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Canada Estate Planning for Tax Efficiency Rough Guide – Update 2021

So I wrote a rough guide on estate planning in Canada that I plan on following here: Estate Planning Guide for paying the lease amount of Taxes in Canada.

In it – you will read all about each account and why you should drain/not drain it before your passing.

Small addendum to the earlier post:

I was thinking of the best way to maximize tax efficiency (as in, paying as little taxes as possible), while having money grow and maximize for Little Bun in terms of compounding interest.

The best option is to max out Little Bun’s TFSA the year he turns 18 and is eligible to open one.

We discussed it, and we will start draining our accounts to give him 50/50 equally, money to deposit into his TFSA, and he can invest it in index funds to start, and have it grow in there, tax-free for his lifetime.

$6000 invested now, for the next 47 years (assuming age 18 to age 65), at 7% interest is $159,525

We plan on doing this for as long as we can, to drain our accounts as much as possible to give him cash early on so it can be invested.

Maybe we will do it as $6000/year gift ($3000 from each of us, with the sole intention that he invests that money to compound).

I would even go as far as to give him money for his RRSP to use up his contribution room as soon as he starts working, to help him max it out (or maybe have him max it out himself as well).

The plan is to have our money as cash, give it as a cash gift, and to let him maximize his compounding interest potential while saving us on estate taxes (government wouldn’t necessarily tax the cash, but if we had it invested for the 40+ years before giving it to him, he’d pay capital gains tax).

If we did $6000/year for the next 30 years (I plan on living a longggggg life but let’s be conservative here), then he would have quite a nest egg.

Again at 7% (very conservative), we are looking at over half a million by the time he is 48.

I am thinking I will even gift more money to him earlier on to reduce my estate taxes, as long as he can use that money as part of his investments, which frees up his working money to pay for bills and live his life.

We could of course, wait until the end, then sell everything to give it to him in cash, free and clear… but that means we pay a FKLOAD of taxes at the time (just before death), and then he has to ‘start’ all over again with compounding interest.

Might as well just transfer him all of the investments and have him pay the estate planning taxes at the time – there’s no benefit in doing it all in cash – he gets slammed either way.

The real benefit I can see of, is to SLOWLY drain our accounts over time, pay taxes under the threshold, and transfer the money to him in chunks over time, so that we take the hit in taxes at a lower tax bracket, and he pays nothing as it is done in cash.

In Canada we do not have a gifts limit in cash. You can gift a million in cash if you had it, and they don’t pay taxes.

In brief summary of estate planning

  • Leave your TFSA to the very last to drain because it transfers TAX FREE to ANYONE you put as a beneficiary
  • Cash is also good. Cash goes tax-free to anyone.
  • Drain your RRSP first, it is the one that gets slammed the hardest, tax-wise out of the TFSA & RRSP
  • Over the years, drain your RRSP or Margin accounts into your TFSA meaning transfer those amounts from either account to top up your TFSA amounts each year, so that yes, you pay taxes in your retirement years as you are tax sheltering them but it stays in your TFSA and can be withdrawn tax free later.
  • If you have a lot of money (YAY!), consider draining it slowly over time and spreading out the taxes instead of getting one massive tax bill at the time of your passing
  • Anything else – unregistered accounts, houses, will all be considered “sold” at the time of your passing and they WILL pay taxes on the capital gains, and market value of the homes.
  • Try not to gift houses as investments, the tax laws seem kind of tricky around this versus the straight up Margin accounts where capital gains are taxed 25%; I didn’t look into it because I do not plan on owning any homes as rentals to do this, but it sounds complicated & gave me a headache
  • Avoid life insurance plans.

Want more detail? Read: Estate Planning Guide for paying the lease amount of Taxes in Canada.

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