Do you have to pay ‘death tax’ in Canada?
Dear Money Lady,
I have heard that you have to pay taxes upon your death. Is that the case in Canada? And how is it determined? As an older man, I am worried about whether or not I will be able to afford this, and I would prefer to not make my children pay for it.
We do not have a “Death Tax” - but we do have probate!
In the United States, death tax is required on all assets of the deceased and calculated at the date of death. This is not something we do in Canada.
I think what you are thinking of is probate “tax” which is determined provincially and is very different from our US neighbours. Essentially, probate is a court proceeding which provides a judicial approval that the will provided is not to be contested, that it is the only will in existence, and that the executor has the authority to act and be recognized by the courts.
All banks, investment companies and financial institutions usually require a probated will to ensure they are dealing with the authorized executor. If there are any lawsuits or claims against the estate, the will must always be probated.
Probate is not a tax; it is a fee that varies by province. In some provinces, it is a fixed amount, while other provinces charge a prescribed rate on the gross value of the entire estate.
So, are there ways to reduce the probate fee? Yes. One way would be to have assets bypass probate and pass directly to beneficiaries. TFSAs, RRSPs,
RRIFs or the proceeds of life insurance are not subject to probate; however, the tax associated with any registered plans will need to be paid by the estate and therefore one
should always ensure your estate has liquidity.
Another way to avoid the potential cost of probate would be to “gift” cash or assets to family members prior to death. It is advisable to discuss this option with a good tax accountant to ensure there are no adverse income tax consequences.
Property can also be sidestepped from probate by simply holding it in joint tenancy with right of survivorship. This is how most spouses hold assets – jointly, so that property passes to the survivor on the first death with no requirement to obtain probate.
Be careful if you plan to transfer title of a property to anyone other than a spouse. You many need a written declaration to prove that there is a clear intention to transfer the beneficial interest in the asset from sole ownership to joint tenancy with right of survivorship. A declaration ensures the asset is not subject to probate, but you still may be on the hook for capital gains tax, which will be triggered upon title transfer as a deemed disposition at fair market value.
Remember to seek professional advice. Talk to your accountant, your advisor or your estate planner. They will know your situation best and can provide other ways to avoid probate, such as testamentary trusts, inter-vivos trusts or perhaps the use of multiple wills.
Good luck and best wishes, Money Lady
Written by Christine Ibbotson, Author of the best-selling book, How to Retire Debt Free & Wealthy, and a new book, Don’t Panic – How to Manage your Finances and Financial Anxieties During and After the Coronavirus, available at all bookstores across Canada. If you have a money question, please email on website: www. askthemoneylady.ca