, getting a will in place has been at the bottom of many "to do" lists. But based on how busy Minden Gross LLP's Wills and Estates Group has been the last year, it looks like it has jumped to the top of many lists. When we think about planning our Will, we think about who will take care of our kids, and to provide for them. It's also possible that one would tend to worry about ensuring there is enough left over for your family members once the taxman gets his piece of the pie. So how do you plan your Will in the most tax efficient manner?
The Spousal Gift
Canadian tax rules provide that when you pass away, you are deemed to have sold all of your assets immediately prior to your death. To the extent that any of your assets have a pregnant gain, then your estate will be subject to capital gains tax. On the bright side of things, at least your beneficiaries get to inherit your assets with a bumped-up cost base and there is no tax to them. There is, however, one important exception to this deemed capital gain. You can defer your death tax exposure by making your spouse the beneficiary of your estate, or perhaps better still, you can leave 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, the tax rules provide that bequests to a spousal trust (or to your spouse outright) will not trigger capital gains tax on your death so that assets transferred to the spousal trust will occur on a tax-deferred basis.
The bonus of a spousal trust is that you can choose trustees to protect the surviving spouse against poor financial decisions, or any undue influences. As well, you can ensure that the surviving spouse will not be able to transfer assets to undesired beneficiaries (for example, if he or she were to get remarried and decide to leave your assets to their new spouse).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.