Previously published in The Fund Library on Thursday, August 13, 2015, by tax and estate planning lawyer, Samantha Prasad.

Thinking about drafting a will? Or updating an old will? Don't forget your silent beneficiary, the Canada Revenue Agency. Though not named in your will, the CRA is always on hand ready to take as large a cut from your estate as it possibly can. Luckily, there are a number of tactics you can use to shrink the taxman's take. I covered the use of trusts in a previous article. This time, I want to look at some less esoteric ideas, including the designation of income-earning assets, probate planning, RRSPs and RRIFs, and charitable donations.

In addition to trusts, there are many other tax planning strategies that you can consider when drafting your will. For example, if you own income and non-income-earning assets, it is possible to leave income-earning assets to children in lower tax brackets. This is because income from bequests to children in higher brackets will, of course, be added to their other taxable income, thus resulting in a significant tax exposure.

Probate planning

In Ontario, tax of 1.5% will be payable on the value of your assets that go through probate. However, if you own shares of private companies, you should ensure that you have a secondary will that deals only with those shares. That's because unlike bank accounts or real property, shares of private companies do not require a probated will for a transfer to the beneficiaries. So by segregating your private company shares in a separate secondary will, you can avoid probate tax on the value of your shares.

These savings can be substantial if the bulk of your wealth is tied up in private company shares. Therefore, if a secondary will is drafted to deal with your shares, then the application for probate will be made only in respect of the assets in your primary will.

I stated earlier that a probated will would be required in order to transfer real estate to your beneficiaries. However, it is possible to save on probate fees on your home or other personally-owned real estate by having a bare trustee company on title. The shares of that company can then be dealt with under the secondary will.

Since you won't need to change title to the property on your death (as it will continue on in the name of the bare trustee company), a probated will is no longer required for that purpose.

RRSPs and RRIFs

I recommend that you designate a beneficiary of a Registered Retirement Savings Plans (RRSP) or Registered Retirement Income Fund (RRIF) directly in the contract itself rather than in a will.

This will do more than just avoid probate fees. If you designate your spouse as a beneficiary (which I highly recommend), the value of your RRSP or RRIF will not be included as income in your final return as there is a deferral of tax for transfers to spouses.

If your spouse passes away before you, or you get divorced, you can designate a child or grandchild who is "financially dependent" on you. This means the RRSP will be taxed in the hands of the child or grandchild with a lower tax rate.

The financially-dependent child or grandchild can also specify a special annuity, which will enable them to defer this tax while they are minors or indefinitely if they are mentally or physically disabled. ("Financially dependent" usually means that the child's or grandchild's income does not exceed the basic personal amount.)

Charitable donations

Your will can provide for gifts to registered charities, which if made in the year of death, qualify for tax credits of up to 100% of your net income. Although this sounds like a great tax planning opportunity, pitfalls abound and care must be taken when drafting your will.

The Canada Revenue Agency used to be of the opinion that if the executors had discretion to choose between the value of the bequest and which charity would receive the gift, the donation would not qualify for the tax credit.

Although the CRA does not currently hold this position, I would highly recommend that you speak with your advisor to ensure that the amount to be donated is determined (whether a specific amount or a percentage), and that it is clear from the terms of the will that the executor is required to make the donation to a qualified donee.

Another strategy is to leave your residence to a beneficiary who will be able to claim the principal residence exemption. In addition, if someone owes you money and you wish to forgive the debt, the best way to do this could be in your will, which will avoid certain debt-forgiveness rules.

By properly planning your will using some of these strategies, you can at least take comfort knowing that upon your death, you are leaving a larger inheritance to your family – and a (much) smaller one to the CRA.

Portions of this article first appeared in The TaxLetter, published by MPL Communications Ltd.,

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.