The Uninvited Guest
“Why work hard all our lives to maximize returns and minimize fees just to give a large chunk away in taxes?”
Someone is coming to your final party who’s not welcome. The TAXMAN. He doesn’t know you, but he’s thrilled to celebrate your death and figure out what all your stuff is worth. After a quick look around, he strikes up a seemingly harmless conversation with your accountant… building his case for a big payday. “Wow, that was a good deal he got on the cottage! Practically stole it, didn’t he?” Suddenly, the chit-chat takes a relentless turn. “How much did he pay for his stocks? What are they worth now? How much did he acquire his investment properties for? What’s the full market value now? What other assets did this guy have? You must send me a list of every asset this guy had, what he paid for it and what it’s worth now. ASAP!” Caught off guard, your accountant reveals that because of joint ownership and rolling the RRSPs to his spouse, they’re deferring the taxes due. The taxman shoves a handful of mints in his pocket and says, “Yeah, I know about your tax deferral tricks, but I’ll be back. We’ll benefit from the growth of each asset one way or another… other than the principal residence… although if I had my say, I’d change that too!” One final glare and the taxman storms off.
Forgive the crude narrative, but it’s not far from the truth. Anyone who’s handled an estate understands that the terminal tax return must be filed by April 30th*. On this return there is a deemed disposition of all your assets. In other words, they pretend everything you own is sold at full market value and you have the cash sitting in the bank. They then calculate what you owe and ask you to send a cheque right away. Not once you sell something. Not once you have the cash available. Not once the market is better. Right away. They know that liquidating things quickly means loss, but they don’t care. They want their money and will charge you interest and penalties if they don’t get it immediately.
That’s why some adult children have to sell the cottage that’s been in the family for 45 years when they are shocked by a surprise capital gains tax bill of $200,000. How many forty-year-olds in the grind of life have an extra $200,000 sitting around in their daily interest account for such an event? To say this causes stress and grief would qualify for understatement of the year.
Here’s an over simplified example of how capital gains taxes are calculated:
Asset acquired for $1, day you die it’s worth $10, therefore $9 capital gain.
That’s a $9 capital gain. 50%** or $4.50 is added to your income on your terminal tax return making $2.25 payable to the taxman on this asset alone.
Estate planning is the one way you can take control back from the taxman. Sooner is better than later, but it’s never too late. Even upwards of 80 years old, highly effective estate planning succeeds.
Throughout the years, you spend a lot of time maximizing your portfolio. Negotiating low interest rates on your loans. Minimizing management fees on your investment portfolio. You sit down with your accountant and financial advisor every year to legitimately lower your annual income taxes. The last thing you want to do is make the taxman the main beneficiary of what you’ve spent a lifetime building.
*Unless the person passes between Nov 1st & Dec 31st, in which case it’s six months after date of death.
**53.5% if taxable income is $220,001+.
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