The Canadian Guide to Will and Estate Planning

Douglas Gray and John Budd have published the third edition of their book

The Canadian Guide to Will and Estate Planning

. They do a good job of explaining in simple language the bewildering array of ways to protect your estate from taxes when you die.

The range of topics covered includes building your estate, wills, trusts, probate, taxes, U.S. taxes, cottages, family businesses, charity, insurance, advisors, retirement care, and funerals. It’s almost enough to make me renounce all my worldly possessions – almost.

I won’t try to summarize this book and further – even at 400 pages, most topics are covered quickly. The main value of this book to me was to become aware of possible estate planning strategies. Actually acting on this information likely requires further investigation or professional help.

For the rest of this review, I’ll point out some parts of the book I found interesting, surprising, or I disagreed with.

CDIC Coverage

“You are protected up to a maximum of $100,000 for each separate deposit.” This may be technically true if you define “separate deposit” correctly, but this definition will not line up with what most people understand the words to mean. Similar deposits get lumped together. It’s best to read the details at the CDIC web site.

Financial Advice

“Unless you consider yourself an expert in the markets, and in forecasting the economy and interest rates, you should have a professional manage your investment portfolio.” Unfortunately, the professionals can’t do any of these things either. The real game is to invest in a way that allows for the possibility of a wide range of outcomes.

Disinheriting Family

Apparently it is quite difficult to disinherit a child or spouse. If you feel strongly about doing this, you’d better get some good advice, because the authors explain that various laws give spouses and children rights that can supersede your wishes.

Wills and Marriage

“A will is automatically revoked by law if the testator enters into a legal marriage after the will has been made.” There are some exceptions to this, but in general you need to look at your will whenever you get married.

Caution on Trusts

“Trusts are complex, and costly to set and maintain year-to-year.” Trusts can save on taxes and solve certain problems, but they are generally only worthwhile for large sums of money.

Final Income Tax Returns

The executor must file a final tax return for the deceased and must file another tax return for the estate to cover the time after death.

RRSP Tax Surprise

If you leave your RRSP to one child and the balance of your estate to another, the entire RRSP will go to the first child, and the balance of the estate will pay the income taxes on the RRSP withdrawal. This can skew the size of each share in a way you didn’t expect.

Electing Out of the Spousal Rollover

Ordinarily, you can leave property to a spouse without triggering capital gains taxes, and the spouse simply takes the property at your adjusted cost base. However, if you have a large capital loss from previous years, you may wish to elect out of the rollover to use up the capital loss and save the living spouse future capital gains taxes.

Principal Residence Exemption

See my previous post for a discussion of reducing taxes by taking advantage of the flexible principal residence designation.

Insurance Agents

“One might think that insurance agents’ … recommendations on the need for, and the volume of, life insurance that is required in a situation are ‘product and sales driven’” to create commissions. “In the writers’ experience, this is not the case.” I’m sure there are many honest insurance agents, but fewer than half of the ones I’ve dealt with had integrity.

Executor Duties

The authors provide a comprehensive list of executor duties in the appendices. This list is long and may make me a little less likely to agree to be executor for too many more family members. On the other hand, maybe it gets easier after you’ve been through it a couple of times.

Life Insurance

According to a chart in the appendices, to have $5000 available to spend each month, you would need investible assets of $2.2 million and require life insurance to close the gap between your current assets and $2.2 million.

Conclusion

Overall, I found this to be a useful book that manages to take dry subjects that are often described with impenetrable jargon and makes them comprehensible.

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Making the Most of the Principal Residence Exemption

Canadians don’t have to pay capital gains taxes on their principal residences. However, the definition of “principal residence” is quite flexible making it possible for families who own a second property, such as a cottage, to save substantial amounts on their taxes.

Douglas Gray and John Budd, in their book The Canadian Guide to Will and Estate Planning, explain that your principal residence isn’t necessarily your “main place of residence.” If you own a vacation property, “as long as you, your spouse or at least one of your children occupy the vacation property for some period or periods of time during the year, that is enough to bring you within the principal residence definition.”

“The fact that you show your home address on your income tax return does not mean that you are designating your house as your principal residence.” Further, “it is not generally necessary for you to decide which property is to be designated as the principal residence for capital gains tax purposes until the year that either property is sold or disposed of.”

Calculating your taxes owing on a property sale begins in the usual way by taking the proceeds of disposition and subtracting your adjusted cost base to get the capital gains amount. Then you get to reduce this capital gains amount by the “exemption fraction,” which is based on the number of years it was your principal residence. The exemption fraction is

1 + number of years after 1971 the property is designated as your principal residence

divided by

number of years after 1971 you owned the property.

Partial years count as full years in this fraction. The purpose of the “1+” in the numerator is presumably to deal with the fact that a family with just one property may move in the middle of the year, but only be allowed to designate one of their homes as their principal residence for that year.

An Example

Sue and Bob bought their home in 1994 and a cottage in 2004. They sold both in 2013 for a $200,000 gain on the house and a $150,000 gain on the cottage. They owned the house for 20 years and the cottage for 10 years.

If they designate the house as their principal residence for the entire 20 years, they will have to pay capital gains taxes on the cottage gain of $150,000. But, look at what happens if they designate the cottage as their principal residence for 9 years and the house for 11 years:

Cottage exemption fraction = (1 + 9)/10 = 100%.

House exemption fraction = (1 + 11)/20 = 60%.

Now the cottage gain is entirely tax-free and they only have to pay capital gains taxes on 40% of the $200,000 house gain, or $80,000. This is a reduction in capital gains of $70,000 compared to declaring the house as their principal residence for the entire 20 years. Assuming Sue and Bob pay 23% capital gains taxes, they save $16,100.

For families with vacation properties, it definitely pays to understand these rules when it comes time to sell homes and cottages.

I am not a tax expert. I relied on the information in Gray and Budd’s book to construct this example. Seek professional tax advice, particularly when dealing with large sums of money.

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