Melvin Pasternak

Canada is generally viewed as a country with no estate tax. While
that's true, what many people don't realize is that a "deemed
disposition tax," which is similar to an estate tax, applies when you
die. In this article, we'll provide tips on minimizing your estate's
exposure to this tax as well as structuring your estate plan to ensure
your beneficiaries get the assets you intend for them.

Taxation Issues
Deemed disposition tax is so-named because your investments are deemed
to be sold at death. Any capital gains triggered by their sale are
included in a final income tax return filed in the year of death. A
final tax return also includes the value of any retirement accounts
and income received from stocks, bonds, real estate investments and
even life insurance proceeds in the year of death, from January 1 up
to the date of death. With Canadian federal income tax rates of up to
29%, this final taxation can be substantial. Provincial taxes and
probate fees also apply.

The good news is the tax is deferred if the assets are transferred to
a surviving spouse. Taxes are deferred even if the assets are held in
a spousal trust, which provides income to the surviving spouse.
However, if the spouse sells the assets, then the tax applies. When
the spouse dies and the assets are passed on to other heirs, 50% of
the capital gains of any stocks, bonds, real estate investments and
other assets are taxable at the personal income tax rate.

Why It's Important To Make A Will
"Nothing is certain but death and taxes," American inventor Ben
Franklin is attributed to saying. While you can't control either of
these two inevitable events, you can make a will to ensure your
financial affairs are managed according to your wishes once you're no
longer able to, due to incapacity or death.

Without a valid will, you are considered to have died intestate. When
that happens, in Canada the province decides how your assets are
distributed, without regard to your wishes. Following the laws of
intestacy, the province typically distributes the first $50,000 of
value to a surviving spouse, then divvies up the rest between the
spouse and children. If you don't have a surviving spouse or children,
your parents are next in line to receive your assets, followed by any
brothers and sisters.

Dying without a will also leads to delays and extra expenses. The
court appoints a bonded administrator to serve as an executor of the
estate. In addition, any assets distributed to children under 19 must
be passed along to a bonded guardian or to the Public Trustee. The
process of appointing these administrators is both expensive and
time-consuming.

Three Types Of Wills
To ensure your affairs are handled the way you want them to be, you
need a will. There are three main types of wills in Canada:
Last will and testament
General durable power of attorney
Living will (also called an advance healthcare directive)
Let's take a closer look at each one.
Last Will
The purpose of a last will is to give instructions to a person you
choose as an executor on how you want your assets distributed after
your death. It typically doesn't give directions on your funeral or
burial, since it won't be opened until after the funeral, when the
heirs come together for the reading of the will.

Power Of Attorney
The power of attorney gives the person of your choice the power to
manage your financial affairs if you become incapable of managing them
yourself. It gives this person, designated as your agent or
attorney-in-fact, the power to handle such day-to-day tasks as:
paying bills
filing tax returns
opening mail
banking
talking with accountants and lawyers
looking after pets
voting on your behalf
Without a power of attorney, a spouse has no legal authority to do any
of these tasks on your behalf if you become disabled.

Living Will
A living will gives healthcare/mental power of attorney to a person of
your choice. It gives this person, acting as your agent or
attorney-in-fact, the power to implement the medical treatment you
wish to receive if you become unable to communicate your wishes. The
document tells doctors, family members and the courts your wishes for
life-support and medical procedures, if you were to become brain dead,
unconscious, terminally ill, or otherwise unable to communicate your
wishes.
A living will essentially gives your chosen agent the power to choose
whether or not to "pull the plug" or to decide your fate for you, but
its value is debatable. Euthanasia isn't legal under section 215 of
Canada's Criminal Code, and the living will has no legal status.
However, Canada's Charter of Rights throws the constitutionality of
this section of the Criminal Code into question by giving everyone the
right to "security of the person and the right not to be deprived
thereof."

Trusts Simplify Your Estate Planning
A will ensures your heirs get exactly what you want them to, but a
trust can simplify the process of transferring these assets to your
heirs. The main difference between the two is that a trust lets you
transfer assets to beneficiaries while you're still alive, and a will
transfers your assets when you die.

A trust is a legal entity that owns some or all of your assets, such
as bank accounts, real estate, stocks and bonds, mutual fund units and
private businesses. The terms of a trust are more legally binding than
those of an ordinary will, which can be challenged in a court of law
as to whether it fulfills the deceased's "moral obligation." A trust
also allows you to avoid the probate process, where the contents of
your will are made publicly available.

Types Of Trusts
The main type of trust in estate planning is a revocable living trust,
so-called because you can change or revoke the terms of the trust at
any time while you're alive. The trust instructs the trustees how to
distribute your assets to beneficiaries while you're alive, after
death or if you become incapable.

Both you and your spouse can be trustees and manage the trust's
assets. This feature of a living trust may be important, for example,
if a family business is placed in a trust and you want to continue to
have some control over its operations. When one spouse dies, the
surviving spouse continues as trustee, but the trust becomes
irrevocable in that only limited changes can be made to the terms of
the trust.

Since the income is taxable at Canadian trust tax rates, living trusts
are not as popular in Canada as they are in the U.S., where the income
is taxed at your personal income tax rate. A living trust established
after June 17, 1971, is subject to tax on all income at the highest
marginal rate of tax in the province of residence. In most Canadian
provinces, this rate can range from 39-47% on the first dollar of
income. In contrast, a testamentary trust, which operates only after
death, is taxed at the personal provincial tax rate.

In addition, assets that are transferred into or out of a Canadian
trust are generally treated as if they have been sold and taxed on any
increase in value (appreciation) from the purchase date. However, two
relatively recent trust structures, the alter-ego trust and
joint-spousal trust, allow you to avoid capital gains taxation.

Conclusion
In sum, to ensure your assets are distributed the way you want them to
be, you will need a last will, and you also may want to consider a
living will as well as a power of attorney, together with a trust.

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