No one likes having to pay more tax, least of all when considering one’s own estate plan. While in Canada, we do not officially have an “Estate Tax” per se, the amount of tax that Ottawa and Victoria collect from the estates of B.C. residents has risen sharply in recent years.
When a person passes and they have a Will, a process called “probate” is sometimes required to confirm that Will is legally valid. Much has been written about the cost of probate in B.C., which amounts to approximately 1.4% of the value of an estate.
In contrast, there is relatively little appreciation for the impact of changes to the top marginal tax rates.
Federally, the top marginal tax rate was increased by 4% in 2016 beginning at the $200,000 level. In BC a 2.1% “temporary” increase was imposed for incomes over $150,000 in 2014 and 2015. It has now been made permanent as of January 1, 2018. This means the government collects an additional 6.1% on incomes above $205,842 in British Columbia than they did in 2013, as the top marginal rate has risen from 43.7% to 49.8%.
In my estate planning workshops I frequently refer to this tax increase as a “stealth” estate tax because those whose annual incomes are generally below $200,000 are often shocked to learn that their RRIFs and other assets may push their income in their final year to the point where nearly 50% is taken as tax.
Consider a retired couple with $300,000 each in their RRIFs, and annual taxable incomes of $45,000. They pay 22.7% on each additional dollar they earn. On first to pass, the deceased’s RRIF rolls to the survivor on a tax deferred basis. With no spouse to split income with, the survivor’s taxable income might rise to the next tax bracket of 28.2%. On the second to pass, the entire RRIF will be added to their other sources of income, resulting in the majority of the RRIF being taxed at 49.8%, whereas in 2013 it would have been taxed at 43.7%.
As a result, the incentive to consider final taxes within the overall financial and estate plan is greater than it has ever been. Retirees need to take into account future tax liabilities that will arise from registered accounts such as RRIFs and LIFs, as well as unrealized capital gains on stocks, real estate, private corporations and other assets.
Please consult a qualified tax advisor for specific advice and we may work with them to coordinate an appropriate plan.