For some reason, Ontario’s probate tax (formally called Estate Administration Tax) seems to drive people crazy. We understand that, at death, taxes often become payable, and we can grudgingly accept income or capital gains taxes that become due at death. But the idea of having to pay the Province of Ontario a probate tax of 1.5 per cent appears to twist some people out of shape.
I agree that Ontario’s probate tax—the highest in the country and just slightly higher than British Columbia—is annoying. But then, Ontario also levies taxes on gasoline and alcohol, which are proportionally much higher.
The difference, though, is that while you can do little about gasoline or alcohol taxes, you might be able to arrange your affairs to defer probate taxes. You do so, however at your peril.
Ontario’s probate tax is 1.5 per cent of the value of the assets that make up the deceased’s estate. Probate tax is collected when the executor makes application to the Superior Court of Justice for letters probate (formally called a Certificate of Appointment of Estate Trustee with a Will). Assets that are in joint names or with named beneficiaries do not form part of the deceased’s estate. If letters probate are not required in a deceased’s estate, no probate tax is levied or payable. Any probate tax that is payable is not deductible in calculating income or capital gains taxes.
Now for a reality check. On an estate with assets of $500,000, Ontario will levy probate taxes of just under $7,500 (there is a slight sliding scale on the first $50,000 of assets but for discussion purposes, the percentage of 1.5 per cent is used). This amount is hardly worthwhile to put your entire estate plan into jeopardy.
In most cases, spouses, however defined, arrange their assets so that both jointly own their home, have joint bank accounts, have investments in joint names or with each other as named beneficiaries and have each other as named beneficiaries, on life insurance/death benefit policies and RSPs/RIFs. This is very good because Ontario’s probate tax is only levied on those assets that are transferred pursuant to the deceased’s Will. An asset in joint names with a surviving person will be transferred to that person by operation of law (subject to some possible review that we shall discuss later) and not by operation of the deceased’s Will. This bit of knowledge can sometimes be a dangerous thing.
Several times a year, I will meet a family who has organized the family assets to avoid paying any or very much Ontario probate tax. Usually this has been done to the detriment of the beneficiaries and is often the result of a discussion that a family member has had with a friend, bank employee or other person.
This type of bad planning might take the form of transferring the family home into the names of the parents and one or more children (who may or may not live in the family home any more) as joint owners. But what happens if one or more of the children die before the parents, or one of the children has creditors, or wishes to purchase their own home, or separates from his or her own spouse, or the parents want to sell the home?
If the family home is jointly owned by the parents and a child who dies before the parents, that child’s share of the home could evaporate to the benefit of the parents and any other children who are also joint owners. If a child who is a joint owner happens to have creditors, then when the family home is sold, the creditors will often have to be paid before the sale proceeds can be disbursed to the parents. If a child who is a joint owner wishes to purchase his or her own home, he or she will have possibly lost the Ontario Land Transfer Tax Credit of $2,000 to which first time Ontario homebuyers are eligible. If a child who is a joint owner separates from his or her own spouse the child’s share of the parents’ home might form part of the child’s matrimonial property–and more so if the child and his or her spouse have been living in the home with the parents. If the parents want to sell the home and one or more of the joint tenant children do not, the cost to resolve the issue could be expensive. These are only some of the problems that can occur by parents transferring their home into joint names with one or more of their children.
I very often see a surviving parent transferring one or more bank accounts, GICs or investment accounts into joint names with one or more of his or her children. When questioned, the parent will often say that it is to avoid probate tax and, when further questioned, the parent will also say that the joint ownership will not be a problem as the child who is the joint owner will certainly share the account or GIC with his or her siblings as in the parent’s Will. Don’t count on it. Several years ago, the Supreme Court of Canada issued two decisions that said a bank account that is jointly owned does not necessarily become the property of the parent’s estate but, depending on the specific fact situation, can just as easily become the sole property of the surviving child. Not what the parent might have wanted.
A few years ago, I acted for a couple who had both lost their spouses and had just been married. I made their Wills to reflect their wishes that they wanted their children to inherit their respective parent’s assets. It was a complex Will but it reflected the couple’s wishes. The couple then was advised by someone along the way that it would be much more efficient (and would avoid probate taxes) if they put their bank and other investment accounts into joint names. They did this without seeking legal advice. One of the spouses later died and, by right of survivorship, the surviving spouse received almost all of the deceased’s spouse’s assets to the detriment of the children of the deceased’s spouse. Unfortunately, the surviving spouse was not capable of making a revision to his/her Will and the assets, subject to a Court challenge were lost to the deceased’s spouse’s children.
Insurance is another common issue. A parent buys a life insurance policy with the intent to divide it equally between the parent’s two children. Rather than make the estate the beneficiary (and thereby attracting probate taxes), the parent makes only one of the children a beneficiary (the child has promised the parent to share the insurance with his/her sibling). On the parent’s death, the child forgets the promise made and keeps the insurance proceeds.
Gifts to purchase a home also can be a problem. A parent may give a child a large sum of money to help the child purchase a house. The intent is that this is part of the child’s inheritance and by giving it now, it avoids probate taxes and helps the child. But if the child and spouse later separate and the house is sold, not all of that gift may be returned to the child due to the house being a matrimonial home. The child’s share of the parent’s estate may be diminished as a result.
Avoiding the pitfalls
Most of the problems arising from attempting to avoid probate taxes can either be avoided or dealt with if a person seeks advice from a lawyer beforehand:
The Supreme Court of Canada has said that if an investment is truly to be held by a parent and child with the parent’s intention that the investment form part of the parent’s estate on the parent’s death, there should be documentation reflecting this intention. Even here though, the documentation does little good if the investment has been used by the child during the parent’s lifetime with or without the parent’s knowledge.
For those who want to put the family home into joint names with the children or a child and avoid probate taxes, don’t do it. The risk of a problem arising far outweighs the probate taxes that might be otherwise saved.
For those parents who want to give money to a child to purchase a house, it is better for the parent to have loaned (with a signed promissory note or registered mortgage) the money to the child and spouse with possibly a provision in the parent’s Will to forgive the loan as part of the child’s inheritance.
For parents who wish to make only one of the children a beneficiary under an insurance policy to avoid probate taxes, don’t do it. It is better to make either the estate or all of the children beneficiaries instead.
In many cases involving second marriages, changing asset ownership to joint names to avoid probate taxes is simply a bad idea and one that should be avoided.
Estate planning is complex. Once your Will is signed, be very careful in making changes in asset ownership simply to save a few dollars in probate taxes. The change may be more expensive than you think.
John Peart is a partner with the Ottawa law firm of Nelligan O’Brien Payne LLP and part of its Wills and Estates Group. John is Certified as a Specialist (CS) in Estates and Trusts Law by the Law Society of Upper Canada and is also a member of the International Society of Trust and Estates Practitioners.
[This article was originally published in the Jan/Feb 2012 issue of Fifty-Five Plus Magazine.]