Strategies to Reduce Probate Tax
One of the essential objectives of estate planning is to reduce the amount of probate tax payable on your death. Ontario has a higher rate of probate tax than many other jurisdictions in Canada – it amounts to approximately 1.5% of the value of the assets in the estate (excluding real estate outside of Ontario and other exempt assets that pass to a named beneficiary or by right of survivorship). Therefore, probate tax in Ontario on a $1 million estate will be $14,500.
While this figure may seem high, lawyers are all too aware that this figure is nothing compared to the expense that may arise to your estate as a result of the trigger of capital gains tax, or the income tax consequences of certain assets (i.e. a second property such as a family cottage, for example) if your affairs are not properly structured. Furthermore, while the objective of reducing the amount of probate tax on your estate is important, its not always the case that obtaining probate should (or could) be avoided. The act of obtaining a seal of probate from the Court can start the clock running (i.e. limitation periods) on potential claims against your estate and also certifies the validity of your Will and confirms the powers that your Will grants to your executors (estate trustees).
Assuming that your Will may be subject to probate (and accordingly exposed to the payment of probate tax), the following are some strategies that may, in the right circumstances, reduce the amount of exposure to the tax:
1. Designating a beneficiary in a life insurance policy, RRSP/RRIF, or pension plan;
2. Multiple Wills (i.e. shares of a private company can be dealt with in a Secondary Will that does not require probate);
3. Joint ownership of assets with right of survivorship;
4. Transferring legal title to a bare trustee, i.e. a corporation;
5. Making gifts prior to your death; and
6. Establishing an alter ego or joint partner trust.
While these tax avoidance mechanisms have advantages, they can also have disadvantages (i.e. such as the loss of control and a trigger of income tax liabilities that may occur when property is transferred to joint ownership). Therefore its always wise to consult tax and estate professionals to ensure that the benefits of avoiding the estate tax outweigh the risks. It may well be that 1.5% on the value of your assets doesn’t seem like that much after all, compared to the alternatives available.
Sarah Hyndman Fitzpatrick