Beware the “stealth” estate tax
Dave Lee, CIM, CFP, FCSI
Senior Wealth Advisor
Scotia Wealth Management
No one likes having to pay more tax, least of all when considering one’s own estate plan. While in Canada, we do not officially have an “Estate Tax,” the amount of tax that the federal and provincial governments collect from the estates of British Columbia residents has risen sharply in recent years.
When a person passes away and they have a Will, a process called “probate” is sometimes required to confirm that Will is legally valid. In my estate planning workshops, I find participants want to avoid the cost of probate, which in BC is approximately 1.4% of the value of an estate.
In contrast, I find relatively little understanding of the much larger impact that many people face from exposure to high top marginal tax rates in their final year.
Federally, the top marginal tax rate was increased by 4% in 2016. In BC, a 2.1% temporary increase was imposed for incomes over $150,000 for 2014 and 2015. It was made permanent in 2018 and in February 2020, a further 3.7% increase was announced. The combined federal and provincial tax rates on income above $220,000 in BC have risen 9.8% in the last seven years, from 43.7% to 53.5%.
I frequently refer to this tax increase as a “stealth” estate tax, because those whose annual incomes are well below $220,000 are often surprised to learn that their Registered Retirement Income Fund (RRIF) and other assets may push their income into the top bracket in their final year.
Consider a retired couple with taxable incomes of $45,000. They pay 22.7% on each additional dollar they earn and name each other as beneficiaries of their RRIFs. When the second of them passes away, the survivor’s RRIF may push their marginal tax rate to 53.5%. Someone with $1,000,000 in their RRIF faces a tax bill that is nearly $100,000 greater than it would have been in 2013.
The incentive to consider final taxes within the overall financial and estate plan is greater than ever. Everyone needs to take into account future tax liabilities that will arise from registered accounts such as RRIFs and Life Income Funds (LIFs), as well as unrealized capital gains on stocks, real estate, private corporations and other assets.
Charitable donations can help to combat the “stealth” estate tax. Well-timed and well-structured charitable gifting strategies enable those with generous intentions to have even greater impact. How confident are you that your current plan is the best plan possible?
This article is intended as a general source of information only and should not be considered or relied upon as personal and/or specific financial, tax, pension, legal, or investment advice.