(As published in LifeStyles 55+, June 1, 2012 )

More than likely! You need to understand how the government will take a large portion of your life’s work, money that you thought would be your legacy for your heirs or causes.

How much of your savings is still in “registered”. Registered Retirement Savings Plans are the primary means for most Canadians to save for retirement. They are great for investing before tax earnings and for accumulating tax deferred growth, especially when you are in your peak earning years at the highest marginal tax rates. However, they only provide tax deferral, eventually the government expects its slice of your pie. Any withdrawals are fully taxable in that year. To avoid paying tax, and with decent pensions from work and some non-registered savings, most of us will put off withdrawing from our RRSPs to postpone paying that tax as long as possible. Another detail is that withdrawals can raise your taxable income to where your OAS (old age security) gets clawed back. But the government limits hoarding your RRSPs very long by requiring that your RRSPs become a RRIF (registered retirement income fund) in the year of your 71st birthday. The RRIF requires minimum annual withdrawals which are then taxed. RRIF withdrawals could reach the point where your could outlive your savings! To guard against this, one might keep their RRIF withdrawals to the minimum to keep funds on hand in case you live too long!

But if you do expire, the government deems that your remaining RRIF is fully withdrawn on your date of death. With living frugally, and postponing taxable withdrawals, there can well be several hundreds of thousands of dollars left in your estate, money that you believed might be a bit of a legacy. But because all of that registered money is deemed to be withdrawn at once, it will be taxed at the highest marginal tax rate. For 2012, that is 46.4% above $85,414. Add provincial probate taxes and legal fees and your heirs will be lucky to see 50% and even that only after the lengthy probate process is completed.

The other area where your estate will pay off Revenue Canada is with deemed capital gains. Assets like your RRIF can pass to your spouse on the first death, but will be deemed to trigger capital gains before they can be inherited by the next generation. The family cottage is a leading example. That island retreat in Lake of the Woods that you bought fifty years ago for $20,000 can be worth $500,000 today and trigger a tax liability over $100,000. Without the ready cash, all too often the family “castle” with all its memories has to be sold to pay the taxes. This can even happen with a going concern family business that must be wound up to pay the taxes.

Dealing with these issues requires the same careful planning of your finances that allowed you to reach a comfortable and secure retirement. Many people are surprised to learn of the tax sheltering benefits of insurance products, structured for you, not on you. A recent Globe and Mail column, Tax Matters by Tim Cestnick, (May 3, 2012) “10 smart things to do with your tax refund” included “5. Invest in Life Insurance”. David Voth in “10 Secrets Revenue Canada does not want you to know” includes a whole chapter on “Buy an Insurance Tax Shelter”. But we are out of space, I will explain how those work in my next column.