In some countries, including the United States, an estate (or inheritance) tax is imposed on an individual’s assets and is calculated at the date of death. There is no inheritance tax in Canada. However, Estate Administration Tax in Ontario, or more commonly known as probate fee is imposed on the value of parts of a deceased’s estate assets. Each province has its own probate fee rate with Ontario’s probate fee rate being one of the highest across Canada.

For estates with significant wealth accumulated, it is important to project the probate fee payable and to proactively plan to reduce the probate fee and preserve the family wealth.

What is Probate?

Probate is the formal process of having a deceased person’s Will validated and to confirm the authority of the executor named in the Will by the courts. Probate may be required prior to transferring legal ownership of real properties, or to deal with investment or bank accounts held at financial institutions.

Probate fees must be paid to the provincial government when an estate is applying for probate. The amount of the probate fee payable is based on the estate value multiplied by the probate rate applicable in that province. In Ontario, probate fee is calculated as 1.5% of the estate assets over $50,000. If probate planning was not considered, the estate could face liquidity issue and be forced to liquidate some of the estate assets to fund the liability.

The application of probate is normally made in the province where the deceased resided at the time of death. If the deceased owned real property outside the province of residence and the real property is subject to probate, it would also be necessary to obtain probate and pay probate fees in the jurisdiction where the real property was located.

Assets Subject to Probate

The assets that are subject to probate are only those that pass through the estate and are under the administration of the Will. Assets that may be excluded from probate include:

  • Joint Ownership – Jointly owned real properties, bank accounts and investment accounts with a right of survivorship;
  • Beneficiary Designation – Registered Retirement Savings Plans (RRSPs), Registered Retirement Income Funds (RRIFs), Tax-Free Savings Accounts (TFSAs) and life insurance policies with a designated beneficiary;
  • Secondary Will – Shares of private corporations that are covered by a secondary Will.

It should be noted that if probate is required on certain assets of the estate, all the assets administrated by the same Will must be included in the estate value upon which the probate fee is calculated. For example, if the deceased has the following assets and all the assets are administrated by the same Will, the total estate value subject to probate would be $6,100,000, and the probate fees payable would be $90,750.

Asset

Value on death

Value subject to probate (without planning)

Real property

$1,000,000

$1,000,000

Jewelry & personal effects

$100,000

$100,000

Shares in a private corporation

$5,000,000

$5,000,000

Total

$6,100,000

$6,100,000

Probate fee payable

$90,750

 

Probate Fee Planning

Some commonly used strategies to reduce probate fee includes:

  • Holding property in joint ownership with a right of survivorship;
  • Designating beneficiaries for RRSPs, RRIFs, TFSAs and life insurance policies;
  • Holding property in a trust, including a family trust, an alter-ego or joint-spousal trust; and
  • Reducing the value of the estate by making gifts before death or implementing an estate freeze to ‘freeze’ the value subject to probate.

Another common strategy in Ontario to reduce probate is the use of multiple Wills. The strategy involves preparing two Wills: the primary Will generally includes assets that cannot be transferred without probate, such as real estate properties and accounts at financial institutions; and the secondary Will deals with all other properties that do not require probate to be transferred, including shares in private corporations.

It may also be possible to hold certain assets, such as real properties and non-registered investments, through a bare trust corporation. If properly executed, the value of such assets could be excluded from probate as well. Additionally, it may be preferable to transfer certain assets to a private company. The transfer generally could be executed on an income tax-deferred basis. The shares of the private company could then be included in the secondary Will, which is not subject to probate.

Continuing with our previous example, with proper probate fee planning, the estate asset value of $6,100,000 subject to probate can be fully removed from the probate fee calculation, by implementing various strategies discussed above, resulting in no probate fee payable. The savings of $90,750 of probate fees will preserve the estate wealth for the beneficiaries by avoiding estate asset liquidation to fund the probate fee.

GG Observations

It is beneficial to consider probate fee planning strategies as part of estate planning. However, careful consideration is required to ensure the probate fee planning is consistent with an individual’s objectives. For example, the transfer of property by gift to children may be viewed as a disposition for income tax purposes, resulting in immediate income tax liabilities. Simply designating one of the children as a beneficiary of an RRIF account may lead to unintended wealth distribution results. It is important to seek professional advice to make sure your probate fee planning works in the way desired.

Grewal Guyatt LLP has extensive experience in estate planning and probate fee planning. We can help you calculate your current probate fee and assist you with strategies to reduce the probate fee and achieve your overall estate planning objectives. For more information and assistance with estate planning and probate fee planning, please contact our tax team.

Authors

Mandeep Khosa

Mandeep Khosa, CPA, CA

Tax Partner

Learn more about Mandeep

Contact Mandeep

Email: mandeep@grewalguyatt.ca
Direct: (905) 780-3117

Elise-Liu

Elise Liu, CPA, CA, MMPA

Manager – Taxation

Learn more about Elise

Contact Elise

Email: elise@grewalguyatt.ca
Direct: (905) 479-1700 ext. 4016