Unlike the United States, Canada does not have an Estate or gift tax. However, when the estate is transferred to the beneficiaries upon the death of the estate owner, it is deemed to be disposed of at the fair market value. A deemed disposition triggers capital gains tax if the value of the estate has increased. These taxes are payable by the estate. Without proper estate planning, a significant portion of your estate could go into paying taxes and probate fees. To reduce or avoid probate, you should first understand how probate works.
How Probate Works in Canada?
If the estate owner has a Will, the executor must present it to the probate office and pay probate fees to obtain legal authority to transfer the assets under the Will. In the absence of a Will or executor, the court appoints someone to manage the estate and issues a document called a Letter of Administration.
Probate fees, also known as the Estate Administration Tax (EAT), vary by province. Some provinces charge a flat fee, while others charge a percentage of the estate’s fair market value on the date of death. Even if one asset requires probate, it can trigger fees on the entire estate. This is the point that estate planners use to reduce probate fees.
5 Strategies to Protect Your Estate from Probate
The key to avoiding probate is to reduce the size of the estate that is subject to probate. An estate comprises various assets such as your business, investments, jewellery, artwork, real estate, and vehicles. You can eliminate most of these assets from your estate using various strategies. However, be mindful of the capital gains tax that could be triggered from the transfer of assets.
Gifting Assets During Lifetime
An estate owner can gift various assets to their loved ones over their lifetime, thereby eliminating them from the estate. Canada does not have a gift tax, but any amount received as a gift is taxable in the hands of the recipient. So if you gift a house to your children, they must pay tax on the rent. Meanwhile, the transfer of property ownership is deemed a disposition that will trigger capital gain tax for you. Another consideration is that you will no longer be able to benefit from the asset once it is transferred, which may mean you have to pay rent.
A tax consultant will determine which assets will benefit from gifting and help you time the gift.
Joint Ownership with a Right of Survivorship
You could also consider owning the asset jointly with another person, such as a spouse, with a right of survivorship. In such a scenario, the asset will automatically transfer to the surviving spouse without the need for probate. High-value assets such as land and a house can be jointly owned. This will significantly reduce the value of your estate that is subject to probate.
However, the surviving owner will lose their partner’s principal residence exemption (PRE) and will have to pay capital gains tax on their deceased partner’s share. Moreover, if the surviving owner has debt, the asset will be exposed to that owner’s creditors. A tax advisor and estate planner will help you navigate a joint ownership structure and manage capital gains.
Naming Beneficiaries for Registered Accounts
You can also name your spouse as a beneficiary on various investment instruments, such as life insurance policies, segregated fund contracts, and annuities. You can add your spouse as a beneficiary in registered savings accounts, like a Tax-Free Savings Account, Registered Retirement Savings Plan, and Registered Retirement Income Fund. The designation of beneficiary overrides the instructions in the will and need not go through probate, significantly reducing the assets in the estate.
The drawback of designated beneficiaries is that they are not flexible. You cannot transfer these funds to minor or disabled beneficiaries, and you cannot gift them to someone if the named beneficiary has passed. If the designated beneficiary is someone other than a spouse or common-law partner, the transfer of funds is deemed a withdrawal and is taxable. It may not be a viable option for those without a spouse.
Setting Up Inter-Vivos Trusts
If your estate is significant, you could consider establishing a trust and transferring assets to it. This transfer could trigger a tax event. If you are over 65, you can defer this tax event by creating a joint partner trust or alter ego trusts, where you are the settler, trustee, and beneficiary. Since the assets have been transferred to the trust, they are removed from your estate, unless the beneficiary of the trust is your estate.
The trust handles the distribution of assets, eliminating the need for probate. However, trust has reporting requirements you must adhere to.
Multiple Wills
As we said before, an estate comprises multiple assets. While you can use joint ownership for property and a designated beneficiary for investments, some assets may be left in a will. Even if one asset requires probate, it can trigger fees on the entire estate. In such a scenario, you can make multiple wills. One will for assets that require probate and the other for assets that don’t need probate. Upon the death of the estate owner, the executor can present the will that needs probate and pay probate fees only on those assets.
While the above strategies can help you reduce probate fees, they could trigger capital gains and other taxes or expose your estate to creditor risk. A team of professionals, from a tax consultant to an estate planner, can help you weigh the pros and cons of each strategy and create an estate plan that mitigates tax and probate fees and preserves your wealth from tax and creditors.
Contact Black and Gill LLP in Etobicoke to Help You with Estate Planning Needs
Talk to a professional tax consultant to discuss the treatment of various assets in the estate and how to smoothly transfer them to beneficiaries with minimal tax liability and probate fees. At Black and Gill LLP, our tax consultants and estate planners can provide services such as estate and tax planning and the creation of a trust. To learn more about how Black and Gill LLP can provide you with the best estate planning and taxation services, contact us online or call us at 416-477-7681.