There is often confusion surrounding the concept of "estate tax" in Canada. Many people mistakenly believe it is a "death tax" that automatically applies upon death, or an "inheritance tax," which is the responsibility of a beneficiary.
"Estate tax" in Canada is, simply, a fee paid in the course of administering an estate, which reflects the value of the individual's assets administered in accordance with a probated will.
In Ontario, estate tax is commonly referred to as probate tax, but is more formally known as estate administration tax. Estate tax is a fee payable by the deceased's estate, and is paid by the personal representative of a deceased's estate, typically as a pre-requisite to the issuance of a Certificate of Appointment of Estate Trustee -- otherwise known as "probate."
The amount of estate tax payable is specifically tied to the value of the assets of the deceased at the time of his or her death. Under the Estate Administration Tax Act, 1998, SO 1998, c 34, Sched, the amount of tax payable prior to the issuance of a Certificate of Appointment is $5 for each $1,000 of the first $50,000 of the value of the estate, and $15 for each $1,000 that exceeds the first $50,000 in estate assets.
In Ontario, under the Estate Administration Tax Act, 1998, the value of the estate includes "all the property that belonged to the deceased person at the time of his or her death less the actual value of any encumbrance on real property that is included in the property of the deceased person." According to the Ministry of Finance, only assets located in Ontario are to be included in calculating the value of the estate.
Federal income taxes also become payable in respect of assets of an estate. Upon death, there is a deemed disposition of all of the deceased's assets, subject to certain exceptions. Accordingly, if the deceased owned any capital assets that appreciated in value during the time that the deceased owned them, any capital gains will be taxed.
Additionally, if the deceased owned any tax-sheltered assets, including Registered Retirement Savings Plans ("RRSPs") or Registered Retirement Income Funds ("RRIFs"), their tax-deferred status will be lost upon the deceased's death, unless the deceased had undertaken estate planning in relation to those assets in such a way that the asset rolls over to a spouse without triggering a tax liability.
The key to minimizing the federal and provincial taxes payable upon death is to make an estate plan. Many individuals consult with professionals, including lawyers, accountants and financial advisors who can provide advice and planning assistance with respect to strategies for tax deferral or reduction. Such strategies may include charitable bequests or life insurance proceeds to fund estate tax liability.
Currently, Ontario has the highest estate tax in Canada. Although there was a recent attempt to address this issue by setting a cap on the amount payable at $3,250.00, the private member's bill that proposed this amendment was voted down at second reading on Sept. 24, 2015.
As a result of the high amount of estate tax payable, the desire to avoid the tax, and the use of methods and strategies for removing assets from an estate and transferring them directly to beneficiaries, has become more popular.
This includes the use of joint assets, gifts during the testator's lifetime and beneficiary designations. Such methods are often highly effective in minimizing the tax payable and, in some cases, may avoid the need for the probate process altogether.
The concern that arises from such estate planning, however, is that the planning may have been undertaken with the main or sole aim of reducing estate tax, and can lead to questions regarding the deceased's true intentions, increasing the likelihood of estate litigation.
Particularly in the case of joint bank accounts, for example, which are often held jointly for convenience purposes and estate administration tax avoidance; there is plenty of opportunity to challenge a transfer of property into joint tenancy based on a deceased's intention to benefit multiple beneficiaries equally and the presumption that the asset, once transferred by right of survivorship, remains subject to a resulting trust in favour of the estate.
It is of the utmost importance that individuals understand the impact of the types of planning tools that can be used to avoid estate tax in order to ensure that they are able to plan their estate in a way that is as tax-efficient as possible, while still representing their wishes.
It is crucial to obtain advice during the course of estate planning, and to ensure that advice is sought continuously over time, particularly in the event that there is a change in circumstances, or a significant disposal or acquisition of assets.
There are a variety of legitimate strategies for minimizing tax payable by one's estate, but it is vital to ensure that such strategies are implemented effectively and in keeping with testamentary wishes.
Ian Hull and Suzana Popovic-Montag are partners at Hull & Hull LLP, an innovative law firm that practices exclusively in estate, trust and capacity litigation. To watch more Hull & Hull TV episodes, please visit our Hull & Hull TV page.
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