
Tax-Free Estate Planning: How to Pay Less Tax and Leave More for Loved Ones?
Stay updated with current accounting standards, business compliance, tax preparation tips, and latest news.

07 May 2024
Result: With a spousal rollover, Mr. X can transfer the ownership of the investment directly to the spouse without triggering capital gains tax at the original purchase price ($1,000) as their "adjusted cost base" for the investment.
Takeaway: In this scenario, the capital gains tax is spread out over two lifetimes. This can potentially reduce the overall tax burden compared to if Mr. X had realized the gain himself. Talk to a CPA Surrey to find out how it applies to your estate/ will.
There are multiple ways to pass on your assets at low or no tax to your loved ones. We discussed some of them, making sure that even the beginners could understand. However, we suggest you schedule a consultation with a chartered professional accountant in your province.
You can also get in touch with CJCPA, a tax and business planning solution Canada firm. The first consultation is free, and the experts with 20+ years of experience will resolve your questions on tax savings and best accounting practices for your estate, small business, or startup. Subscribe to our blog for more such informational posts.
Tax-Free Estate Planning: How to Pay Less Tax and Leave More for Loved Ones?
We all, regardless of where we come from, have one thing in common: we all want to pay less taxes. For an informed discussion with a chartered professional accountant, we always look for such opportunities. Don’t we? Whether we are in the accumulation phase (asset collection and enhancement), the decumulation phase (drawing our funds at the retirement phase), or the estate phase (for smooth transfer of assets after death), we want to lessen our taxes. In this blog, we decided to find out if we can structure our assets in a way that they get transferred to the next generation with practically no taxes (or less taxes) in Canada. Is it possible? Can accounting services help us do that? Read the blog further to find out!Deemed Disposition
In Canada, there isn’t traditionally an inheritance tax. However, “deemed disposition” is applied, which triggers capital gains tax in the event of death. CRA will consider the assets of the person sold at a fair market value. One can minimize their tax burden and pass on their assets to their loved ones without a huge tax bill. Here are some strategies used by many Corporate Tax filing Canada firms:Spousal Rollover
Usually, the assets transferred to the spouse are not eligible for capital gains tax. Due to this, one can inherit the cost of the asset while also deferring the tax on those assets, unless they sell them later. Here's an example: Assume that Mr. X owns an investment (stock) that they bought for $1,000 (the original purchase price). Presently, it's worth $5,000 (current market value). This means that Mr. X has a potential capital gain of $4,000 ($5,000-$1,000). Capital Gains Tax Impact on Sale: If Mr. X sells this investment, he can realize the capital gain and incur capital gains tax on the profit of $4,000. The exact tax rate depends on the specific tax bracket. Business Planning Solution Canada firms often suggest this strategy to their estate clients.
Tax-Free Savings Accounts (TFSAs)
It's a tool for tax-efficient estate planning in Canada. It allows you to contribute money, watch it grow within the account, and withdraw funds at any time—all completely tax-free! Unlike regular investment accounts, contributions to a TFSA are made with after-tax dollars. However, the magic lies in the tax-free growth within the account. Any interest, capital gains, or dividends earned on your investments inside a TFSA are not taxed when withdrawn. Let’s understand it with an example: Emma contributes $5,000 to her TFSA. Her money is invested and grows to $6,000 after a year. In a regular investment account, she might earn interest on that $5,000, but the interest earned would be considered income and subject to taxes. However, with a TFSA, the entire $6,000 is hers to keep. The $1,000 gain is tax-free because it grew inside the sheltered environment of the TFSA. Result: This tax-free growth makes TFSAs ideal for estate planning. In the event of death, the funds remaining in their TFSA can be directly passed on to the beneficiary, tax-free. Takeaway: This allows you to leave a tax-sheltered legacy for your loved ones.Estate Freezes: Limiting Capital Gains Tax for Businesses
An estate freeze is an advanced tax-planning strategy specifically designed for business owners. It aims to minimize capital gains tax on the future growth value of a business while transferring ownership to the next generation. Here’s an example: Ryan built a successful business from the ground up. Over time, its value significantly increased. He wants to transfer ownership to his children, but he is concerned about the potential capital gains tax burden at the time of transfer (deemed disposition upon death) or future sale. Here’s how estate freeze mechanics work: Ownership of your business is restructured to separate the current value from the future growth potential. This is often achieved by creating different classes of shares:- Fixed-Value Shares (e.g., Preferred Shares): These represent the current value of the business at the time of the freeze. They offer a fixed dividend or return.
- Growth Shares (e.g., Common Shares): These represent the future growth potential of the business. Ownership of these shares is typically transferred (often at a nominal value) to your children or a trust established for their benefit.
Summing Up!
