Rebecca Cynader, Associate, Farris, Vaughan, Wills & Murphy LLP
What happens to your assets when you die? When will the Canada Revenue Agency come knocking? What kind of planning can you do in advance to help your executor and beneficiaries to get the most out of your estate? These are all questions you may be wondering about during Make a Will Week.
This article will discuss two major types of taxes and fees that may arise when a person dies: provincial probate fees, and income tax payable as a result of the “deemed disposition on death” triggered under Canadian federal and provincial tax laws.
Generally, after someone dies the executor of the estate will need to file a “probate application” with the applicable provincial court. The application starts the process for the court to consider and verify the deceased person’s will and confirm the appointment of the executor. When the court is satisfied, it will issue a “grant of probate”. A grant of probate is required in order to deal with any real property transactions on behalf of the deceased person’s estate, and many banks and other large institutions also require a grant of probate before they will deal with the executor in respect of an estate.
The probate application must include the original will and an inventory of the deceased person’s assets, and as part of the application the executor must pay probate fees.
Each province has a different probate fee system; this article addresses the probate fees payable in British Columbia. There is an initial fee of $200 to file the grant application, but the fee is waived if the value of the estate (calculated based on the value of all of the deceased’s property located in British Columbia) is not more than $25,000.
In addition to this initial fee, the probate fees payable will depend on the value of the estate. The estate must pay probate fees of 0.6% on the value of the estate between $25,000 and $50,000, and 1.4% on the value of the estate over $50,000.
Deemed Disposition on Death
Although we do not have an explicit “estate tax” in Canada, there is a mechanism that imposes tax on a person’s assets when they die. Under Canadian law, when a person dies their assets are subject to what is called a “deemed disposition”, which can result in a large tax bill.
Essentially, the law pretends that just prior to death, the person disposed of all his or her assets and received fair market value compensation, and then immediately reacquired the assets at fair market value. The result is that all accrued and unrealized gains on property held by the deceased person are fully realized and taxable as of the date of death. So, for example, if the deceased person owned real property, a vehicle, investments, or any other property prior to their death that has appreciated in value, there may be significant tax payable.
Because the deceased person is deemed to reacquire their assets at fair market value, there should be no further tax when the person’s executor later transfers their assets to the beneficiaries of the deceased’s estate (except to the extent that any assets further increase in value between the date of death and the date of the ultimate transfer to the particular beneficiary).
Some assets, like a person’s principal residence, may be exempt from tax, which can reduce the tax bill otherwise arising from the deemed disposition. It may also be possible to defer the tax arising on the deemed disposition of a particular asset, if for example the asset is left to a surviving spouse or to a special trust for a spouse (known as a spousal trust) created under the deceased persons will. If this kind of “spousal rollover” is properly effected, Canadian tax law allows the spouse or spousal trust (as applicable) to receive the asset at the deceased person’s original cost, such that no tax is payable until either the spouse or spousal trust sells the asset or the surviving spouse dies. At such time, tax will be payable based on the asset increase in value up to that time.
There may be a variety of other tax-planning you can do in advance of your death, to save your estate and your beneficiaries from paying too much tax unnecessarily. An informed advisor can help you create a plan tailored to your personal needs.
BC’s Make-a-Will Week is April 7-13, 2019. MAWW is a Ministry of Justice campaign that brings awareness to the importance of creating and maintaining an up-to-date will, which ensures that the people, charities and organizations you care about most receive the benefit of your estate.
In conjunction with the Leave a Legacy Vancouver program of the Canadian Association of Gift Planners, we are sharing tips and info throughout the week to help our readers learn more about wills and their pertinence in ensuring that final wishes are understood and executed. Visit our blog all week for key posts related to MAWW and will preparation.