When you pass away there is a deemed disposition of your assets — everything is treated as if it was sold at market value at the date of death. A final tax return is prepared in which 50% of your capital gains will be taxable capital gains and the entire amount remaining in your RRSP is treated as income and added to any other earnings. This can create a large tax bill.
A donation to a registered charity creates a tax credit and effectively reducing taxes owing; leaving such a gift in your will can reduce the amount of tax paid by the estate. The value of the credit depends on your marginal tax rate in the year it's claimed. Tax credits for charitable donations are limited to 75% of your net income in any tax year and 100% of net income in the year of death.
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If you donate shares that have appreciated in value, you get a tax credit for the full market value of the shares and you don't have to pay tax on the capital gain that you had while you held the stock. For example, let's say you owned 1,000 shares of publicly traded company XYZ that you bought for $5; let's also say the shares now trade for $10 at death and you donate them in your will. On your final return you will get a tax credit for the $10,000 donated and your estate will not pay tax on the $5,000 that the shares appreciated. (This is a good strategy during your lifetime as well. If you normally make donations in cash but have appreciated securities, you should discuss this with your financial advisor.)
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You can also donate your RRSP to a charity. In that case, the tax credit will offset most if not all of the tax liability for the RRSP income inclusion.
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Meeting with a financial planner is recommended. He or she can do calculations on your estimated tax liability on death and give you a more detailed understanding of your particular situation. Also consult with a lawyer who specializes in Wills and Estates. They will be able to guide you through the process in order to efficiently distribute your estate according to your wishes.
For more financial planning expertise (or to ask your own question), visit Anna-Marie's profile page on GoldenGirlFinance.ca.
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Nothing contained herein is intended to provide personalized financial, legal or tax advice. Before implementing any financial strategy, you should obtain information and advice from your financial, legal and/or tax advisers who are fully aware of your individual circumstances.
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