How to save money on the cost of your estate taxes

(3 min read)

The majority of us will owe taxes in our estate

Do you want to pass down assets to your children or grand children? A cottage? rental property? business? RRSP? RRIF?

These assets all come with a tax bill.

When someone passes away, it’s as if they cashed out all of their assets the moment before passing away. This is according to the Income Tax Act we all follow.

It is unlikely that $0 taxes will be owed in your estate.

The real focus should be on how are you going to pay for these taxes in the most efficient way possible….in other words, the cheapest way you can pay a tax bill.

What are your options to pay your taxes?

Well, you have a few options:

  • You can use cash
  • You can rely on what’s left in your RRSP
  • You can rely on what’s left in your RRIF
  • You can cash out your non-registered investments
  • You can cash out your TFSA
  • You can use tax-free money from a life insurance policy

How do you calculate your final estate taxes?

A professional should definitely be involved.

At MD Insurance, we can calculate your tax bill for free.

It’s best we work alongside your accountant and lawyer to ensure everything is accounted for.

$250,000 example

Let’s say you’ll owe $250,000 in taxes due from the capital gains of a cottage you own, a rental property, your RRSP or RRIF, income in the year of death and the deemed disposition of your corporate shares.

What is the cheapest way to pay this tax bill?

Option 1

Use your RRSP or RRIF.

This can be an extremely costly option.

Registered investments are taxed like regular income, so the more you cash out, the higher your tax bill will be….peaking at a tax rate of 53.53%.

If your tax bill was $250,000, it could cost you nearly $500,000 in RRSPs or RRIFs to pay for this. Why lose all the hard earned money you’ve saved your entire life?

Option 2

Use cash.

If your your tax bill was $250,000 and you had $250,000 in cash, why wouldn’t you use it to pay the tax bill?

Using cash is a dollar for dollar exchange, and although there is no tax loss like using RRSPs, this is still a costly option. 

Option 3

A permanent life insurance policy.

This is the most cost effective way to deal with your estate taxes.

Depending on your age and health, you may only have to contribute approximately 40% of your total need, meaning if you need $250,000 to pay taxes, you would contribute $100,000 in premiums which are spread over 20 or more years.

This also means you could be saving $150,000. This is the only option where you will save money. Cash is not the second cheapest option.

Buying life insurance is the cheapest option.

Permanent life insurance policies come with a tax-free investment account, known as the cash value, so even though you have contributed $75,000 – $100,000, you would have that plus more in your cash value which you can use for any purpose at any time.

Permanent life insurance is an asset that grows tax-free and is a legal contract between you and the insurance company which guarantees you multiply your money with a tax-free payout when you pass away.

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