There’s a common saying that “Canada doesn’t have an estate tax.” I find this misleading. When an Ontario resident with an estate passes away, the estate’s executor must pay capital gains tax to the CRA due to the person’s death and also the Estate Administration Tax (EAT) to the Ontario government. How can we say there’s no estate tax?
A testator usually aims to minimize taxes after their death to leave more to their beneficiaries. However, minimizing taxes involves three key aspects:
- Federal government (CRA) – Tax Consideration
- There’s a saying that when a Canadian dies, CRA is the first beneficiary. And it’s not far from the truth.
- Dealing with taxes owed to CRA is a complex issue, and we will dedicate an entire series to explain how to manage taxes effectively.
- Ontario government’s EAT – Planning to Reduce EAT
- The main focus of this blog article is how proper planning when drafting a Will can help reduce the EAT owed to the Ontario government.
- Transfer property to a family member and/or adding family members to property titles while the testator is alive
- These strategies could impact both CRA and Ontario’s EAT.
- One way to avoid EAT is by adding a family member’s name to property titles before death, allowing the property to transfer through survivorship rather than going through the estate.
- For instance, an elderly mother adds her daughter’s name to the title of a rental property, creating a joint tenancy. However, this transaction must be reported to CRA, and capital gains tax will likely be due.
- With current legal trends, adding names to property titles often results in a “resulting trust.” This means that even if the testator transfers the property before death, it could still be included in the estate and subject to division.
- There are many risks involved with this approach, and we will cover it in detail in a separate blog in our Will DIY series.
When an Ontario resident passes away, the provincial government charges an Estate Administration Tax (EAT) based on the value of their estate.
The EAT is calculated as follows:
- First $50,000
- Exempt
- Amount over $50,000
- 1.5% tax
If you’d like to estimate your EAT, feel free to use our EAT calculator:
There is only one way to reduce EAT: since it is calculated based on the total value of the estate, if certain assets do not form part of the estate, the EAT will naturally be reduced.
So, what types of assets do not need to be included in the estate?
- Real property located outside Ontario
- Property jointly owned by the deceased
- Life insurance with a designated beneficiary.
- For example, if a husband buys life insurance and names his wife as the beneficiary, the insurance payout will go directly to the wife and not form part of the estate.
- Benefits payable under a retirement plan.
- For instance, if someone has a Registered Pension Plan (RPP) with a named beneficiary, the payout bypasses the estate and goes directly to the beneficiary.
Thus, to minimize the exposure of a testator’s assets to EAT, the following strategies can be used:
- Disposing of property during one’s lifetime or make it jointly-owned
- Using “designated beneficiaries” (named beneficiaries) for plans such as
- Life insurance
- RRSP
- Tax Free Saving Account (TFSA)
- Creating two separate Wills: one for assets that must or can only form part of the estate (we can call these “bad” assets or “taxable” assets), and another Will for “good assets” that can bypass the estate process, thus avoiding EAT.
Points to note:
- If the deceased had a mortgage on a property, the outstanding mortgage can reduce the estate’s overall value.
- However, debts and liabilities do not reduce the value of the estate for EAT purposes. For example, if the deceased had $60,000 in their bank account and owed $60,000 to a credit card company, the estate would still owe EAT on the full $60,000.
To understand how to use two Wills to separate “bad” (taxable) assets from “good” (non-taxable) assets, you first need to grasp the concept of probate in Ontario.
What is probate?
Probate is the legal process where the deceased’s estate submits the original Will to the courts, along with an application and a bank draft for the Estate Administration Tax (EAT) payable to the Minister of Finance. The estate receives a certificate in return, granting the estate trustee the authority to administer (but not distribute) the estate.
The decision in Granovsky Estate v. Ontario [1998] clarified that EAT is only payable on assets governed by the primary Will. This allows a testator to create:
- Primary Will for “bad assets”
- This Will will be probated.
- Secondary Will for “good assets”
- This Will will not be probated.
A testator could theoretically have multiple Wills (third, fourth, etc.), though it’s not recommended.
The Legal Principle Behind This
“Bad” assets require a probated Will for ownership transfer. The strategy here is to create multiple Wills for different types of assets, ensuring that only the Will with bad assets is submitted for probate.
“Good” assets, like shares in a private corporation, can be transferred with a secondary, unprobated Will. However, this requires the approval of the company’s board of directors. If the board insists on probate for the transfer, the shares will need to go through probate. Similarly, if the deceased was the sole director, this could also pose an issue. A lawyer drafting the Wills should address this and provide comprehensive advice.
“Basket Clause”
This clause allows the estate trustee to decide which assets require probate and which don’t. An example clause might read:
“Any other assets for which my Estate Trustee determines a grant of authority by a court of competent jurisdiction is not required for transfer or realization thereof.”
This gives the trustee discretion over assets intended to bypass probate, effectively governing the “bad” assets.
A Shock in 2018
In Re Milne Estate [2018], Judge Dunphy ruled that if the assets governed by a Will couldn’t be clearly identified, the entire Will could be considered void due to “uncertainty.” This ruling caused widespread concern, as many believed their Wills might now be invalid.
However, the Ontario Divisional Court, in Re Panda Estate [2018], quickly overturned this decision. In short, Wills with a basket clause are valid again.
Final Thoughts
Whether using two Wills or a basket clause, these strategies can introduce uncertainty. The primary goal of a Will is to provide clear instructions on how to manage the testator’s estate. In the pursuit of reducing EAT, these tactics could backfire if any aspect goes wrong. If you’re considering multiple Wills to reduce EAT, this article provides only a basic overview. It’s essential to consult with your lawyer and follow their professional advice to ensure everything is handled properly.
Final Important Note
Although this series focuses on DIY will-making, if your personal circumstances, family situation, or asset structure are complex, we recommend seeking assistance from a licensed solicitor specializing in wills and estates.