Death and taxes are two certainties in life, and taxes are also a certainty in death.
While there is no inheritance tax in Canada – meaning that your beneficiaries will not pay taxes on the gifts you leave to them – there are two main types of tax that your estate will incur after you pass away: your final income tax return, and probate fees, which are otherwise known as estate administration taxes (if your estate requires probate, there is a tax on the estate assets as part of this process). Your executor will be in charge of paying your final tax bill, and paying any probate fees associated with the estate.
There are several ways to pay in advance to eliminate or minimize your estate administration taxes, which leaves more money in your beneficiaries’ pockets. However, keep in mind that there may be adverse consequences that may result – for example you may incur more tax if you don’t structure your assets or policies in the correct way. Generally, saving income taxes is considered far more beneficial than saving estate administration taxes, and if there is a conflict between the two, you should concentrate on saving income taxes even if it means your estate administration taxes aren’t reduced. This is why estate planning should be a top priority when considering you and your loved ones' financial future.
So how do you reduce the taxes your estate pays after you pass away? There are a few ways to do this, mostly related to joint ownership of assets, naming beneficiaries on investments and/or life insurance policies, and setting up trusts.
Some examples are as follows:
- Assess the possibility of administering the estate without a probated will – not all wills need to go through probate, and by avoiding probate, your estate will avoid the associated probate fees in your province;
- Register ownership of assets jointly with right of survivorship – if assets are owned jointly, they pass to the other owner without flowing through the estate. Note that owning a property jointly with “tenants in common” is different (there are exceptions to this – speak with a real estate lawyer or financial advisor about the nuances);
- Designate beneficiaries on registered funds like RRSPs, pension plans, life insurance policies, etc. – any policies with a named beneficiary will go directly to that person and bypass your estate
- Register real estate under the Registry Act system (not Land Titles Act), which does not require a probated will to be administered;
- Make inter vivos gifts, which transfers an asset to someone while you’re still alive (these are transfers of property during the lifetime of the transferor, and cannot be revoked once made);
- Transfer ownership of assets to an inter vivos trust (this is a trust you make while you’re still alive)
- Use altar ego trusts and joint partner trusts; these are complex trusts that require the assistance of a lawyer
- Change the location of an asset to a jurisdiction outside of your province
- Use multiple wills – through this method, you can separate assets by: 1) assets which require a probated will; and 2) other assets which do not require a probated will – your estate will save on taxes for the assets that do not have to be probated
- Leave a charitable bequest – just like charitable donations reduce your tax burden while you’re alive, charitable donations reduce the tax burden on your estate (you can easily leave a cash gift or percentage of your estate to charity using Willful)
In Ontario, a new statute called the Estate Administration Tax Act (EATA) requires that you pay estate administration taxes on the value of the assets passing through the estate of the deceased, as part of the process of obtaining the certificate of appointment of estate trustee (the certificate that formally appoints the executor of an estate).
Anyone who receives a certificate of appointment of estate trustee – whether you were named the executor in the will or appointed as an administrator for someone who passed away without a will - now has the additional obligation of completing and filing an Estate Information Return with the Ontario Ministry of Finance. The initial information must be filed within 90 days of receipt of a certificate of appointment of estate trustee. This additional requirement of having to complete and file the Return has increased the burden on the estate trustee, which is already a very time-consuming position, as well as the costs associated with the administration of an estate. The motivation behind the new requirement is likely to ensure that all necessary estate administration taxes have been paid.
These are just suggestions, and the Willful platform is only able to assist in simple estate planning. For advice, speak to a financial planner.