Recently a good friend confided to me that her Dad had just added her as a signing authority on his bank account. The reason that he did this was because someone at the bank had told Dad that he would be subject to a bunch of taxes if he were to pass away.
This prompted a number of questions from both father and daughter. What are estate taxes in Canada? Are there ways to avoid these taxes? How much would these taxes be?
The good news is that there was a bit of an unnecessary element of fear in the conversation. We don’t have “death taxes” per se in Canada. While it is true that there can be taxes triggered by a person’s death – common examples are taxable capital gains or RRSPs that do not have a spousal beneficiary – there is no special tax on estates.
What the bank clerk was probably referring to was probate fees. Basically, probate fees are charged by the province to declare that a will is valid. But probate fees have become a bit of a boogeyman. People don’t always understand them, often make them out to be a big deal, and subsequently fear them.
Probate fees differ across the provinces. At a rate of 1.4 percent on estates above $50,000, BC has some of the highest probate fees in the country, and there is no upper limit. The bigger the estate, the bigger the probate fee.
For example, if you have an estate of $300,000 you are looking at $3,858 in probate fees just for the province to say that you have a valid will. A lot of people would like to plan ahead in order to minimize these fees.
Probate fee reduction strategies center on the idea of transferring assets to someone outside the will. It’s simple, really. You own something. You want it to go to a beneficiary. Eventually you are going to die. If the asset is transferred via the will you pay probate fees. But if you can transfer that asset outside of the will, no probate fees. It can be as easy as that.
There are several ways to transfer assets outside the will. The simplest way is simply to gift an asset while you are alive. If the transfer happens before you die the asset doesn’t form part of your estate.
Insurance products are another way to transfer assets. With a life insurance policy, or a segregated investment fund you can name a beneficiary. On your death the funds go directly to your beneficiary, not to your estate.
Another method of reducing probate is to own an asset jointly with someone. If you are thinking of doing this you need to be careful, though. Joint ownership can have some unintended consequences.
Obviously nobody wants to pay more money than they have to. And fortunately, with some advance planning you can minimize probate fees. And you should, too.
But bear in mind, we are only talking about a maximum probate fee of 1.4 per cent. Sometimes a person may be so focused on minimizing probate fees that they accidentally shoot themselves in the foot. If a person is not careful there are worse things that could happen than probate fees.
Let’s say that a person has $100,000 in the bank and a duplex that she bought for $80,000 as an investment property that is now worth $150,000. She has two children as her beneficiaries, and she is concerned about probate fees.
She wants to transfer the money to the kids free of probate. One of the kids is pretty sharp, so Mom puts the assets into joint ownership with the smart cookie so that the bright child can look after things in the meantime, with the idea that the two kids would eventually share equally in the estate.
Well, that sounds pretty easy, right? Unfortunately this all too common scenario is going to have some consequences.
The first thing is that it is going to trigger taxes on the duplex. By transferring the ownership of the duplex from her name into joint ownership with her child the lady has deemed to have disposed of the asset for tax purposes, even though she didn’t really sell the investment property. This means the $70,000 increase in the value of the duplex is considered a capital gain, fifty percent of which is taxable at the lady’s marginal tax rate.
The second thing is that the child that is now on title is a bonafide owner of the assets. One obvious implication is that there is nothing stopping the child from draining Mom’s bank account, but there are some less obvious possibilities too.
What happens if the child goes bankrupt? Now these assets will be exposed to the creditors of the child. What happens if the child gets divorced? Now the child’s ex-spouse may go after the child’s share of Mom’s assets. What happens if the child dies first? Now part of Mom’s assets are going to form part of the child’s estate, and ownership goes to the child’s beneficiaries.
Nobody wants to pay more in probate fees that they have to. And a proper estate plan designed by a team of professionals will take probate fees into account. But beware of simplistic solutions to probate fees- they may have unintended consequences.
