Most clients think that having a will is only for the purpose of ensuring that, upon death, their assets go to the intended beneficiaries. However, turning your mind to having a will is also an opportunity to plan for your assets during lifetime and to consider taxation issues. One important consideration is that of taxation of capital assets upon death.
According to the Income Tax Act, a deceased person is deemed to have disposed of their capital property as at the date of death. The result is that this triggers significant capital gains taxes immediately upon the date of death. The surviving spouse might have to sell property in order to afford the tax liability of the estate.
The Income Tax Act allows the use of a spousal trust to defer the income tax consequences of the deemed disposition of capital property until the death of the surviving spouse or until disposing of the capital property. This spousal trust can actually be drafted to continue to exist for up to three years from the date of the surviving spouse. This would allow for losses after the spouse’s death to reduce any capital gains payable as per the deemed disposition.
The spousal trust is one of many planning techniques to reduce or defer estate taxes.
*The above is drafted by Soica Law Professional Corporation and not intended as legal advice.