The average Canadian household will pay $34,408 in payroll, income, and health taxes in 2024[1]. They will also pay $9,164 in sales tax and $4,664 in property tax. And if you like your occasional Cabernet Sauvignon on a Saturday night, then you will also pay around $2,359 in liquor and other excise taxes for that privilege this year. The taxes are unending. Yet the biggest tax bill you will ever face hasn’t happened yet…It will happen when you sell all your belongings at once. It will happen when you die.

This is called a deemed disposition. Once you have passed away, your estate will subtract the difference between the fair market value of your assets and the price at which you acquired them. Then, you will pay that difference in a capital gain to the taxman. How much you pay the taxman will be determined by how diligently you designed your estate plan and how well executed it is. But that’s only if you don’t die intestate. Did you know that one out of every two Canadians die without a will? See our article here[2] discussing that.

An improper or outdated estate plan leaves 2 problems:

  1. You will leave money on the table due to tax inefficiencies. On top of paying too much tax when you’re alive, you will pay even more when you die. When you don’t have tax experts helping you place and separate your assets in companies and trusts to maximize tax advantages set out by the income tax act, then there is a 0% chance you accidentally did it while setting up your business. Therefore you are leaving money on the table!
  2. You will need a mass liquidation event to pay for your taxes. Because all of your asset gains are now going to be taxed at once, your heirs are responsible for producing a large sum of cash to pay for that gain. If you don’t have a mass liquidation event, then your heirs will have to come up with the cash in ways such as a distressed sale of your business or a predatory loan.

More taxes and distressed liquidation of assets is a recipe for family feuds and resentment for your next generation. So much so that 58% of Americans have experienced family disputes that have resulted in assets under court control[2].

Life insurance by itself will not cover the mass liquidation event your estate will face. Your estate will need a substantial amount of cash to pay those taxes. Combining life insurance with your financial plan is a better way to deal with those tax inefficiencies, as well as provide some living benefits.

Have a plan and the resources to make your post-humous wishes possible. Pass on your estate, not just the taxes.

 

Sources:

  1. All average tax amounts. Table 3: https://www.fraserinstitute.org/sites/default/files/tax-freedom-day-2023-15363.pdf
  2. Don’t die intestate: You Will Die – Don’t Die Without A Will – TTSG Insights (targetedstrategies.com)
  3. 58% will experience family feuds: https://www.investmentnews.com/industry-news/news/lack-of-estate-planning-leads-to-family-feuds-study-shows-240734