Wealth Strategies: Tax-Savvy Estate Transfers

Dealing with the passing of loved ones is never an easy situation, nor is dealing with the implications of wealth and estate transfers, and the resulting taxes. However, there are sometimes unadvertised loopholes that can significantly reduce tax liabilities upon estate transfer.

One rather common example is found in estate transfers between spouses and common-law partners. Normally when assets transfer from one spouse/partner to another, they do so at the adjusted cost base (ACB) of the asset per the Income Tax Act. The capital gains are therefore not split between spouses, but solely burdened on the second spouse’s passing (added to their income in the year of passing). This will most likely push one spouse into a far higher marginal tax rate as opposed to evening out the tax burden, for both the asset transfer, (i.e. investments, real estate, etc.) and any additional income for that year.

That said, unbeknownst to most Canadians, you do have the option of transferring the asset at the fair market value (FMV) as opposed to the adjusted cost base (ACB). This then triggers half of the capital gain upon the first spouse’ passing, as opposed to the full capital gain burden being placed on the latter spouse’s passing. This does require some additional tax elections with CRA, but it can be applied to real estate and investment assets. If opting for the latter, you also have the option of ‘resetting’ to the ACB once it transfers to the spouse at FMV.

Your trusted financial professional can assist you in implementing these sound, proactive strategies to help preserve your family’s wealth.