Death Taxes

CANADIAN DEATH TAXES – Many people wrongfully assume that there is no estate tax in Canada.  They simply are not aware of the “deemed disposition tax” in Canada that occurs at death.  Similar to the deemed disposition tax  when you exit Canada, this same tax applies when you die as well.  This means on your final Canadian tax return you must report the full value of your RRSPs, the capital gains in investment real estate, stocks or bonds plus any other income realized in the year of death.  Needless to say, with Canadian income tax rates reaching 45 – 50%, this can be a significant tax burden.  In addition to the federal tax burden, the provinces get their share of the proceeds plus a variety of additional probate fees that they levy individually.

US DEATH TAXES - For anyone moving to the US, the myriad of taxes that occur at death needs to be considered.  There could be estate taxes, income taxes, state inheritance taxes, gift taxes and generation skipping transfer taxes.  The estate taxes are based on your total net worth (including life insurance proceeds) and can be as high as 48%!  This is in addition to professional fees, court costs and probate fees that could consume another 5% of the value of your estate.  RRSPs are particularly troublesome because they could be triple taxed: First, the deemed disposition taxes at death in Canada; Second, any US federal and state income taxes due on the income accrued in the RRSP must be paid and Third, the RRSPs are included in the estate and may be subject to US estate taxes as well.  Fortunately, the Canada/US Tax Treaty does allow some foreign tax credits (or at least a deduction) in some circumstances to offset the double taxation.  In addition, recent changes in the US estate laws will make estates greater than the “estate exemption” (U$2.0M in 2007 per person) subject to US taxes unless the requisite planning is done. However, to take maximum advantage of this U$2.0M exemption, a proper US estate plan is required.

With no, or improper estate planning, these taxes can be punishing as illustrated with the examples below:

	Gross Estate	Settlement Costs	Shrinkage
Walt Disney	$23,004,851	$6,811,943	30%
Alwin C. Ernst, CPA	$12,642,431	$7,124,112	56%
J.P. Morgan	$17,121,482	$11,893,691	69%
Elvis Presley	$10,165,434	$7,374,635	73%

The settlement costs include the estate taxes, court fees, legal and accounting fees, probate fees, etc. that go into settling these estates after death. Your first line of defense in taking control of your financial affairs no matter what happens to you (death or incapacity) and reducing the settlement costs is a full “trust-centered” estate plan.