The first things that come to mind when you think of estate planning might be your will, beneficiaries and executor or estate administrator. However, another key element is planning for the tax liability on your estate’s assets.

The tax liability could be significant. Take the example of an estate that includes $300,000 in a Registered Retirement Income Fund (RRIF), $100,000 of equity investments in a non-registered account and a vacation property valued at $600,000. That’s $1 million until the Canada Revenue Agency (CRA) receives its share. Say there are capital gains of $40,000 on the non-registered investments and $360,000 on the vacation property. Based on a 50% marginal tax rate, the tax owing is $10,000 on the investments and $90,000 on the vacation property. Tax on the RRIF balance, considered income, is $150,000. The total tax bill is $250,000.

Planning for the tax liability can help ensure that your heirs receive what you wish for them. Without proper planning, an estate administrator may need to look at selling a treasured asset—even a vacation property—to cover the tax bill.


Tax on estate assets is usually covered by one or more of the following methods, with the choice depending on your personal preference and financial situation. Here’s why each one may be suitable, along with concerns to consider.

Using cash on hand. If an estate has enough liquidity, drawing from cash assets can be the easiest way to cover the tax. However, if the tax liability is significant, available cash may fall short. Also, that cash may end up being a source of retirement income.

Dedicating a savings fund. In your working years, you can save to build a fund specifically designed to offset taxes on estate assets. A Tax-Free Savings Account (TFSA) could be ideal. A challenge is remaining disciplined—it’s a tempting way to cover home renovations, vacations abroad, a child’s wedding or the down payment on a child’s first home.

Selling certain assets. A common solution is for the estate administrator to liquidate enough assets to cover the tax payable, leaving the remaining assets for heirs. However, at the time the tax must be paid, the particular asset’s market value could be less than its expected value. Another concern is sacrificing an asset with high growth potential or sentimental value.

Purchasing life insurance. You can purchase permanent life insurance in an amount sufficient to cover the projected tax bill, with your estate as the beneficiary. This solution preserves estate assets from the time you pay your first premium. However, you need to assess the cost over time—depending on your age and health, life insurance may or may not be cost-effective. 

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