Certain farm properties may be eligible for a capital gains exemption which will minimize income taxes on your estate.

Be tax smart in your estate planning

By  Anthony M. Cusimano, Catholic Register Special
  • November 8, 2015

To make things as easy as possible for your family after your death, it’s necessary to understand the effect on your estate of probate fees and income taxes.

Probate fees (officially known as “estate administration taxes”) are paid to provincial governments to validate the authenticity of a final Will and to certify that the legal personal representative has the right to administer your affairs after your death.

Separate probate will be required for assets held in different provinces or countries.

Probate is generally required to sell real estate as well as deal with assets held by third parties (i.e. banks and stock brokerage). Ontario probate fees are based on the gross value of the estate, without taking off any liabilities other than mortgages against real estate.

The fees are 0.5 per cent on the first $50,000 and 1.5 per cent thereafter. An estate of $1,000,000 would bear a probate fee of $14,500.

Here are ways to minimize the cost of probating your Will:

1. Joint names: Hold assets in joint names with a right of survivorship. This allows assets to automatically pass to the surviving party. The fees will be payable only when the last survivor passes.

If an individual owns 100 per cent of an asset (i.e. real estate or marketable securities) and then puts it in joint name, a capital gains tax may arise. Be sure that if you put an asset in a joint name that this is your true intention, especially if other survivors exist. A survivor may have no obligation to share the asset, and litigation among siblings may result after the death of the original holder. Document in writing the true intentions.

Be aware that putting an asset in joint name may put it at risk should the joint owner be involved in a lawsuit, bankruptcy or divorce proceeding.

2. Named beneficiaries: If an insurance policy (RRSP, RRIF, pension etc.) plan has a “specifically named” beneficiary, the proceeds will pass directly to the named beneficiary without the need for probate.

3. Transfer assets to a trust prior to death: If you and your spouse are over 65 you can create a “living Will.” An individual can create an “alter ego” trust while a couple with joint ownership over an asset can create a “spousal” trust. The individuals retain rights to the assets until they pass away. Such trusts remain private and avoid probate delays in transferring assets to beneficiaries. There are administration and costs of maintaining such trusts.

4. Transfer assets prior to death: If you do not own the asset at death, then the estate value will be less. However, even though transferring assets can minimize the probate fee, you will lose control of the asset. Also, you may have a capital gains subject to income tax on the sale or gift of the asset (except principal residence). There may also be “land transfer tax” and “family law” issues on transfer of real estate prior to death.

Finally, consider your own future needs (i.e. financial, health care etc.) before transferring the asset.

5. Multiple Wills: Currently, probate is not required to transfer personal and household items and shares of private companies, so you should consider having two Wills.

However, they have to be carefully drafted to ensure that one does not revoke the other.

Income taxes come into play because, as a general rule, when you die you are deemed to have disposed of all of your worldwide assets at fair market value. So if the fair market value of your assets exceeds their original cost, they are taxed at the higher value.

Examples of assets subject to income tax would include real estate, securities, RRSP, RRIFs, jewellery and art. A “principal residence” may be fully or partially free from income taxes.

Cash is not subject to income taxes.

There are ways to minimize income taxes on your estate:

1. If a spouse or a financially dependent child is the beneficiary on your registered accounts (i.e. RRSP and RRIF), there is no income tax.

2. Personally held shares in a “qualifying small business corporation” as well as certain farming and fishing properties may be eligible for a lifetime capital gains exemption of $800,000 indexed to inflation. Certain steps need to be taken before death to ensure and maximize this exemption.

3. Consider transferring accrued gain assets before you die on a tax deferred basis via an “estate freeze” to other family members. In this way future growth and related income taxes are transferred and deferred to other younger members of the family. Be aware that this may give rise to income taxes, land transfer taxes on real estate transfers as well as income attributed back to the freezor unless proper steps are taken. This is complicated and requires professional advice.

4. If a surviving spouse exists, a spousal RRSP contribution may be possible within 60 days after the end of the calendar year of date of death

5. Assets that have appreciated in value can be left to a spouse specified or a spousal trust created in a Will. Ensure that the Will is properly drafted. This can lead to significant income tax deferral until the last spouse passes away.

6. A life insurance policy can help fund the death taxes.

7. Donations in the form of cash or assets to Canadian (and certain foreign) “registered charities” could result in significant tax savings. To understand the various types of charitable donations and how each is regulated it is important to receive professional advice.

8. Certain “post mortem” strategies should be used to minimize income taxes on a terminal tax return and future disposition of assets. This is especially true for a last surviving deceased spouse in the following situations: (1) He/ she owned a company of significant value; (2) there is significant appreciated “non-depreciable capital property” in the company; (3) the estate realizes a capital loss in the first year of the estate. Timing is critical and professional assistance should be obtained.

This article is meant to be general in nature. Each person’s situation is different and individuals should consult with a professional advisor, especially in light of recent and proposed changes to taxation law.

(Anthony M. Cusimano is a chartered professional accountant practicing public accounting in the Greater Toronto Area.)

Comments (1)

This comment was minimized by the moderator on the site

I was just reading about this topic on PlanBeyond. They brought up a great point about working with an estate planning professional when it comes to optimizing for taxes. There are so many options, it's hard to know what's really right for you...

I was just reading about this topic on PlanBeyond. They brought up a great point about working with an estate planning professional when it comes to optimizing for taxes. There are so many options, it's hard to know what's really right for you without working with a professional.

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