Case Study: How a Canadian Couple Created a Strategy to Cover RRSP Taxes and Keep Their Cottage in the Family

Can You Preserve Both Wealth and a Family Cottage?

Mary and Jeff had accumulated substantial wealth, but a lot of it came with future tax and estate-planning complications. 

Their $1.5 million in RRSPs could create a major tax liability. Meanwhile, capital gains on their cottage put the couple’s goal of keeping that property for their kids at risk.

Their plan shows how several coordinated strategies can address liquidity, legacy, and charitable giving, and keeping a family cottage in the family. 

Written By Tiffany Woodfield, Financial Advisor, TEP®, CRPC®, CIM®

How Mary and Jeff Planned for Taxes, Family, and Giving

BACKGROUND & GOALS

Mary and Jeff have a principal residence, a cottage, and more than $3 million in investable assets, including RRSPs, TFSAs, and taxable non-registered accounts. 

Their RRSPs total $1.5 million, which represents a significant future tax liability. 

They also know they can only use the principal residence exemption on just one property per year, and both their home and cottage have significant capital gains. 

Their goals are to reduce taxes, pass as much as possible to their two sons, and keep the cottage in the family so the kids and grandkids can continue spending time together.

RRSPs & JOINT LAST-TO-DIE LIFE INSURANCE

One of the main issues is the tax liability from their RRSPs. 

When the first spouse passes away, their RRSP can generally roll over to the surviving spouse if properly structured. However, when the surviving spouse passes away, the remaining RRSP balance is typically taxable to the estate. 

Mary and Jeff have named each other as beneficiaries on their registered accounts, which can help defer tax and may help avoid probate on the first death. 

Mary and Jeff purchased joint last-to-die life insurance so that funds will be available when the second spouse passes away. 

These tax-free funds can provide the necessary liquidity to cover RRSP taxes and other estate liabilities, rather than forcing the family to sell assets at the wrong time. They are also considering a planned RRSP drawdown strategy once they stop working, when they may be in a lower tax bracket.

PRIMARY RESIDENCE & COTTAGE

Mary and Jeff have also decided to use the principal residence exemption on their primary home, so the capital gain on that residence should not be subject to tax if the criteria are met.

To help keep the cottage in the family, they discussed whether a trust could be appropriate. 

Moving the cottage into a trust may create a taxable event now because ownership is changing from Mary and Jeff to the trust. However, in the right situation, a trust can help create structure around who can use the cottage, how decisions are made, and how future generations may benefit. 

Their lawyer also explained how maintenance costs could be funded after they are gone and the importance of understanding the 21-year rule. They’re still deciding whether or not to use a trust. 

CHARITABLE GIVING

Charitable giving has always been important to Mary and Jeff, but their giving has been somewhat haphazard in the past. 

They liked the idea of creating a donor-advised fund because they could donate appreciated securities now and receive a tax receipt in the current year. They can decide which charities to support over time and can name their sons to continue the giving after they are gone. 

This allows them to reduce taxes while supporting causes that reflect their family values. This is something that they’re currently planning to execute. 

TAKEAWAY

By reviewing the planning that Mary and Jeff have done, you can see that estate planning isn’t about using one perfect tool to avoid taxes.

Instead, estate planning is about deciding what matters most to you and using the appropriate strategies. 

If you want your kids to receive the maximum inheritance, you’ll need to create a solid plan. 

Key Tools

IMPLEMENTED

• Spousal beneficiary designations
• Joint last-to-die life insurance
• Principal residence exemption planning

UNDER CONSIDERATION

• Planned RRSP drawdown strategy
• Trust planning for the family cottage
• Cottage maintenance funding
• Donor-advised fund
• Donation of appreciated securities
  

Summary of Key Points

• The couple’s RRSPs created a substantial future tax liability.
• Joint last-to-die insurance provided liquidity at the second death.
• Spousal beneficiary designations could defer tax on registered accounts.
• Cottage planning addressed future use, decisions, and maintenance costs.
• A donor-advised fund could make their charitable giving more intentional.

*Names have been changed to protect the identity and privacy of the individuals in this story. Please seek the advice of professionals before taking action. This case study is for educational purposes only. 

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