“Our parents just passed—What do we do about their estate?”

RRIF and TFSA

With you and your brother named as the beneficiaries, there will be no probate, and these are probably the easiest accounts to deal with. Once you provide your financial institution with the required paperwork, which is minimal, you should have the money within two to three weeks.   

You and your brother will receive the full value of the tax-free savings account (TFSA) and the registered retirement income fund (RRIF). It is your dad’s estate paying the tax on the RRIF, not the RRIF beneficiaries. This may be an issue if, say, your brother was receiving all the RRIF money and you were receiving the non-registered money. Your brother would get the full amount of the RRIF, and the taxes owing on the RRIF would come from your share, the non-registered money. 

The full amount of the RRIF will be added to your dad’s “other income” for the year and taxed at that rate. If your dad’s only income is the RRIF, then the tax owing on $450,000 is about $197,500. Here is a link to a calculator you can use to estimate the tax owing.

That is a lot of tax! And this is the time a RRIF is unfairly criticized. The RRIF started as a registered retirement savings plan (RRSP) for which your parents received tax deductions and the money compounded tax-sheltered inside the RRSP/RRIF, which is a huge benefit. Advisors sometimes suggest drawing money early from a RRIF to reduce final taxes. This may work if the money is going to another tax shelter like a TFSA, but it doesn’t normally work if it is going to a non-registered investment. Your parents likely did the right thing here.

Cash account/non-registered

This money will be subject to probate and will take longer to receive.  

There will be capital gains tax of about $100,000 on this account. It is calculated by taking the difference between the book value and the market value at the date of death and applying the inclusion rate of 50%. In your case, $200,000 x 50% = $100,000. The $100,000 is then added to your dad’s RRIF income and other income for the year, including CPP and OAS, and taxed at that rate.  

Holding company

Your parents had two wills, one for their personal assets and one for their holding company. This allows the assets in the holding company to avoid probate costs, which is beneficial in provinces with high probate fees.

The estate freeze likely created a large tax saving, but you need to review your corporate situation with your accountant, and you should do it sooner rather than later. There are some tax minimization strategies that, if warranted, must be done within one year of the deceased’s passing. 

If the estate freeze was not completed, this is what may have happened: your dad owned all the shares in the corporation. On his death, the shares of the corporation would be deemed to be sold, and tax would be owing on the gain. Then, when the investments in the corporation are sold, tax is owing on the gains. Then, when the shareholders draw the money in the form of a dividend, they get taxed. This is referred to as double or triple taxation.  

The estate freeze froze the value of your parents’ shares, and all future growth of the corporation was attributed to you and your brother. This move eliminated or minimized the first layer of tax described above. There will still be capital gains tax, paid by the corporation, when the investments are sold, and tax when you draw the money as dividends, paid personally.

Insurance

Insurance is sometimes used within a corporation to compensate for the tax loss as the corporation is transferred from one generation to the next. The other use of insurance is to form part of the conservative piece of an investment portfolio on money that will never be spent. The idea is to have a little more of a tilt toward investments that generate capital gains, for tax efficiency in the corporation, and the insurance protects against negative markets at the time of death.

At your dad’s passing, the insurance is paid into the corporation and creates a nominal account (an accounting term for an imaginary account) called the CDA, capital dividend account. The value of the CDA will equal the value of the tax-free amount of the insurance proceeds, which should be most if not all of the $1 million. At that time, a tax-free CDA dividend can be paid out to the shareholders, you and your brother.

Should you move all the investments to cash?

You will first need to confirm with the financial institution holding the investments what its policies are. You will likely find that where probate is required, it must be completed before any changes to the investments can be made. This means no changes to the non-registered account; however, RRSP/RRIF and TFSA accounts with named beneficiaries are not subject to probate and can be traded. 

Before making any trades, consider how the beneficiaries may react to your investment decisions, and their plans for the money they will receive. The best solution is likely to have the beneficiaries complete the necessary paperwork as soon as possible so they receive the proceeds or investments in kind within a few weeks. 

What about trading investments in the holding company?

With your parents’ personal holdings, the beneficiaries receive the money tax-free, after the estate pays the tax, which may seem all one and the same. This is not the case with investments in the holding company, or holdco. You and your brother will receive taxable dividends unless they are tax-free CDA dividends. If you are collecting OAS now, you might find it all clawed back once you draw dividends from the holdco. 

Also, capital losses within the holdco reduce the value of the CDA, and capital gains increase the value of the CDA. It may be best to pay out all your tax-free CDA dividends before selling an investment that is down in value, which would reduce the amount you can pay out tax-free.

This is an area you will want to discuss with your accountant and financial planner.

Marina and Jody, with all the forward tax planning your parents did for your benefit, I can just imagine how important you were to them, and I am left with the impression you had and will continue to have great family relations. I’m sorry for your loss.

More from Allan Norman:

• Financial hardship withdrawal exceptions and increasing income in retirement
• Using a HELOC as an investment strategy: not as taboo as you might think
• How to model retirement income in Canada
• Should seniors cancel their life insurance policies?

About Allan Norman, MSc, CFP, CIM

With over 30 years as a financial planner, Allan is an associate portfolio manager at Aligned Capital Partners Inc., where he helps Canadians maintain their lifestyles, without fear of running out of money.

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