Michel A. Saleh

Financial security advisor   *
Mutual funds representative   **
514 282-3276 1 866 665-0500, 23276

My financial chronicle

The Ministère du Revenu: Your primary heir?

Who wants the tax authorities to be their primary heir? Of course, for couples who are married or qualify as common-law spouses under the tax law, the tax impact is less upon the death of the first spouse. Indeed, the assets can be transferred to the surviving spouse without paying taxes at that time.

However, upon the death of the second spouse, the tax impact is inevitable, and the tax authorities often become the primary heir of the estate. The deceased person is deemed as having cashed out both RRSPs (registered retirement savings plans) and RRIFs (registered retirement income funds) just prior to death. The total value of these accounts will thus be taxed before the balance is transferred to the estate. And the bill may be steep-often nearly 50% of the total value.

What can you do to prevent Revenue Canada and Revenu Québec from being your primary heirs?

Here are some of your options:

1) Cash out registered plans (RRSP, RRIF) during your lifetime

With this option, you can keep your estate from being taxed by paying your taxes yourself. This may make it seem like you're paying less tax, since you'll be taxed at a lower rate if your retirement income is low, but the main drawback is that you're paying tax now to avoid paying it later. In addition, amounts reinvested outside of RRSPs generate taxable returns each year, losing the important advantage of accumulating tax-free interest. This is thus the opposite of a winning tax strategy, which usually aims to postpone taxation for as long as possible.

2) Create a savings fund

Some people choose to create a savings fund outside their RRSP in order to accumulate a certain amount to bequeath to their estate. While created as a future inheritance, this fund can also be used during your lifetime for emergencies. This strategy is effective financially but far from effective in terms of taxation, since all returns are taxable each year. However, the accumulated amount is tax free for the estate, since taxes will have been paid all along. This is an interesting option if you're sure you'll have enough time to reach your objective. But how can you be sure you won't die first?

3) Use life insurance
When you want to be sure that your real heirs will receive a set amount upon your death, regardless of when you die, taking out a life insurance policy is an interesting option. The main drawback is that to be insurable, you must meet certain health requirements upon subscribing. This solution lets you choose the insured amount-and since it is tax free, it will be paid in full to your estate upon your death, even if you die prematurely. You can also use the amount to pay the taxes due on your final tax return, after your death. Lastly, you know in advance exactly how much you will have to pay to guarantee that a certain inheritance goes to your estate.

For those who are insurable, this third option–which is highly effective from a tax standpoint–is certainly worth considering.

Have concerns about this topic? As your financial security advisor, I'd be delighted to answer your questions and help you build a personalized strategy based on your situation.