Estate Planning in Canada

Estate Planning in Canada
Published on: August 8, 2021
Author: Thomas Chan

Thinking about our death and what happens after is not a comfortable topic. Estate planning can be very complex but it’s a necessity when it comes to preparing your family for when you pass away. In this blog post, I will go over estate planning 101 in Canada so that you know what happens to your assets when you pass away, how long it takes for your family to get access to your assets, what you need to prepare to split up your assets and more. You want to maximize how much your family will get from your assets and with poor planning, 50% of your assets could go to the Canadian government.

Everything shared in this post is for informational purposes only as I am a financial consultant and not a lawyer. Talk to a lawyer to create a will or power of attorney.

Introduction to estate planning

Estate planning is when you plan to pass one’s wealth or assets from one person to another. No matter how big or small your wealth is, anyone with any assets should do this. It deals with the important question of what happens if someone passes away? Will the assets go to the spouse, the children or a charity? What part of the wealth will be owned by the business? What will be kept as memories and what will be disposed of?

Estate planning is important in Canada because with unclear instructions and planning, the Canadian government can step in and potentially take away 50% of assets. We work hard for our entire life so we should be in control of what happens after and making sure your family is left with your hard earned assets is one of them. Your family will already be in grief and without proper estate planning, it can even divide a family.

Take care of your will and estate planning now. If you need help, an estate planner can show you how to structure your estate planning as well.

The importance of estate planning

I already discussed above why estate planning is so important in preparing for your death but it is especially important for business owners and/or high networth individuals. Clear rules on what happens to your assets will protect your family, regardless of how large or small your assets are. The worst thing that could happen is to have your assets go to the government or become a financial burden for your family with poor planning.

What happens if someone passes away in Canada?

When someone passes away, they enter the probate phase. Probating is a process where the state checks if the deceased’s will is valid. In the probate phase, there are a lot of things to do and costs that await you. Debt has to be cleared, the assets have to be distributed, etc. and more importantly, you have to cut a cheque to the government before you can claim the asset. If everything goes smoothly, this process usually takes 6-18 months but up to 3-4 years if there are issues or lawsuits.

The two biggest fees involved are:

  • The Probate fee – This varies province to province. For example, in British Columbia, the probate fee is 1.4% which can add up to a huge amount.
  • Taxes – If a Canadian citizen dies, everything that person owned will be treated as if this person sold all their belongings this year and is part of their income causing a huge tax influx that your family will be responsible for. This includes any real estate other than your principal residence, your RRSP or RRIF accounts. For example, if you have $500,000 in the RRSP/RRIF accounts and no spouse to roll over, the whole $500,000 will be considered your income which results in 50% of it going to the CRA.

This is why estate planning is so important to reduce stress for the remaining family.

How to do estate planning

The information below is an overview of things to consider when estate planning but keep in mind it varies in each province.

      1. Your tax documents and insurance

Let your family know where they can access documents like your tax and insurance statements. You may want to have a card with phone numbers and contacts as well. We would not recommend putting this in a bank vault as your family may not be able to access it unless you have left instructions and set it up with your bank.

      2. Have a will

Everyone in Canada should have a will as it is a huge factor for estate planning. A will provides clear instructions to avoid arguments. In a will, you will need to name an executor who is the person who will essentially execute your will. Commonly, people name the beneficiary as the executor as well for cost purposes. Being an executor is a serious task where mistakes can result in other family members suing them so pick someone ready for the task. Inside the will, you should have funeral instructions, instructions on what happens to your assets, and even guardian choices for minors and disabled members.

Some may think they can get by without a will but here’s an example that may make you reconsider: If you are based in Ontario and you don’t have any will, then only the first $200K of your assets go to your spouse, the rest is split within the family. This can be a serious issue if you have kids under the age of 18. In some cases, the family has to document all expenses of the kids moving forward, to get or keep the money. But even if your kids are over the age of 18, there are still risks. Your kids suddenly get a huge sum of money, and there is no control over what decisions they make. In many cases, they are wasting the opportunities.

A proper, clear will helps everyone to avoid tricky situations like these. However, a will is not a magical tool that saves everything. Your will also becomes a public document so be sure not to leave unpleasant comments about family members in there!

Even with a will, there are laws that you can’t just leave people out. Talk to an estate professional in your province to find out why.

      3. Your online passwords

Programs like One Password can help you keep a record of all your passwords safely but you can also write them down and keep it somewhere secure. This way, your family members can access your accounts after you pass away. Be sure to decide what you want to happen with your social media accounts after you are gone. Should they be taken down or kept as a memory?

      4. Power of Attorney

The power of attorney is someone who has the power to act on your behalf with financial, legal or health matters when you are unable to do so such as sickness. There are ways to make this temporary in certain cases such as if you were out of country. Regularly a power of attorney needs two witnesses to be legal and formal but some institutions have their own rules.

Once you have your power of attorney, send a copy to financial institutions. Depending on your location, you might need two PoA, one for health matters and one for financials. It’s also a good idea to have a backup in case the first PoA passes away or can’t continue the role.

      5. Name your beneficiaries

Naming your beneficiaries makes it possible to bypass probate fees. For example, when you open an RRSP or a TFSA account in the banks, most of the time, they will not let you assign a beneficiary so be aware of that.

      6. Life insurance

When you pass away, your family will have to take care of your final expenses which includes your probate fees, and the capital gain tax before they can inherit your assets. But if they can’t access your estate, it can become a financial burden and delays could result in more fees to the CRA. This is why life insurance is important. Insurance money gets paid out right away tax-free so it helps your family pay fees immediately. Life insurance has privacy protection, so therefore it will go straight into the hands of beneficiaries without any interference or delay. If you want to have your insurance reviewed for any gaps, please feel free to contact me for a consultation.

      7. Trust

Another component of estate planning are trusts. This is a complicated topic but it can be very effective for big corporations, real estate investors, or people with a huge portfolio. It provides a tax-saving advantage, estate freezes, and can even be used as a retirement income stream for yourself while younger family members work corporate.

As you can see, estate planning is a topic that goes deep and this post just covers the tip of the iceberg. If you have any questions, please feel free to contact me. If you want to keep learning about wealth and finances in Canada, be sure to follow me on my YouTube channel.

Investing 101 Personal Finance

Thomas Chan

Thomas C.Chan has been advising for over 10 years and has built a reputation for his approach in developing personal finance strategies, setting up risk management, and accumulating wealth for Canadians.

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