Wealth Strategies: The new Federal tax bracket - It may also affect you

The new Federal tax bracket:  It may also affect you

When it comes to the recent changes that the Federal Government has introduced to the income tax brackets, specifically the top Federal bracket of $200,000 and over (increased to 33%), most Canadians likely feel that they won’t really be affected.  While this may be true for the most part, those that pass away with registered account assets remaining (RSP’s and RIF’s) and no spouse to which to roll these assets could also fall into the top tax bracket.  When one passes away, registered assets are considered disposed of and terminated (in other words, included as income), and are therefore taxed at the marginal tax rate of the deceased. This disposal of registered assets could potentially lead to a total income in excess of $200,000 in the year of death for those with significant registered assets remaining. This in turn means that the relative amount of the inheritance that one’s beneficiaries receive is reduced, due to the additional tax incurred in the year of death.

So how do you tackle this estate planning issue and reduce this potential looming tax bill?  One idea is to try to withdraw additional monies from your RSP or RIF gradually over time and transfer to a Tax Free Savings Account (TFSA).  The TFSA annual contribution amount is now $5,500 (or $11,000 per couple).  If one has not contributed any monies to a TFSA since the inception of the program in 2009, they would also have cumulative carry-forward room of $46,500 as of 2016.  One just needs to be mindful of OAS claw-backs, or pushing oneself into a higher tax bracket due to the added income from the registered account withdrawals.  

The amount of tax one would pay on withdrawing the monies earlier, at a lower marginal tax rate, versus the top 33% Federal rate that may be applicable upon “disposal” of the registered assets at death, can be quite significant.  For example, in the province of Alberta, you withdraw $8,000 from your RRSP and move the monies to your TFSA, total income is $70,000 and marginal tax rate is 30.5%.  Now compare this to the amount of tax if the income amount is over $200,000 in the year of death and you garner a whopping tax savings of 17.5-18.5%.

Another option to reduce the amount of tax at death, noted more in depth in prior blog posts, is to use insurance as a form of estate planning to help ease your tax burden. Various types of insurance* such as Term, Universal life or Whole Life can be utilized, depending on your needs.  The latter two types provide more options and can potentially be paid in advance so that the insurance is fully “paid-up” after a specified period of time and self-funding thereafter.

If one takes some proactive steps in advance to reduce their registered assets slowly over time, the tax savings may be quite significant. The added bonus of course being that your hard-earned assets end up in the hands of your loved ones, as opposed to the tax man.

 

*Offered through Canaccord Genuity Wealth & Estate Planning Services