Taxes are cut in half. Is there anything that can be done?

It’s a story about two young men who were angry ($659,000) for their wealth lost by taxes, when their parents both died within a year in the early 1960s.

I can sympathize with the kids, thinking they will get so much money, but just finding that they are getting less and less. I’m sure it doesn’t understand why, it’s confusing and hurtful. Let’s explain why the tax rate is so high and what if there is anything to do.

Their father died in December after his mother, so he had a full year of income, which I think is $175,000. The RRSP is worth $715,000 and I will assume the capital gains of this cabin are $850,000. This combination results in a tax of about $659,000.

It’s hard to solve afterwards

What can they do to reduce taxes? In this case, when death suddenly comes, there is nothing you can do. My father’s salary is taxable and has not been resolved.

The same is true for RRSP. No taxes. These children are called beneficiaries of RRSP, saving probate fees, but you can’t transfer RRSP to your adult children like you can. The funds are withdrawn and the value of the child is allocated to the child, but the estate must be taxed on the value of the RRSP. Anyway, the kids end up paying taxes.

The amount of capital gains paid can be reduced by designating a house or cottage as the primary residence and naming it with the least secondary property. If the interest tax has a bright side, that is 50% of your gains are tax-free, so for $850,000 you only have to pay $425,000 in taxes.

When you add all the fees (Salary $175,000, another $715,000, plus $425,000 in taxable capital gains) the taxable income is $1,315,000, and the tax is $659,000 or 50% of the total income.

That’s why the government took all the money from parents. The children inherited the house and the cabin and the only cash they had to pay taxes was the money from the RRSP. Of the $715,000, they only have about $56,000 left between the two to pay for funeral, accounting and attorney fees and maintain the property until one or both can be sold.

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Key points: Plan many results

I’m sure when their parents do the plan, if they do, they think they might live to 90, and their RRSP/RRIF will minimize taxes over time. They may have sold their primary residence and moved to the cabin to designate it as the primary residence. This would have delayed and narrowed with inflation. They may never consider the situation where unexpected situations occur.

If anything, they may have considered buying life insurance. Life insurance is unexpected “just in case”. If the tax rate continues to be a real estate issue, they could have purchased some term insurance that could be converted to permanent insurance. Insurance won’t minimize taxes, but it will immediately provide tax-free funds for kids, giving them time to stop and think, rather than feeling stressed under the pressure of selling real estate when it may be uncomfortable.

This story is a great reminder that when planning, consider if something unexpected happens, think about the look of the picture and decide whether you want to do anything about it. In this case, parents may have realized and understood the effects of taxation if they both died sooner. Maybe they feel like the kids will only sell one or two properties and everything will be fine. This is an unfamiliar area for adult children and the learning curve is very large.

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About Allan Norman, MSC, CFP, CIM

Allan, a financial planner for more than 30 years, is an associate portfolio manager at Aligned Capital Partners Inc., where he helps Canadians keep their lifestyle without worrying about running out of money.