An estate can pay up to 24% on any capital gains and up to 48% on any of the registered pension, RRSP and RRIF balances that it receives.
This tax can be deferred if assets with capital appreciation and registered funds are transferred to a surviving spouse.
Life insurance can become an economic tool
Often one of the only ways to raise the money to pay the taxes is to sell investments or assets. If the timing of selling is poor or the assets are valuable family treasures your estate may not wish to sell them at that time. Examples may be the shares of a privately held corporation, real estate, the family cottage or other assets that are to be kept in the family.
Life insurance can become an economic tool where life insurance is placed upon the life of the owner or upon the lives of both spouses.
Assume a couple both age 60 own a private corporation with a value of $5,000,000. Assuming the original cost of the shares is nominal, a deceased’s estate could face a tax of approximately $1,200,000 ($5,000,000 x 50% = $2,500,000 x 48% tax rate). In addition, the cost of withdrawing funds from the company to pay the tax could be as high as 40.24%.
As another option, the company could purchase insurance on the lives of the owner and spouse to fund $1,200,000 of tax at a cost of approximately $20,000 per year. By paying $20,000 per year they have effectively removed the risk of the estate having to sell the business on the death of the owners just to pay the taxes.
Alternatively assume a couple has a family vacation property worth $1,000,000. Upon the death of the surviving spouse the taxes payable by the estate would be approximately $240,000. With only a small amount of insurance the family can be guaranteed that they will not have to sell the treasured property just to pay CRA.
Life insurance creates liquidity for the benefit of the heirs to pay taxes and removes concerns of an asset having to be sold.
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Thanks to Gary Clark of Clark & Arsenault for providing much of this content
