Table of Contents
- “Will” Power
- Tricks to Minimize Estate Taxes in Canada
- Incorporate the Rights of Survivorship in Your Will
- The Loss Carry Back
- The Graduated Tax Rate Estate
- Plan with Tax-free General Rollovers in Mind
- A Portfolio of Investments Trick
- Add Funds to a Trust to Fund Your Children’s Investments
- Principal Residence
- Minimize Probate Tax Exposures
- Dividends Receivable Trick
- Purchase Life Insurance
- Bottomline
This blog is for information purposes only and should not be taken as legal advice. With changing tax laws, many tax-saving strategies quickly lose their validity. For tax advice, consult one of our tax professionals.
The word estate sounds ominous because many think estate, will, and death are interlinked. However, estate planning and minimization of estate taxes are a part of life planning. They are a continuation of the steps one takes in life.
Similar to planning for loved ones while alive, individuals also consider their future needs in their absence.
Minimizing taxes on Estates can go a long way in providing maximum benefit to the heirs and reducing their financial burden. However, it takes timely planning and exploration of a variety of strategies. The following writing describes some longstanding tips and tricks for this purpose.
Before moving forward, it is crucial to understand the importance of a will in this regard.
"Will" Power
One can also put it as: the power of Will. A will is a legal document stating your desires about how you want your personal representative to dispose of your assets after you pass away.
If there’s no “Will”, there’s no way.
It is the foremost step to ensure that your assets are not at the government’s disposal and at the discretion of the courts. It is also the pinnacle of your Estate tax management.
Tricks to Minimize Estate Taxes in Canada
- 1. Incorporate the Rights of Survivorship in Your Will
Joint Tenancy with Rights of Survivorship (JTWROS) is more than just a way to co-own property… It’s a legal arrangement where two or more individuals share equal ownership, and, crucially, the survivor automatically inherits the entire interest when one party passes away. On the face of it, it might appear a tax-free method of transferring property, but, in fact, it is more complex. Even though JTWROS is a successful way to avoid probate, tax exemption is not included. The death of one joint tenant can take place, leading to a deemed disposition of the interest at fair market value and consequently capital gains tax. That said, a notable exception applies when the transfer occurs between spouses or common-law partners—under Canadian tax law, such a rollover typically defers taxation until the second partner’s death.
- 2. The Loss Carry Back
Another hidden evil is the loss carry back method of tax saving, which should be strongly resorted to in case of death. It amounts to letting an estate use a capital loss incurred (when a depreciated asset is sold) against capital gains on the final (or in some cases, last) tax return of the deceased. Why should this even be important? The death of a party is considered similar to selling assets at Fair market value, which could attract huge capital gains with an immense tax liability. The estate can recover its capital gains by being able to recognize as a post-death loss the gains, thus claiming back thousands in taxes already paid. It is a savvy, legal method of cushioning the tax impact of the deemed disposition upon death, and as a way of placing substantial value on the estate in the hands of the beneficiaries, it can be significant.
- The Graduated Tax Rate Estate
A Graduated Rate Estate (GRE) is a special designation provided by the Canada Revenue Agency (CRA) to an individual’s estate when certain conditions are met and a formal application is submitted. This is a classification that can attract favourable tax treatment whereby the income of an estate is taxed at the graduated rates rather than qualifying for the highest marginal rate of administration, which most trusts are subjected to. In simpler terms, it can result in meaningful tax relief during the early period of estate administration.
However, this benefit is both exclusive and time-sensitive. GRE status is available for only one estate per deceased individual and is limited to the first 36 months following the date of death. Before 2016, it was common for people to set up multiple testamentary trusts in order to split income and enjoy several low tax brackets. Changes to the law have since curtailed that practice by imposing the top tax rate on all trusts except the primary estate that qualifies as a GRE. Even with these restrictions, the tax advantages within that three-year window can be significant if the estate is planned and managed effectively.
It should also be remembered that not every transfer to the beneficiaries is tax-free. In other words, whereas a beneficiary under a life insurance policy would typically receive the proceeds of the policy free of tax, an asset (like RRSPs) is another matter altogether. RRSP may be deferred by passing it to a dependent child who is still underage and is still financially dependent, then the RRSP is used to acquire an annuity. Otherwise, this kind of transfer frequently entails an immediate tax impact, or postpones it, and does not avoid taxation, however.
- 3. Plan with Tax-free General Rollovers in Mind
Tax-free rollover is not an exemption that covers all aspects of taxes. It is simply used in reference to certain instances of the transferring of an asset without tax implications. Deferral (and in rare situations, avoidance) of taxation may be permitted by the Canada Revenue Agency depending upon the nature of the asset and the nature of the relationship between the deceased person and the beneficiary. The postponement of the tax occurs more frequently than its abolition. The following are some of the generic instances where rollovers can be used:
-
Assets transferred to a surviving spouse or common-law partner
These typically qualify for full tax deferral until the spouse passes away or disposes of the asset. -
RRSP rollover to a spouse
This transfer is usually tax-deferred, provided it meets the CRA’s conditions. -
RRSP rollover to a financially dependent minor child
The transfer may qualify for tax deferral only if the funds are used to purchase a term-certain annuity ending at age 18. Otherwise, tax may be payable. -
Life insurance proceeds paid to a named beneficiary
These are generally received tax-free, making life insurance a valuable estate planning tool. -
Charitable donations made through the estate
Eligible gifts can generate tax credits, which reduce the overall tax liability of the estate. -
Transfer of a principal residence
Gains on a principal residence are typically exempt from capital gains tax if the property qualifies under the principal residence exemption. -
Transfer of a family farm to a child or grandchild
If certain conditions are met, the rollover can occur without immediate tax consequences.
All these rollovers are accompanied by a set of rules and eligibility requirements. These opportunities can be taken advantage of with the help of professional advice, but having a cohesive estate plan in place will help in maximizing them, thus reducing tax liability and the eventuality of wasting the estate.
- 4. Undertake an Estate Freeze
Estate freeze is a formidable tax tool that enables one to freeze the current value of his or her estate. In this manner, a further increase in the value of such assets is channelled to their heirs or successors and the person remaining in possession of the current assets, the one who froze the value, has the right to decide the fate of the unextracted value. It is worth mentioning that no matter what has been emanated earlier, a capital gain does remain triggered when the freeze takes place, and that is done according to the fair market value of the respective assets.
The problem with this is, however, that the taxable growth is indeed limited in the possession of the original owner, making it easier to control and cap the capital gains tax that would be imposed on its death.
An estate freeze is normally combined with a well-structured life insurance scheme in order to make the most out of the plan. Heirs can pay any tax that is due on the frozen assets by using the tax-free insurance proceeds that are reaped when the owners die. The combination is not only able to preserve wealth across generations, but it also allows liquidity when needed most. The estate freeze is a key element in planning intergenerational wealth when used as a strategy.
- 5. A Portfolio of Investments Trick
In this method, a person transfers a portfolio of growth investments like shares, stocks, and real estate to his private corporation. In return, he gets preferred shares with fixed values. At the same time, the children subscribe to common shares for a nominal value of around $100 and continue to derive income. On the death of the parent, the children inherit the preferred shares. In this way, the estate moves from one generation to the other, and the cycle repeats for the next generation.
- 6. Add Funds to a Trust to Fund Your Children's Investments
Every Canadian is entitled to a Basic Personal Tax Credit, which effectively shields income from tax up to a threshold of $15,705. This credit can be strategically used when setting up a trust for your children. By contributing assets to such a trust and ensuring that the income is distributed to the beneficiaries, you allow that income to be taxed in their hands rather than at the highest marginal rate applied to retained earnings within the trust. If your children have little to no other income, their personal tax credit may eliminate the tax liability on those distributed amounts entirely.
This strategy not only makes use of the personal tax exemption but also helps navigate around what’s known as the “tax on split income” or TOSI rules—anti-income-sprinkling regulations introduced to prevent high-income individuals from lowering their tax bill by shifting income to family members in lower brackets. While these rules limit who can benefit from income-splitting strategies, with careful planning and legitimate distributions, a trust can still serve as an effective tool for long-term, tax-efficient wealth transfer within the family.
- 7. Principal Residence
In Canada, a single property for everyone qualifies for principal residence status. It raises no tax liabilities to inherit such property. Make sure you declare that particular property as a principal residence, which you think will incur the maximum tax. It can lead to a considerable reduction in the overall tax due.
- 8. Minimize Probate Tax Exposures
Probate taxes can be as high as 1.5%, as is the case in British Columbia and Ontario. Make sure you take steps to minimize the likelihood of probate. One way to do this is to set up inter vivos trusts. Such trusts ensure that the assets in their holding devolve to the beneficiaries without probate.
- 9. Dividends Receivable Trick
One creative way to optimize your estate’s tax outcome is to have your corporation declare, but not pay, dividends each year in an amount equal to its after-tax earnings. While no funds are actually distributed, this creates a valuable asset on your personal balance sheet known as a dividend receivable. Upon your death, this receivable does not simply vanish. Instead, it can be reported on a separate tax filing known as the “Rights or Things” return, available under Section 128 of the Income Tax Act.
This return is filed only once, at the time of death, and it allows certain unpaid amounts owing to the deceased–such as declared but unpaid dividends–to be taxed separately from the primary terminal return. The benefit? This second return opens the door to an additional set of graduated tax rates and another Basic Personal Amount, which for 2025 is set at $15,705. In effect, you gain a second set of tax brackets, helping to reduce the total tax payable on your final estate. It’s a smart, often underused tool in estate planning that can translate into thousands in tax savings for your heirs.
- 10. Purchase Life Insurance
Life insurance can be a remarkably effective way to offset the taxes that become payable upon death. Unlike many other estate assets, the proceeds from a life insurance policy are not considered part of “rights or things” or receivables, which are typically taxable. Instead, life insurance payouts are generally received tax-free by the named beneficiaries. There is no reporting burden, no clawbacks, and no surprise tax bills awaiting your heirs. The funds arrive quickly and cleanly, precisely when they’re needed most, and can be used to cover the estate’s final tax obligations without liquidating valuable assets.
What makes this even more appealing is that the beneficiaries themselves can pay the premiums, especially if they stand to benefit directly from the policy. This structure keeps the estate’s cash flow intact during your lifetime, while ensuring your heirs have the resources to meet posthumous tax demands. In the right circumstances, it’s a win-win arrangement that combines tax efficiency with financial peace of mind.
Bottomline
As far-fetched as it might seem, estate planning to minimize tax liability at death can be a significant relief for the loved ones who will depend on the assets you leave them.