Death Taxes

Death Taxes

Canadian Deemed Disposition Rules on Death

On the day you die, you are deemed to have sold all your property (this includes capital property, depreciable property and partnership interests) at fair market value which is taxed in your final return.  Also on your date of death, your Registered Retirement Savings Plans (RRSPs) and Registered Retirement Income Funds (RRIFs) are collapsed and their market value is included as income of your final tax return.  However, income tax may be deferred if the beneficiary of the RRSP, RRIF, or estate is:

  1. your spouse or common-law partner
  2. a financially dependent child or grandchild under 18 years of age, or
  3. financially dependent mentally or physically infirm child or grandchild of any age.

As a consequence of your death, your estate could be subject to a substantial amount of income tax.  This is what drives most people to do some estate planning – to minimize these death related taxes.

 

Probate Fees

When you die, your Will gives your Executor legal authority to deal with your estate.  But when it comes time to sell or transfer certain assets registered in your name, a death certificate and probated Will are normally required.  Probate serves as proof to financial institutions, financial advisors and the land registry office that your Will has been certified by court as being your Last Will and Testament and that your Executor is the person who’s authorized to deal with your estate.  Probate also protects the Executor from liability in acting and making distributions should a more recent Will be found.

The probate fee is the fee that the court charges.  It is based on the fair market value of property that you own at the time of your death that passes through your estate[i].

Property that is subject to the British Columbia Probate Fee includes:

  1. tangible personal property situated in British Columbia,
  2. real estate situated in British Columbia (for example, fee simple or leasehold), and
  1. if you were resident in British Columbia immediately before the date of death, any intangible personal property[ii] you owned or had rights to, regardless of where it is located.

The amount of the British Columbia Probate Fee is:

  • ‘nil’ if the estate value is less than $25,000
  • $6 for each $1,000 or part of $1,000 of estate value in excess of $25,000, up to $50,000, plus
  • $14 for each $1,000 or part of estate value in excess of $50,000 together with a $208 fee payable to commence the application for the grant.

For example, if an estate has a gross value of $500,000, the total fee payable will be[iii]: $150 [($50,000 – $25,000) / $1,000 x $6] + $6,300 [($500,000 – $50,000) / $1,000 x $14] = $6,450.00

There is also an administration (filing) fee of $208 for estates with a gross value exceeding $25,000.

Probate or application for Letters of Administration is a rather complex matter.  It should not be attempted without the assistance of a lawyer unless the estate is quite simple.  If you retain a lawyer, a common fee is 2% of the value of the estate or 1% if the estate is worth more than $100,000.

Given the amount of Probate Fee, legal fees and other costs in order to obtain probate as well as the time delays to access assets due to a lengthy court process, it makes good sense to avoid the process of probate unless there is a good reason for having assets enter the estate – like where the cost of probate is small compared to the tax benefits and other advantages that are derived by having the estate directed to a Spousal Testamentary Trust, Testamentary Trust, or a Henson Trust (to preserve government disability benefits).

Note that through gifting assets prior to your death, you may reduce the value of your estate that is subject to probate.  However, when you make a gift, you are deemed to have received an amount equal to the fair market value of the gifted property.  This means that if you give away assets, you may have to report a capital gain on the property.  Also, last minute gifts may be subject to challenge as to whether they were in fact gifts and should form part of the estate.

 

U.S. Estate Taxes

The United States of America has the most powerful, diversified, and technologically advanced economy in the world.  Almost by definition, if you invest, you are likely to have some U.S. investments.  Canada, by contrast, has a fairly limited stock market in terms of number of listed “blue chip” stocks and the range of industries in which these businesses operate.

For “Canadians”, which we define those persons who are not U.S. citizens that are not resident in the U.S., that choose to own U.S. property (like U.S. stocks or U.S. real estate), we need to consider exposure to U.S. taxes – both income taxes and transfer taxes (in the form of the estate tax and the gift tax).  Where a Canadian holds U.S. listed stocks and bonds, U.S. income taxes come through the form of a withholding tax.  But there is another form of U.S. tax that we need to be concerned about called the U.S. Estate Tax – a tax on property owned at the time of one’s death. You should consider your exposure to the Estate Tax if:  (1) your total assets are worth more than $1.2 Million USD, or (ii) you own US real estate that you intend to bequest to someone other than your spouse.

Your exposure to Estate Taxes can impact your estate plans.  If you’re a U.S. citizen or U.S. resident or a Canadian with over $1.2 million USD worth of assets and own U.S. assets, you need advice from an expert as your planning needs to be coordinated for both the Canadian and US tax regimes.

If you own foreign assets in other countries, it is important to learn about their tax systems with regard to their transfer taxes (such as inheritance taxes, gift taxes, and estate taxes).  Through planning in advance of the purchase of such assets, it might be possible to not only minimize such taxes but avoid them altogether.

 

The Next Step

If you are considering doing some estate planning, it is a good idea to consult with a financial planner.  Doing so could help in identifying problems for which solutions can be developed with your estate planning lawyer to reduce or eliminate such costly taxes and transfer fees.  We provide estate planning at no extra charge to our clients.  If you are interested in becoming a client, please call me at (604) 288-2083 or email me at steve@lycosasset.com.

 

Written by Steve Nyvik, BBA, MBA ,CIM, CFP, R.F.P.

Financial Planner and Portfolio Manager, Lycos Asset Management Inc.

 

 

 

 

[i] Assets excluded from valuation for probate purposes are those that pass by operation of law outside of the estate.  Such assets include:

  • those where ownership is registered in Joint Tenancy which, on the death of the first person, automatically pass by operation of law to the surviving joint owners by right of survivorship;
  • Real estate you own that is located outside the province of residence (however, the jurisdiction where the real estate is located may impose its own probate taxes on that property);
  • Life insurance and insurance segregated funds (Insurance Act, R.S.B.C. 1996, c. 226, ss. 48, 49, 54, 57);
  • RRSPs and RRIFs where you designate a person as beneficiary under the plan (Law and Equity Act, R.S.B.C. 1996, c. 253, ss. 49 and 51);
  • Family Assets – The Family Relations Act, R.S.B.C. 1996, c. 128, creates a Tenancy In Common for property that is a “family asset” (as defined in s. 58 of the Act) upon the occurrence of one of the “triggering events” set out in s. 56 of that Act before the death of either spouse.  The portion that belongs to the deceased‘s spouse does not form part of the deceased‘s estate, and, conversely, a portion of the surviving spouse‘s assets may form part of the deceased‘s estate.
  • Voluntary Employer Payments – An employer may make voluntary payments in recognition of the your services.  These payments do not form part of your estate.
  • Benefits under an Employee Benefit Plan where you designate a person to receive a benefit payable under the plan on your death (see Law and Equity Act, s. 46).  If a valid designation is made, it appears that the benefit does not form part of the estate, although this is not expressly stated as it is in ss. 49 and 51;
  • Up to 3 months of unpaid salary or wages if you were subject to the Workers Compensation Act  (Estate Administration Act, R.S.B.C. 1996, c. 122, ss. 120-125).  Such wages do not form part of your estate and are not liable for the satisfaction of debts;
  •  Survivor pension plan retirement benefits (Section 24 of the Pension Benefits Standards Act, R.S.B.C. 1996, c. 352);
  •   Canada Pension Plan survivor’s pension and benefits payable to the children under age 18 or children over 18 and under 25 in full-time attendance at school  (note the death benefit forms part of the estate);
  •   Interests in Trusts – If you were a Trustee or a beneficiary under a Trust, the terms of the trust should be reviewed.  The trust documents may indicate whether your Executor will replace you as Trustee.  If you had a beneficial interest, the trust document may indicate whether your estate will receive a benefit;
  • Where you have a “Special Power of Appointment”

Where you are given the power to appoint property to whomever you please (including yourself), this is known as a general power of appointment.  The property subject to the power of appointment forms part of your estate.  However, a special power of appointment is restricted to appointing property to a particular class of persons that excludes yourself.  The property subject to a special power of appointment does not form part of your estate;

  • Imminent death donation – A person may, in expectation of his or her imminent death and conditionally upon it occurring, make a gift transferring the legal and beneficial ownership of personal property.  Such a gift is known as a donatio mortis causa, and such a gift does not form part of the donor‘s estate.  Note that no gift mortis causa of land is possible;
  • Contractual and other obligations – Your estate is subject to rights and obligations under court orders and contracts entered into during your lifetime, provided that the obligations survive your death.  Examples of the kind of obligations that could survive death include maintenance orders, marriage contracts, separation agreements and Buy-Sell agreements;
  •  Statutory Benefits – Statutory benefits that may become payable to your spouse, children or other dependants, such as compensation under the Family Compensation Act, R.S.B.C. 1996, c. 126, compensation for spouses under the Workers Compensation Act, R.S.B.C. 1996, c. 492 in fatal cases, and I.C.B.C. —no fault“ death benefits, do not form part of your estate.

[ii] Intangible personal property includes your stocks, bonds, notes, bank deposits, royalties and patents.

[iii]  If, after the issue of any grant or after any resealing, the Executor learns of the existence of an asset of the deceased that was not disclosed, determines that the value attributed to an asset did not correctly reflect its value, the executor must disclose to the court the existence and value of that asset and must pay to the court the difference between the fee paid before the issue of the grant and what the amount of probate fee should have been.

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