It’s Time to Talk About the Intergenerational Wealth Transfer (Canada)
If you need another reason to celebrate being Canadian, how about... no inheritance tax? We’re very lucky that the Canada Revenue Agency allows one generation to pass wealth to the next, tax-free. But how to minimize all the other taxes that can whittle down the wealth you leave behind? Here's how.
KEY TAKEAWAYS
- Canada has no inheritance tax, but many other taxes and fees need to be paid when you die.
- You need to leave enough cash to your beneficiaries to pay any taxes or fees payable in the year you die.
- Access to tax-free cash means your heirs won’t have to sell off real estate or dip into investment accounts to cover taxes.
- There are many wealth-transfer strategies you can put in place today that will ensure your loved ones receive the most out of their inheritance.
- The most successful plans are created early and reviewed regularly, helping ensure wealth is transferred efficiently, fairly, and in a way that minimizes fees and taxes.
What is intergenerational wealth transfer in Canada?
Intergenerational wealth transfer in Canada is measured by adding up all the money and other things of value that one generation passes on to the next. That could mean grandparents and parents passing wealth to children, grandchildren, and even society at large. In Canada, that figure is estimated to be $1-Trillion, according to the CBC, and has become known as the Great Wealth Transfer.
If you’re one of the Canadians making plans to leave money or other things of value to the next generation, the question you need to ask is not how much you are giving them, but rather:
- What can you be doing right now to minimize the impact of taxes?
- How will you limit the amount of tax that needs to be paid before they receive your gift?
- Will they have enough cash on hand to pay for any unavoidable fees or taxes?
- Most of all, do they understand your wishes and how your wealth transfer plan works?
A Serenia Life advisor can guide you through these questions to help you create a tax-effective intergenerational wealth transfer plan – with the help of an accountant or tax expert, of course!
And when the time is right, invite your adult children and beneficiaries into the process so they understand how your plan works and their role in overseeing your wishes.
How wealth transfer works in Canada
Canada does not impose an inheritance tax on you (i.e., the person who is transferring the wealth) or your beneficiaries (i.e., the people receiving your generous gift). This doesn’t mean that other kinds of taxes and fees may not apply.
Here are four expenses that everyone should prepare for when creating an intergenerational wealth strategy:
1. Capital gains
Any time you buy something and sell it for a profit, the “gain” is taxable. If you leave your kids something (like a cottage) that has gone up in value, a capital gain tax will apply to the difference. That’s why your beneficiaries need access to cash.
Want to learn more about the history of capital gains tax and when it applies to you? Dive deeper.
2. Probate fees
Every province and territory in Canada has a process called probate. It’s necessary because it validates that the executor of your will has the legal authority to start distributing your wealth according to your wishes. The Government of Canada website can help you estimate your cost based on where you live. It’s good information to have on hand as you refine your intergenerational wealth transfer plan.
3. Final tax return
Even though you won’t be here to do it, a final tax return must be filed in the year that you died. Granted, it won’t be you doing the paperwork, but the government will tax things like income earned and certain investments. A good wealth transfer strategy will name beneficiaries for your RRSPs and successors for your TFSA to minimize taxes.
4. Legal fees
You should assume that your heirs will need money to cover legal costs associated with settling your affairs. They may need to transfer land deeds or make adjustments to their own will and powers of attorney.
Common challenges in wealth transfer
Chaos and confusion have no place in the grieving process. Your wealth transfer strategy should provide peace of mind and comfort when your loved ones need it most. Creating a plan now will go a long way to mitigating or simply preventing these common challenges:
Delays
Settling your affairs can take time. The executor of your estate is expected to complete the process within one year – but it can take longer. Your loved ones could be juggling tax and legal bills with no access to cash for anywhere from six to 18 months.
Taxes
Income and capital gains taxes may be due before your estate is settled. If your loved ones can’t pay the bills, penalties could apply – reducing how much money your beneficiaries get to keep.
Disputes
Sky-high real-estate values, complicated family structures, and the lack of up-to-date paperwork can lead to disputes. A single dispute can derail the probate process and extend the time it takes to settle your estate.
Non-cash assets
If you are leaving assets to your heirs that have great long-term value, you have to anticipate the cost of owning them. For example, are there property taxes to be paid on commercial real estate or a hobby farm?
Confusion
The best-laid plans can get derailed or fail to achieve their goal if your beneficiaries don’t understand how the plan works and who to contact. Make sure everyone who is part of the plan knows what to do and when.
You can avoid or significantly minimize these issues through an up-to-date strategy developed with the help of a qualified advisor who understands the ins and outs of intergenerational wealth planning.
The hidden challenge: Taxes are paid before wealth is transferred
You now know that the estate settlement process can take from six to 18 months, even if there are no disputes. This long delay puts pressure on your loved ones because the “tax man” may want their money before your will has been settled. This happens more than you might expect. The good news is, it doesn’t have to.
Here are three ways to bridge the timing gap that occurs when taxes need to be paid before wealth is transferred:
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Create a cash slush fund
Easy access to cash that can pay taxes and buy time is a critical part of a thoughtful wealth transfer plan. Consider appointing someone to offer financial advice if your beneficiaries are inexperienced in money management.
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Avoid forcing your loved ones to sell valuable things
Things like family cottages, vacation homes, and recreational land are likely to go up in value. If your loved ones have to sell a valuable property or other investment to cover tax bills, they lose out on the long-term growth potential and the chance to carry on family traditions.
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Shore up business interests
Businesses gobble up money every day. If you are transitioning a business to your children or a business partner, succession planning needs to be part of your wealth transfer strategy. Learn more about protecting your business interests and securing your family’s wealth through life insurance for business owners.
When you anticipate the time delay between when taxes are due and when your wealth will be transferred to your loved ones, you can make an informed estimate of how much cash you may want to leave on hand. Making this available through a life insurance policy is one of the easiest ways to make it happen.
Tax-efficient wealth transfer strategies in Canada
Most of the tax-saving strategies that Canadians use to transfer wealth are either free or relatively inexpensive. Compared to the cost of saddling your kids with unnecessary tax bills, the time and money you spend on a wealth transfer plan is a bargain.
Here are five common strategies you can start using in any combination today.
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Life insurance
If you’re looking for a guaranteed payout, any form of permanent life insurance, such as whole life insurance from Serenia Life will guarantee your loved ones a lump sum of tax-free cash, paid out typically within days of filing the claim. That means they’ll have cash to help them deal with any of the delays, complications, or unexpected fees. This is a no-brainer in the world of wealth transfer planning.
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Registered accounts (RRSPs/RRIFs)
The easiest way to ensure that your hard-earned savings go to your loved ones, and not the government, is to name a beneficiary for your RRSP and a successor for your TFSA. This will ensure that your savings get transferred to the right person and can either continue to grow (RRSPs) or provide additional retirement income (RRIFs).
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Gifting during your lifetime
“Better from a warm hand than a cold one” is an expression that some people use when they choose to give their loved ones financial gifts while everyone is still alive. Giving money to adult children while you’re around can help them turbo-charge their own financial success by putting time on their side when it comes to investing and benefitting from compound interest.
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Real estate planning
You can pass your principal residence on to your beneficiaries, tax-free. Any other kind of real estate will be subject to capital gains tax that will have to be paid by your estate, meaning less money for your heirs. Transferring ownership while you are alive may help reduce the future tax bill. Find out how.
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Trusts
Think of a trust as a bank account with lots of rules around who can put money in and how it gets taxed when someone takes it out. In the eyes of the law and the CRA, a trust fund is a separate legal entity, not tied to you. Setting one up lets you decide what to put in the trust, and how those things will get distributed to others – before or after you die. There are three advantages to spending the time and money to create a trust.
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- Potentially lower taxes when you distribute your wealth
- Greater control over when and how your money is taxed
- Flexibility to distribute your wealth whenever you want
Trusts fall into two main categories. Each one puts you in control of how your valuables are shared and who will receive income. Here’s an explanation of each, and a real-world example of how you might use them.
Type of trust Real-world example Inter-vivos
Inter-vivos literally means “while you’re alive.” So this kind of trust is something you set up and manage with the help of an estate planning team during your lifetime, not after.
When you put money in a trust, it is no longer yours. The trust becomes the legal entity that “owns” the cash. So when you die, the whole amount transfers to your beneficiaries without getting caught up in legal process discussed throughout this article. This means they get the money right away.
At any time, the trust can give money to your children while you are alive as gifts or a way to share your income.
Testamentary
A testamentary trust is created by the executor of your will when you die. They are most often used to ensure that money gets distributed to your beneficiaries in a regular and tax-effective way.
You’re leaving money to people who may not manage it well. You’re afraid they’ll squander your gift so you set up monthly or annual payments through a trust. As a bonus, the money in the trust is protected from creditors and can’t be used to settle debts. -
Why life insurance plays a central role in estate planning
A tax-free life insurance benefit, paid directly to your loved ones within days or weeks of the claim being filed, provides an immediate blanket of financial protection against all of the challenges that can accompany an intergenerational wealth transfer.
And with a lump sum of cash, they can:
- Patiently wait out the legal process that begins when you die, which could take up to 18 months
- Cover any taxes or fees that may be due before your wealth is distributed
- Hang on to long-term investments, like the family cottage, instead of having to sell it to cover taxes owed or the cost of maintaining it
- Equalize your wealth among siblings
On a more practical note, cash gives your loved ones some freedom to decide how they want to divide their inheritance. For example, one sibling may want to hold on to real estate while the other may want to start a retirement plan. They’ll have more freedom and control to reach an agreement if you set them up with a tax-free, lump-sum life insurance benefit.
Advisor TIP
Reviewing your will with your adult children gives you a chance to find out what they really want. Their answers may change as they get older and start a family of their own.
Adding protection during life: The role of critical illness insurance
Think of critical illness insurance as the flipside of life insurance because it pays a tax-free benefit to you or your loved ones while you’re alive. In the event you’re diagnosed with a critical condition (e.g., heart attack, stroke, cancer, multiple sclerosis, or kidney failure) and survive, the payout is swift and you can use it any way you wish. Combined with life insurance, critical illness insurance further strengthens your wealth transfer plan.
Comparing how planning can change the outcome – a case study
To see how a wealth transfer strategy comes to life, consider this simplified example of a middle-aged Canadian couple who are putting plans in place to transfer wealth to their two adult children, hopefully a long time from now.
- Their primary residence has been valued at $1.2-million.
- RRSPs, TFSAs and non-registered investments are worth $800,000 today.
- They purchased a family cottage five years ago for $450,000, but it is now worth $600,000.
The couple met with both a financial advisor and a tax expert – here’s what was recommended for a tax-efficient wealth transfer plan.
- Purchase permanent life insurance and name both children as beneficiaries. This will guarantee a tax-free inheritance and reduce the stress of managing your final expenses.
- Buy enough life insurance to cover:
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- Capital gains on the cottage
- Any outstanding mortgage debt on the primary residence
- Capital gains on non-registered investment account
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- Leave the primary residence to the children so that it transfers tax-free.
- Name the children as beneficiaries on RRSPs and successors on TFSAs so that the money will be added to their retirement plans.
These are simple, effective steps anyone can take to blunt the impact of taxes and give your loved ones a leg up in life.
Why choose Serenia Life for wealth transfer strategies?
As a member-based organization that’s been around for nearly 100 years, we encourage kindness by sharing our profits through community outreach, fundraising, and unique member benefits that help Canadians support their family, their community, and the causes they care about. Benefits, such as:
- $2,500 post-secondary scholarships
- Up to $600 towards fundraising events, and up to $400 for volunteering expenses in Canada
- Financial support when you draft or update a will through a lawyer
- And much more!
View a full list of our member benefits.
Frequently Asked Questions
How much tax do you pay on inheritance in Canada?
How does life insurance help with estate planning?
What is taxed at death in Canada?
What happens to an RRSP when you die in Canada?
What is the best way to pass wealth to children in Canada?
Is whole life insurance good for inheritance planning?
Can life insurance pay estate taxes in Canada?
At what age should you start doing estate planning?
Ready to start your wealth transfer plan?
A wealth transfer plan is a reflection of where you are and what matters most today. It will change over time to adjust for increased wealth, new demands, changes to your family structure and tax codes. What matters most is getting started and making sure that everyone who stands to benefit knows how the plan works and what to do when.
Want to learn more about intergenerational wealth transfer?
Calculators.org
How much should you set aside for legal costs to enforce your will? Find out: Canadian Estate Calculator
Canadian Tax Foundation
Explore this concise history of capital gains taxes, how they work, and when they apply to you and your financial plan: Capital Gains Taxation in Canada
Government of Canada
When you appoint someone to file your final tax return, here’s what they’ll need to know: Doing taxes for someone who died
Disclaimers
This blog post contains general information only. Because each person’s situation is unique, it is best to speak with a qualified professional before making any final decisions. Serenia Life Financial does not advise clients on tax, accounting, or legal matters.
¹Cash values are accessible via a withdrawal, policy loan, or surrender. These may be subject to taxation and a tax slip may be issued. Accessing the policy’s cash value will reduce the available cash surrender value and death benefit
