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Many Canadians are surprised to discover just how much income tax their estate can end up owing. Fortunately, there are a number of strategies for reducing your final tax bill, but they can be effective only if you implement them in advance through your estate plan.
Speak to your advisor about ways to minimize:
- capital gains tax on all property passed on through your estate,
- income taxes on the balances held in Registered Retirement Savings Plans (RRSPs) and Registered Retirement Income Funds (RRIFs), and
- provincial probate fees.
In addition, you may want to explore the use of trusts to ensure that your heirs receive their inheritance in the most tax-efficient way possible. And if you hold property in the U.S. or are a non-resident of Canada, you'll face special taxes, so be sure to consult a tax professional who specializes in this area.
Keeping the cottage in the family
Suppose that back in 1983, you purchased a cottage for about $80,000. Today with minor improvements, the property would fetch $200,000 on the open market. Twenty or 30 years from now, if the cottage is passed on to the adult children through their parent's estate, it might be worth $400,000 or more. That could mean a taxable capital gain of $320,000.
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If the proceeds from the estate can't cover this expense, and if the children don't have the cash on hand, the cottage will have to be sold. However, with a little pre-planning, you can resolve this problem. Once again, your advisor can help identify the various options and help you select one that best suits your family's needs.
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