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Reader Mail: Estate Taxes?

Last week, Ed Rempel wrote a 2 part article about Universal Life Insurance.  At the end of that article, GatesVP asked a great question.  If you find the article a little long, you can skip to the end where I've written a summary of the important points.

Here is the original question: 

Now, if I’m understanding this correctly, paragraph 5 seems to imply that a Universal life insurance policy could actually help you “dodge” this tax burden? Is this correct? Can life insurance save me from paying taxes I owe?

And what about the cottage thing? If I give my kids the cottage before I die does it get taxed then? Why does it get taxed when I die then? I mean all of the money that paid for the property has already been taxed and it’s not like the kids are selling it. I mean if they sold it, then they’d definitely have to pay capital gains taxes, but they’re not, they’re just receiving it. Or am I totally off base there?

By the same respect then, can any life-insurance policy cancel out the capital gains taxes on properties? How else can I get around being forced to “cash out and pay taxes” on things I don’t want to “cash out”? How does this apply do collectibles, I mean what if I have an $50k, two-bedroom book collection are we collecting taxes on that stuff too? are we supposed to or does it normally just slip under the radar? Can I use the same “give to my children” trick? Could I do it over several years?

As I'm not a tax expert, I asked Ed Rempel (a CMA) to help answer the question. 

Here was the response:

In Canada, we do not have estate tax, like they do in the US on the value of large estates. In Canada, we only have INCOME tax on estates. It is assumed that all assets are sold and all RRSP’s cashed in on the date of death (unless passed on to a spouse). It is not a separate tax on the value of the estate – it is just income tax that has been deferred is now all due at once.

This applies to any real estate, other than your principal residence. Therefore, a cottage is deemed to be sold at fair market value when you die if you are passing it on to your kids. Capital gains tax will apply from when you originally bought it – which can be a large figure.

This is mainly only a problem if the kids want to keep the cottage and there is no significant liquid investments in your estate. If you have a huge investment portfolio or if your kids are will sell the cottage, then they have the cash to pay the tax. But if you have little else and they want to keep the cottage in the family, then how do they pay a $250,000 tax bill?

If you give the cottage to your kids earlier, then capital gains tax applies up until that date based on the fair market value. The “gift to my children trick” usually just results in paying tax sooner than if you wait.

Having insurance doesn’t change the tax. It just gives you some money to pay the tax.

Capital gains tax also appies to certain collectibles and personal investment assets (like gold bars, fine art), but they do not apply to depreciating personal use property like cars, or books.

(By the way, if you have $50K of books, are none of them about income tax?)

Gifts are not taxable and there is no limit on gifts (like there is in the US) – unless the gifts are taxable property (like real estate). Gifts of taxable property that are given as gifts or sold at low prices are deemed to be sold at fair market value.

Interesting question about inflation. Even though most of the appreciation of real estate is inflation – all of it is taxable. Many people have argued that only growth above inflation is real growth that should be taxable, but the Tax Act taxes it all.

Selling something to yourself is not a transaction. It you want to trigger the tax every year instead of deferring it (for some MAD reason), you have to give it or sell it to someone else.

You have some creative ideas, Gates, but triggering tax sooner is rarely a good idea. Much better is to either have life insurance to pay for it or just invest extra money.

Life insurance is more expensive than investing in tax-efficient investments. Fairly often, we have clients save a pot of money to pay taxes, instead of buying life insurance. Investments will build up a larger amount than life insurance – unless you die sooner than expected.

If you are saving for an increasing tax liability (like a cottage), an investment plan can be the most effective strategy. If you want protection now, then life insurance is usually the best option.

 To Summarize:

  • There is no estate tax in Canada, upon passing, there is income tax applied to the estate as if everything was sold at market value.  RRSP's and principle residence can be passed to a spouse tax free.
  • Cottages and vacation property upon passing will be deemed sold and capital gains tax applied (if there is a profit).
  • If you give the vacation property to your children before you die, then the property is considered sold at market value.  Thus there is a potential capital gains tax to be paid by the vendor.
  • Insurance doesn't change the tax payable, it provides money to pay for the taxes owed upon passing.
  • Capital gains tax does not apply to depreciating personal use property like cars, books etc.
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FT About the author: FT is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.

{ 10 comments… add one }
  • The Financial Blogger July 25, 2007, 8:48 am

    We do not have estate tax in Canada, but we do have probate fees. These fees can be very high in some province. Universal Life policies could be use to pay capital gains and probate fees as the beneficiary receive the policy without paying taxes or probate fees on it.

    Another way of avoiding a part of capital gain taxes on your cottage is to set up a trust and crystallize its value while you are still alive. As long as the cottage is not sold by your children, no capital gain will be charged. I guess that Ed could go a little bit further on this topic.

  • Ed Rempel July 31, 2007, 2:48 am


    Probate fees here in Ontario range from .5% to 1.5% – which is eliminated by the higher MER’s and costs if you are in a UL for 1-2 years. If you are on your death benefit, you could save with a UL (but not qualify for one).

    Crystallizing the cottage now and putting it into a trust has 2 disadvantages:

    1. You pay tax now on the gain so far (as opposed to deferring it until you and your spouse have passed).
    2. Trusts have a term of 21 years, so you would have to pay tax every 21 years on the cottage in a trust. Unless you are old, you will probably live longer than this, so the trust won’t defer your tax.

    Trusts while you are alive (inter-vivos trusts) are usually used to maintain control, not save tax.


  • Phil June 4, 2009, 11:10 pm

    My Father recently passed away, my mother having passed away in 1988, and has left savings of $700,000 and a condominium valued at around $180,000. I’m curious as to the estate taxes or probate fees we can expect to pay…

    Thank You for your assistance…

  • Ed Rempel June 5, 2009, 3:02 am

    Hi Phil,

    Sorry to hear about you father. My father also passed away in March.

    There are no actual estate taxes in Canada – just income tax on your father’s final return. If the savings are non-RRSP, then there is no tax. If they are RRSP or RRIF, then they will be fully taxed on his 2009 return. Assuming the condo was his principal residence, there is no tax here either.

    Probate fees are between .5-1.5% and only apply to those assets transfered by the will. Even on a $900,000 estate, probate fees will probably be just over $10,000. Anything held in joint name with you would not be subject to probate fees.

    Does that answer your question, Phil?


  • Rob Anderson August 22, 2009, 4:45 am

    Hi Ed, My Dad passed away this past January. My Mom has been gone for several years. My Dad left me lake property in BC with a Cottage on it. At the time of is death the tax assessment was $248.500 which is way more than the property is worth. Should I assume I will have to pay income tax on this amount even though I would be lucky right now to get $150.000 for it? My Dad and I were joint tenants on this property prior to his Death. Does this make any difference in the tax implications?
    Thank you! Rob

  • Rob Anderson August 22, 2009, 4:48 am

    Well, all I can say is I wish my Dad had liquidated all of his property prior to his death as it looks like the Pigs in Ottawa are going to clean me out!

  • Ed Rempel August 23, 2009, 5:08 pm

    Hi Rob,

    Sorry to hear that. My Dad passed away in March. It’s been more than 5 months, but I still think about him all the time.

    Your situation is not as bad as you think. The concept is that your Dad’s estate must pay capital gains tax based on the market value at the time of death compared to the cost of his portion.

    The first question is: Did you each owned half, or did he own it all and you just put it into joint name to avoid probate fees? Most likely, you did not pay tax on half when you switched it to joint names, so then the property would be his.

    Then you need to establish a reasonable market value and cost.

    The market value would be based on what it would sell for now. The property tax assessment would work against you, but it is only one indication of market value. I would suggest having a real estate agent give you a written market value. Better would be 2 or 3 agents, since the property tax valuing does not support your figure.

    Are you planning to keep the property? If you sell it, then obviously what you sell it for is the fair market value.

    Then you need to establish the cost. This would be what he originally paid for it (including legal and other fees), plus the cost of any major improvements (not repairs and maintenance).

    The issue here is that many people keep no records when they own a property for decades. Do you still have records of what he paid for it? What about records of the cost of significant improvements?

    If you have no records, then all you can do is go with the most reasonable estimate you can come up with. Any records are helpful.

    The taxable amount is only half of the total capital gain. The taxable half of the gain would be added to your Dad’s final tax return

    To take a worst-case scenario, if it is worth $150,000 and he paid $20,000 100 years ago, then you have a $130,000 capital gain, or a $65,000 taxable capital gain. Even if his estate is in the highest tax bracket, you won’t pay more than about $30,000 on it.


  • Anita Clancy January 20, 2010, 11:19 pm

    My Aunt passed away on March 1, 2008. She left $5000.00 to 3 beneficiaries and $10000.00 to me. Does the executor, who is also a beneficiary, pay taxes on that money? If he does, does he take the taxes out of our inheritance and the original inheritance is thus reduced?

    Thanks iln advance for your reply.

    My Aunt died in Manitoba.

  • FT FrugalTrader July 30, 2010, 9:17 am

    Antia, this is a late reply, but my understanding is that the estate pays taxes before any distributions to beneficiaries (unless it’s a life insurance benefit).

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