Death is something no one likes to think about; however, like taxes, death is inevitable. Therefore, like any aspect of your financial life, you should plan for it to ensure your loved ones are well taken care of.
Income Splitting After Your Death
If you are married or have a common law partner and you have significant assets, your wills should include a spousal trust in the event that one of you predeceases the other. This will allow the survivor to continue to income split after the first death. The surviving spouse can be named as the trustee, giving them total control of the assets. Please note, a trust created on death is called a testamentary trust and, as such, is taxed like a separate legal entity and has available to it all the low and middle tax brackets. If your spouse leaves you $1,000,000 (and that $1,000,000 earns 5% income, or $50,000) then all of that income ix taxed on top of your regular salary, dividends, etc. and you could pay up to $22,000 (depending on the type of income) in additional income taxes on that income. Alternatively, if the $1,000,000 is left to a spousal trust, then the $50,000 is taxed inside the trust and most of the income is taxed mostly at the low bracket and would be about $11,000 or less depending on the type of income. This is a very significant tax savings since it happens each and every year. Because the surviving spouse is both the trustee and the beneficiary of the spousal trust, they maintain complete control over the money inside the trust, i.e. they can remove it at any time. It should also be noted that the surviving spouse can remove the funds out of the spousal trust completely tax free at any time. It is only the income (not the original $1,000,000 in capital) that is taxable.
If you have children, you should also make provisions for an individual trust for each child on the first death. This will provide for additional income splitting opportunities. These trusts should be set up if either spouse predeceases the other. The surviving spouse would be the trustee of each trust.
In the event of a common disaster (you both die), you should establish a separate trust for your children. The assets can be held “in trust” using an outside trustee until the children reach an age of your choosing. At that time, the trustee can be changed to the individual child. This will allow them to maintain the integrity of the trust (effectively income splitting them themselves).
Death Benefits
The CPP death benefit is calculated using the amount that the deceased contributor’s Canada Pension Plan Retirement Pension is, or would have been, if he or she had been 65 when death occurred. The death benefit is equal to six months’ worth of this calculated retirement pension, up to a maximum of $2,500. Note, that this is not a tax-free benefit. It must be included either on the tax return of the deceased’s estate or the surviving spouse’s tax return.
The tax-free death benefit: if you are an employee of your own corporation, you have the opportunity to have your surviving spouse receive up to a $10,000 tax-free death benefit from your employer, i.e. your corporation. The benefit must be documented in the corporation’s minute book and must be for the employment service of that individual.
Did you know?
Life insurance proceeds owned by a corporation can be received by the corporation tax-free. In addition, the
proceeds of the life insurance (less any adjusted cost base of the policy) can then be paid out to the shareholders of the corporation using a special tax account called the Capital Dividend Account (so long as the proper election forms are first filed with CRA).