DON’T LET THE TAIL WAG THE DOG!

A lawyer’s perspective on minimizing Probate Fees.

By David Thomas

One of the less endearing moves of Bob Rae’s government was to triple Ontario’s Probate Fees on estates to 1.5%. The present government, knowing a cash cow when it sees one, has not reversed this. Since the increase, many people have been jumping through hoops to avoid this tax - sometimes to their detriment.

Saving tax is a good thing, but it is important to look at the big picture, and get some competent advice. Good estate planning involves starting with your long-term objectives, and then figuring out, with expert advice, the best way to accomplish them. Too much attention to tax savings can lead to unintended consequences. In this article are some examples of how too much concentration on avoiding one tax can cause problems.

The Estate Administration Tax (formerly knows as Probate Fees) is levied when an Estate Trustee applies to the Court for a Certificate of Appointment (formerly called Letters Probate).

Applying for a Certificate of Appointment is often necessary in order for an Estate Trustee to deal with some kinds of assets, especially money invested with financial institutions, or in stocks. This is because third parties, such as financial institutions, can rely upon the Certificate of Appointment, and don’t have to worry about another will popping up later.

The Estate Administration Tax is charged on the value of assets which are part of an estate. It is not charged on assets which pass outside your estate. For example, the following kinds of assets pass directly to a beneficiary, or to a surviving owner outside an estate, and are not subject to this tax:

a home owned by two or more people as joint tenants.

a life insurance policy which is payable to a named beneficiary.

an RRSP or a RRIF which is payable to a named beneficiary.

investments, or bank accounts, which are owned by two or more people as joint tenants with right of survivorship.

Here are a couple of examples of what can go wrong:

1. Consider a widow who owns her home. Her two children suggest she add them to the title as joint tenants, so that on her death title passes to them, and no Estate Administration Tax is paid on the value of the house. The two children will own the house equally and can keep it, or sell it, as they wish. This is fine, but what if things don’t go as planned? For example:

- What if one of the children becomes bankrupt before the mother dies?

- What if one of the children gets divorced? Will his or her part ownership of the home be included in calculating what the divorcing spouse gets?

- What if the mother wants to sell the house to pay some of her bills, and the children don’t want to cooperate?

- What if the mother and one of the children have a falling out, and she wants to cut one out of her will? by then, it’s too late to take the house back.

The widow could cause herself a lot of trouble, by trying to save her kids 1.5% down the road.

2. Income tax also has to be considered. The fact that an asset goes outside the estate does not mean there is no income tax payable. Often, the tax is paid by the estate, and not by the person who ends up with the asset. Consider a father who has three sons. He has three major assets:

- an RRSP worth $400,000.00,

- about $400,000 in a stock portfolio, which he had bought for $200,000.00, and

- a small apartment building worth about $400,000.00, which he bought for $200,000.

He names one son as the beneficiary on his RRSP, makes the second son a joint owner of the stock portfolio, and leaves the apartment building to his third son in his will. He thinks he has treated them equally, and saved a lot of Estate Administration Tax. On his death, the first son gets the RRSP outright, as beneficiary. The second son gets the stocks outright. The third son gets the apartment building. The tax man then comes knocking on the third son’s door. He has to sell the building to pay the tax on the RRSP, the tax on the capital gain on the stocks, and the tax on the capital gain on the apartment building. He will probably get nothing.

These cautionary tales are meant to say three things:

1. Get good advice from experienced advisers.
2. Tell your advisers the whole story.
3. Consider the risks carefully. Saving that 1.5% can be very costly otherwise!

These articles are provided as general information only, and should not be considered to be legal advice. For advice on a specific situation, please see one of our lawyers.