How to reduce probate tax

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By Julie Cazzin with Ed Olkovich

Q: Which assets require probate and which do not? How much would probate be on a $4-million estate made up of cash, three properties, a $52,000 registered retirement income fund (RRIF) and a $100,000 tax-free savings account (TFSA) in Ontario? How can I minimize probate and would it be worth it for me to do so on an estate of this size? — Gianni

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FP Answers: Gianni, first, let me explain the term probate. Probate is the process of having courts certify that wills are valid. If you don’t have a valid will, government intestate laws determine who administers and shares in your estate. Thus, the government writes a will for you if you don’t make one. You cannot avoid probate taxes by not making a will.

Probate taxes apply based on where your real estate is located and where you reside at the time of death. It isn’t always mandatory and varies in each jurisdiction. Reducing provincial probate taxes paid by your estate is tax planning.

After you’re gone, assets in your name alone may require estate certificates to sell or transfer. If your Ontario real estate properties are only in your name, no one can usually transfer those properties without an estate certificate. You pay probate taxes when anyone applies for an Ontario estate certificate.

The process of obtaining an estate certificate to appoint an estate trustee (with or without a will) requires the payment of probate tax. In Ontario, this probate tax is called the “estate administration tax” (EAT). This tax is paid in advance as a deposit for an estate certificate. The court identifies who is authorized to transfer your assets and who is to receive them even if you did not make your will.

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You may own real estate through a corporation, partnership or as tenants-in-common. Who can sign on your behalf to transfer your property? Estate certificates are required to do this. And unless you know how your property is owned and where it is located, you cannot estimate probate taxes.

Your $4-million estate consists of cash and three real estate properties. You can use the Ontario government website’s estate administration tax info to calculate EAT. A fair market value of the properties as of the date of death is required. Only the value of existing debt or mortgages secured on the property is deducted to calculate the EAT (funeral costs cannot be deducted).

On an estate of $4 million, the EAT is more than $59,000. Ontario can audit your EAT calculation. Those handling estates must file an estate information return (EIR) to substantiate their EAT calculation. There are penalties, including jail time, for making false or misleading statements.

Ensure that your RRIF and TFSA have named designated beneficiaries without estate certificates. If these assets have no named beneficiaries, they pass on to your estate and are subject to the EAT.

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Can you avoid probate tax or reduce it? This requires a review of your circumstances. Are you married or single? Do you own a corporation? You may be able to reduce probate tax by gifting away cash to reduce the size of your estate. You can transfer properties into joint ownership or into a trust before you die.

Otherwise, probate tax is the price your estate pays to keep you in control of your assets.

This information is not a substitute for legal advice. Edward Olkovich is an Ontario lawyer at https://mrwills.com. He is also certified by the Law Society of Ontario as a specialist in estates and trusts Law.

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