Estate Tax
WHAT YOU NEED TO KNOW
“Taxes can be delayed but not avoided” is a familiar refrain, but in the case of Estate Taxes (formerly known as “Probate Fees”), taxes can be avoided completely, with some careful planning.
The Ontario “Estate Tax Act” taxes an estate whenever the deceased’s Will is probated or, if there is no Will, whenever an “Estate Trustee without a Will” is appointed to administer an estate. The tax can be substantial. Unless the estate’s assets are less than $1,000, the tax is 0.5% on the first $50,000 and 1.5% on the excess (after deducting real estate encumbrances). So, if the estate assets are $200,000, the tax is $2,500.
Probate - proof of the Will - is a court declaration that the Will is valid. Whether probate is needed, and whether the tax is payable, depends on the assets to be administered. For example, if the deceased’s assets are a life insurance policy payable directly to the surviving spouse, and joint ownership in the home and some joint bank accounts, then probate is not needed. The insurance and joint assets will pass directly to the survivor outside the Will. Even if assets do pass through the Will, probate is not always needed. For example, a bank may not require probate if the funds on deposit are not large and if a suitable indemnity can be provided.
Avoiding the tax is relatively simple if assets are to go to a spouse, since spouses can conveniently hold legal title as joint owners. But what if assets are to go to a child? Can the legal title be held jointly with a child while retaining the entire beneficial ownership with the parent? Yes. The parent can share “legal ownership” with a child (and list the child as a joint owner on public documents) while retaining beneficial ownership. The child should confirm this in writing, undertake to do all things regarding the property as directed by the parent while the parent is alive, and on the parent’s death, undertake to transfer the property as directed by the parent’s executor without requiring probate of the parent’s will. Because there is no transfer of beneficial ownership during the parent’s life, there would normally be no “deemed disposition” of the property for income tax or capital gains purposes. Caution should be exercised, of course, in drafting such a “Non-Beneficial Acknowledgment”.
Because tax laws change so rapidly, please do not rely on this suggestion without first checking with a tax professional. Probate planning, like all tax planning, requires careful consideration of each asset. The total cost of the transfer or succession of property can be affected by foreign and domestic taxes, capital gains tax, probate costs, GST, land transfer tax, and various legal transfer costs. However, as a general rule of thumb, the best Will is often the one which administers the least - where everything goes to the survivor(s) outside the Will, and where estate taxes, foreign and domestic, are kept to a minimum.
Michael Woods and John Allen are associated lawyers located in Toronto and Mississauga. In Toronto, please call John at 865-0303 ext 2. In Mississauga, please call Michael at 905-568-1206. Website: http://www.virtual-law.com
This article is for general information only. A lawyer should be consulted regarding specific circumstances.