As Benjamin Franklin stated, “nothing can be said to be certain, except for death and taxes.” Most provinces have stopped calling the charge they collect to probate a will a “fee” and now refer to it as a probate tax. Probate — when required — is the process undertaken by the executor named in the will that starts with itemizing the deceased’s assets and ends with the provincial court providing the executor with the authority — sometimes called “letters probate” — to give instructions to the appropriate financial institutions. The federal government also wants its share of taxes based on the deceased’s taxable income in the year of death. (In Canada, succession taxes, which were calculated on the entire wealth of an estate, were eliminated in the early 1970s.) It is your executor’s duty to probate the will if necessary and file a final tax return on your behalf.
Planning can help minimize the amount of probate and income tax due. The cost to probate a will ranges from zero to 1.5 per cent, yet too many people have arranged their estates to simply reduce or eliminate probate tax without realizing the potential implications to their current financial situation or the effect tse arrangements could have on the distribution of their estate. One example I’ve seen is where assets have been put in joint name with rights of survivorship with one child. This could expose these assets during a person’s lifetime to the financial life of that child — such as the child’s bad debt or divorce. And the same is true with income tax planning. The top federal tax rate and the top provincial tax rate combined are much greater than 1.5 per cent. Any estate plan to reduce personal income taxes could potentially have a clear financial benefit. After you have estimated the amount of income taxes and probate tax that could be payable, it is best to reconsider your planning in the following order:
1. What does your estate plan need to do?
2. Is there a way to implement your estate plan that will reduce the amount of final income tax payable?
3. Assuming your will needs to be probated or there is no maximum on the amount of probate that could be charged, is there a way to reduce the amount of probate tax that is paid?
4. Would implementing any of the strategies under consideration make your estate plan unduly complex?
Most financial institutions require validation of a deceased’s will by the provincial government before they are willing to carry out the executor’s instructions. Once a will is probated, third parties can be certain the executor has the legal authority to act on behalf of the estate. The process of probate involves the presentation of the original will to the provincial probate office along with a list of the deceased’s assets and payment of the probate tax.
In provinces where there is no maximum probate tax (see “Probate Fees/Taxes Across Canada” at the end of this article) or where the estate is substantial, reducing probate tax means trying to reduce the value of the assets that are distributed according to the wording in the will. Some techniques work well in certain family situations; others work better in theory than real life.
Next page: Designated beneficiaries
When you name a beneficiary on your life insurance, pension plan, RRSP, RRIF, etc. (i.e., not designated as “estate” so it defers to the wording in your will), these assets are distributed outside your will and are not included in the calculation of probate tax. Here are two points of caution regarding RRSPs/RRIFs.
• Naming a beneficiary on a RRSP/RRIF does not eliminate any income tax that might be due, which is calculated based on the taxable income on the deceased’s final tax return (unless the beneficiary is a spouse/partner) although it may keep them out of the probate tax calculation.
• Leaving specific assets to particular beneficiaries can make it difficult to create a “fair and equal” distribution of your estate since you don’t know the future value of your assets. As an alternative, some people distribute a percentage of their estate, rather than a specific amount or asset.
Register assets jointly with a spouse/partner
When assets are registered jointly with a spouse (sometimes referred to as joint tenancy with the rights of survivorship or JTWROS), the surviving spouse or partner (common-law or same-sex) remains the owner of the asset on the death of a spouse. These assets are not distributed through the will.
Many older people want to make their children joint owners of their investment accounts, houses, etc. Even though it is relatively easy to re-register asset ownership by setting up a joint account (for investments) or re-registering title (for land), holding assets in JTWROS has potential drawbacks, the most important being loss of control. Other disadvantages include but are not limited to:
• Creditors could seize the assets if the other owners file for bankruptcy.
• The assets could get caught up in a divorce settlement if the other owner files for divorce.
• If the asset is an investment/bank account, the other owners could cash them in or deplete the accounts without your consent.
• The Canada Revenue Agency (CRA) will consider you “sold” that portion of the asset to the other owner at fair market value (unless he or she was your spouse or partner), and you, depending on your tax bracket in that year, may have to pay tax on any taxable capital.
• Some professionals (e.g., architects, engineers, lawyers) hold their home in their spouse’s name because of potential professional liability. These people may not ever want to hold their assets jointly with their spouse or partner just to save probate tax if potential professional liability might last years after retirement.
Give it away now
Some people have taken to giving away money or assets, assuming their adult child or grandchild might as well have it now rather than later, to go to school, buy a house. There’s no tax on gifts of cash to adults, but there may be tax consequences if you give assets such as investments or cottages to children/grandchildren while you are alive. And money and people can be complicated. The gift giver is sometimes disappointed because the person receiving the money doesn’t use it exactly the way it was intended or doesn’t call more often. And the person who received the gift may feel burdened by an obligation to visit more that isn’t the same as love.
Next page: Final income taxes
Final income taxes
There is at least one final personal tax return your executor will file on your behalf. A terminal return is much like your annual personal tax return, with a few notable differences. Unless you are leaving these assets to your spouse or partner (common-law or same-sex) or in a few exceptions to minor or disabled children, CRA wants you to settle up any deferred or outstanding taxes on your registered assets (RRSP, RRIF, LRSP, LIF, etc.) and profits on your non-registered assets. Otherwise, the following have to be included on your final tax return:
• The market value of your registered assets (not left to minor children) as of the date of death. Your executor should be able to get a statement as of the date of death.
• A calculation of the profits on each non-registered asset (untaxed capital gains) based on the market value as of the date of death. For tax purposes, these assets are deemed to have been sold, even though no actual sale may have taken place.
Plan to reduce your final bill
If you don’t want the government to be one of your estate’s major beneficiaries, you shouldn’t miss a planning opportunity. Here’s a list of ideas.
1. If you have a spouse or partner (common-law or same-sex), leave him or her your registered assets and those assets that have untaxed capital gains. Deferring the tax on these assets helps to preserve their value for your partner’s needs as well as offers the opportunity for them to increase in value over time.
2. In your will, provide your executor(s) with discretionary powers to make elections under the Income Tax Act that would be in the best interests of the estate and the beneficiaries that may not have existed at the time your will was prepared.
3. Have an accountant review the final tax return to ensure no more tax is paid than necessary. It is not necessary for your executor to be an accountant. Giving your executor the authority to hire and pay for the services of a professional accountant can be money well spent, given that it is the executor’s job to ensure all income taxes due are paid.
For example, where a deceased spouse has capital losses or other deductions that might otherwise be lost, the executor may elect to declare enough taxable capital gains to offset the capital losses and any other deductions so any related tax savings are not lost. Then the remaining assets with capital gains can be rolled to the surviving spouse. Otherwise, some people may be reluctant to take on the job of being an executor and face any potential liability with CRA.
4. The executor may be able to file up to three optional returns on behalf of the deceased. If applicable, this could save the deceased tax because certain tax exemptions and credits can be used more than once. These optional returns are for:
a) Earned business income from a partnership or sole proprietorship with a year-end that was not Dec. 31.
b) Income from a testamentary trust with a year-end that was not Dec. 31.
c) “Rights and things” that were due, but not yet paid. Rights and things could include vacation pay, salary, commission income and/or investment income.
5. If you have more than one residence, determine which is your primary residence. Capital gains on your principal residence are exempt from tax.
6. Spend more on yourself while you’re alive. If you have to withdraw money from your RRSP early or sell some investments, you could end up in a higher tax bracket today. You could also end up in a high tax bracket in the year of death. But this is your money, and I’m all for enjoying your money in your retirement, not just maximizing your estate. A successful estate plan includes you as one of your own beneficiaries through your retirement.
Note: Buying life insurance to pay your tax bill does not reduce the amount of that bill.
Tax on U.S. assets
If you own property in the U.S. or are married to an American, you may be required to pay U.S. estate taxes based on your total wealth in addition to the amount you owe CRA. There are at least three things to consider regarding your U.S. assets:
• In 2002, the U.S. started to lower its estate tax rates. By 2010, the goal is to have eliminated current estate and gift taxes. But a “sunset” provision could restore these taxes and rates in 2011 to pre-2002 levels.
• The Canada-United States Tax Convention provides Canadians with some relief from double taxation. Essentially, your executors can offset a portion of your Canadian tax bill by reporting the amount paid to the IRS.
• The IRS likes to be paid in U.S. dollars. If the Canadian dollar is down in value at the time your executor takes out the pen to write the cheque (or should I say check?), the currency conversion will take an additional bite out of your estate.
When the spouse or partner in the household dies, the most immediate financial concern is, “Can I get my hands on enough cash to buy the groceries?” Your estate plan should ensure this can be done and cash is available before the will is probated. This could be as simple as the survivor having access to a joint account.
What happens when a business owner dies? If he or she is the sole director and individual with signing authority, the business can not carry on as usual. Until the family, professionals and the bank sort it out, not even the bills can be paid. Your accountant, lawyer or adviser can discuss your options. Tying the hands of a business can be hurt its reputation or even put it out of business.
No one wants to pay any more tax than necessary. Unless you plan, your estate may be much smaller than you anticipated.
Next page: Probate taxes/fees across Canada
Probate fees/taxes across Canada
$25 for the first $10,000, progressing to $400 on amounts over $250,000.
$0 for estates under $25,000.
If the estate is greater than $25,000, $6 per $1,000 on $25,001 to $50,000, $14 per $1,000
$50 for first $10,000.
Over $10,000, $50 plus $6 per $1,000.
$25 for the first $5,000, progressing to $100 on next $5,001 to $20,000.
Over $20,000, $5 per $1,000.
$75 for first $1,000 and $5 for each additional $1,000.
$75 up to $10,000;
$150 on next $10,001 to $25,000;
$250 on $25,001 to $50,000;
$500 on $50,001 to $100,000;
$600 on $100,001 to $150,000;
$800 on $150,001 to $200,000;
Over $200,000, $800 plus $5 per $1,000.
$5 per $1,000 on first $50,000 plus $15 per $1,000 thereafter.
PRINCE EDWARD ISLAND
$50 up to $10,000;
$100 on $10,001 to $25,000;
$200 on $25,001 to $50,000;
$400 on $50,001 to $100,000;
Over $100,000, $400 plus $4 per $1,000.
$0 for notarial will.
$7 for first $1,000 and $7 for each additional $1,000.
$0 for estate under $25,000, $140 for estate over $25,000.
$8 on the first $500;
$15 on the next $501 to $1,000;
Over $1,000, $15 plus $3 per $1,000.
$8 on the first $500;
$15 on the next $501 to $1,000;
Over $1,000, $15 plus $3 per $1,000.
*NOTES: In addition to probate tax, some provinces also charge additional fees for setting up a file, as well as relatively small “nuisance” fees for paperwork related to the file, such as searches and making copies. The value of estate – for probate purposes – is calculated according to the rules of each province. These rules may or may not allow deductions for items such as debts or property located outside the province.
Source: You Can’t Take It With You by Sandra Foster, compiled from various sources believed to be accurate as of Jan. 1, 2005.
Fees are set by the province or territory and are subject to change.
Sandra Foster is the author of five financial books, including You Can’t Take It With You: The Common-Sense Guide to Estate Planning for Canadians (John Wiley & Sons, 2002).