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Legal Matters

      Will Planning to Reduce Tax Liability

Canada and the provinces do not impose an inheritance, estate, gift, death or any other tax or succession duties on a deceased Canadian resident’s assets worldwide, except income tax. To save most of your estate for your beneficiaries, structure your will to minimize income tax liability.  And because tax laws are subject to change, keep informed of tax changes as they occur, as they may require you to change your will.

Everyone should have a valid will

The person making a will, called a testator (male) or a testatrix (female), has to be of sound mind and legal age to make a will.

Your estate consists of all the assets (money and property) you own on the date of death, and the assets distributed by will are estate assets. The person you appoint in your will as estate trustee assumes the responsibility to look after your estate and to distribute the assets to your intended beneficiaries (after payment of debts of the estate, related expenses, income taxes, and foreign taxes if applicable). In Ontario, he or she must be 18 or older. The estate trustee is also called the executor (male) or executrix (female), or personal representative.

Not only should the estate trustee know about your financial matters, it helps if he or she also has some legal and accounting knowledge.  Ask an income tax expert if you are allowed to provide in the will a reasonable amount of money as a tax-free gift (instead of a taxable fee) to the estate trustee(s) for the work to be done by the estate trustee(s).

You can appoint more than one person to administer your estate, including a beneficiary or beneficiaries of your estate.

Money or property that you bequeath (gift by will) is referred to as a testamentary gift, bequest, devise, or legacy; and the individual receiving money or property is called a beneficiary.

The remainder of your estate, after the payment of debts and specific legacies, is called the residue; and the person or persons to whom you bequeath the residue are known as residuary beneficiaries.

Probate is generally required for an Ontario resident’s estate assets

The estate trustee applies for probate. Probate is confirmation by the Ontario court that the will, and codicils if applicable, are valid and that the estate trustee has authority to administer the estate.

Third parties, such as banks, investment dealers, etc., require probate before releasing the assets to the estate trustee. However, if your estate is very small, it may not have to be probated. Probate fees are calculated on the value at death of all the assets distributed through your will, minus any mortgage(s) owing on real estate in Ontario.

Currently the fee is $ 5 for every $ 1,000 of estate assets up to $ 50,000, plus $ 15 per $ 1,000 on the remainder. If the value of the estate is $ 300,000, the fee is: 250 + 3750 = $4,000.

Probate is not required for assets distributed outside the will, such as

1) insurance payable to a named beneficiary (including RRSPs, RRIFs and pension funds payable to a named beneficiary);
2) assets held jointly and passing by survivorship; and
3) real estate outside Ontario.

Protecting your assets should take priority over reducing fees; for example, if you register property jointly with a married child and he/she files for bankruptcy, creditors may seize the asset.

Life insurance proceeds received as a result of your death are not subject to income tax. If your life insurance policy is payable to the "estate," it becomes an estate asset and the proceeds may not be protected from your creditors and dependants. To avoid probate fees and creditor claims, you may want to bypass the estate, by designating a beneficiary on your policy.

Wills are public property once probated; so anyone can read the contents of the will. Immediately after making the will, if you think your will may be challenged by anyone, state the reasons for your bequests and appointments in a letter to your lawyer, which he/she should have on file in case of a legal suit and your executor/executrix needs to present the original letter in court. If you don’t want it to get into court, write WITHOUT PREJUDICE in capital letters at the top of your letter. It means that the letter cannot be used as evidence in a court. Keep a signed copy of it with your original will.

How marital status affects the estate of Ontario residents

Unless made in contemplation of marriage, generally a will made prior to marriage becomes void after marriage, and you are intestate (without a will).

If you are marrying, remarrying, separating, divorcing, cohabiting common law, or are widowed, seek legal counsel and make a new will. When changing your marital status, you may want to change the designated beneficiaries of your assets, including insurance and RRSPs.

Ontario family law protects the property rights of legally married spouses, so the will should take your married spouse’s rights into consideration. A marriage contract (domestic contract) can be entered into by the spouses before or during marriage, to deal with property, support and other issues; but it does not affect the spouses’ right to possess (live in) a matrimonial home, regardless of who owns it.

On death, the matrimonial home is no longer a matrimonial home. If the matrimonial home is jointly owned by the spouses, the deceased’s interest is automatically passed on to the other joint tenant. However, if it is owned jointly with a third party and not with the other spouse, the joint tenancy is deemed to be severed (unjoined) immediately before the deceased’s time of death; it becomes a tenancy-in-common and the deceased’s interest is included in the deceased’s estate. If the matrimonial home is owned by one spouse only and that spouse dies, the non-owner spouse is entitled to continue occupying it rent-free for up to 60 days after the spouse’s death, against the spouse’s estate.

"Tenants in common" is a form of co-ownership where two or more persons have an interest in a property and an equal right to use the whole property, but they don’t necessarily own it in equal portions. There’s no right of survivorship. The deceased owner’s interest will be distributed through the will to his/her beneficiary or beneficiaries.

"Joint tenants" is a form of joint ownership with right of survivorship, and each tenant (owner) holds the same interest as the other. The deceased’s share in the property (real estate, bank accounts, etc.) automatically passes to the joint survivor(s). It is not an estate asset.  If you want to own property in joint tenancy with right of survivorship, it should be so indicated on the ownership document, otherwise you own the property as tenants in common.

Separation does not end a marriage. If you die without a valid will, your separated spouse could become your sole beneficiary if you have no children or grandchildren. When separating, each spouse should release his or her claim to the other spouse’s estate through a court order or separation agreement; in any event, it’s advisable to make a new will. Divorce generally voids all gifts and appointments intended for a former spouse under a will made prior to the divorce, but the will still remains valid. Commonlaw partners need wills to protect each other.

A claim for support can be made against your estate, whether you have a will or not. If the dependant applies within a specified time limit, support payments may still be binding if you provided support immediately before death, to a surviving spouse, or a separated or divorced spouse, or to other dependants. A commonlaw partner qualifies for support if, at the time, you were cohabiting continuously for at least 3 years, or you were in a relationship of some permanence during which you had a child together.  

Although jointly held assets and designated-beneficiary life insurance proceeds are not estate assets, in some situations they may be included in the estate if needed to carry out support obligations. If you want to ensure that the insurance proceeds are excluded, the person who will be the beneficiary of the policy can purchase a life insurance policy on your life.

Other than a matrimonial home, you can protect a gift or inheritance and any future income from inclusion in the married recipient’s "net family property" under Ontario’s Family Law Act. The will can state that the inheritance and any benefit therefrom (for example, capital gains, interest or rental income) shall remain the separate property of the beneficiary.

Marital status - for income tax purposes

From 2001, the term spouse refers to a legally married person only.  A commonlaw partner has the same income tax rights and obligations as a spouse, and is a person to whom any of the following conditions apply. He or she:
- is the natural or adoptive parent (legal or in fact) of your child; or
- has been living and having a relationship with you for at least 12 continuous months; or
- lived with you previously as your commonlaw partner for at least 12 continuous months, and has resumed living with you in a commonlaw relationship.

The above includes any period that you were separated for less than 90 days because of a breakdown in the relationship.

Transferred assets that are taxed on the final return of the deceased person

If the only asset you leave to your family is your home, no one will have to pay any tax (other than probate fees). If you have capital property which you bequeath to your married spouse or common-law partner, it’s transferred to your spouse or partner tax-free and tax is deferred until your spouse or partner disposes of it, unless your estate trustee chooses to declare the capital gain or loss on any assets on your final income tax return if better overall taxwise. 

Capital assets (capital property) left to others are deemed to have been sold (even though not actually sold) at fair market value immediately before death, resulting in a capital gain (50% of the profit is taxable) or loss (50% of the loss is deductible) on your final return. Capital property refers to personal property (stocks, bonds, art, etc.), a personal-use property such as a cottage, real property (real estate), including depreciable property (rental or business property), and any property which, if sold, would result in a capital gain or loss.  If you filed a $100,000 capital gains declaration in 1994 and have not used up all the amount, keep a copy of it with your current tax documents.

Since 1982, a family (you, your spouse or commonlaw partner, and any unmarried children under 18) is limited to one principal residence at a time.  If you own a home and a cottage, and if you or your family reside in your home part of the time and in your cottage part of the time (any number of days - there is no specific minimum requirement), either one can be considered a nontaxable principal residence (even if it's outside Canada), so it may be prudent to keep receipts of purchase costs and improvement expenses for both properties - obtain professional advice from a tax accountant in this regard.  

f you own foreign assets, to avoid double taxation, consult a tax expert.

You are not taxed on any RRSP or RRIF funds that are transferred to your married spouse, commonlaw partner, or to qualified dependent children or grandchildren. For them not to be taxed on the funds, certain guidelines must be followed. If there is no qualifying beneficiary, generally the full value of your funds is taxed on your final return, and the beneficiary or beneficiaries receive the full value tax-free. The Canada Customs & Revenue Agency's RRSP Guide (T4040) provides details on RRSPs, RRIFs, and other retirement plans.

More than one final tax return may apply (and may be beneficial taxwise to the taxpayer)

Depending on the source of income, there are up to 3 additional separate tax returns that can be filed on behalf of the deceased person by the estate trustee, which may reduce the total tax to be paid to the CCRA, if the deceased:
1) was the sole proprietor or a partner in a business,
2) was a beneficiary of a testamentary trust, or
3) earned "rights or things" which may consist of income earned before death that had not yet been paid to the deceased, such as matured bond interest not yet cashed, salary earned but not yet received.  

Once the estate trustee has obtained a Clearance Certificate from the CCRA stating that any and all tax owing on behalf of the deceased had been paid for the assets to be distributed, the beneficiaries then receive their inheritances tax-free.

Before seeing your lawyer about a will Itemize all your assets (current value), by Designated (named beneficiary), Joint, or Estate Assets (which includes tenants-in-common assets), such as real estate (home, vacant land, etc.), investments, business assets, bank accounts, pension plans, personal items of value. Check if Air Miles and Sears Club Points can be passed on to a family member. And list all your debts. Your lawyer may want to know if the beneficiary designations on your RRSPs, RRIFs, pension plans, life insurance policy, etc., are revocable (can be changed) or irrevocable (cannot be changed without the named beneficiary's signed consent).

Write down your beneficiaries’ names, addresses, dates of birth, relationship to you, who should get what, and to whom you want to leave the residue. The two witnesses to your will and codicils and their spouses (which may include commonlaw partners) cannot be beneficiaries (a beneficiary should not be a witness to the will).  Generally, the lawyer's assistants witness your signature.  

Include the name and address of the individual or professional trustee who has agreed to be the estate trustee, and the name and address of the person (guardian) who has agreed to look after your minor children if both you and their other parent die.

If you would like more information on wills, the 15th edition (or more current edition if one has been printed) of "Wills for Ontario" (part of the Self-Counsel Legal Series) is available at Grand & Toy or at any major bookstore.  

Keep your family and estate trustee informed 
Let them know where to find your original will (only the original of your will is binding) and codicils, income tax returns and corresponding Notices of Assessment from the CCRA and tax-related receipts for the current year, bank accounts, bonds, insurance policies (life, property, vehicle), deeds to property (and copies of any applicable mortgage discharge documents), safety deposit box and key, etc. If you have placed your original will in a bank safety deposit box, make sure your estate trustee or a family member has authority to access the box after your death.  

As well, if you are employed or self-employed, you should be receiving your Canada Pension Plan Statement of Contributions every 3 years or more frequently; check it for accuracy, and keep the most recent statement with your other documents, as your family will have to apply for the Survivor's Pension, Orphan's Benefits and Death Benefit based on your contributions.  The Death Benefit is a lump sum payable to the surviving spouse or commonlaw partner or to the estate, which is generally applied for by the personal representative.  If it had been overlooked by the personal representative, it can be applied for retroactively.

Also, let them know the name and phone number of your lawyer, accountant, insurance agent, stockbroker, financial planner, bank manager or other bank contact; inform them of the location of the latest statements and related information re your stocks, mutual funds and other financial investments, the location of your birth certificate, citizenship papers, power of attorney, valuable jewellery and other collectibles, company pension plan documentation; provide a list of all your credit cards and their account numbers; regarding real estate (excluding your principal residence which is not taxable), for income tax purposes you need to note the date purchased, the actual cost and other financial information, full details on property owned outside Canada, and any other relt data. 

Once the will has been signed and witnessed, do not write, type, or cross out anything on the original will.  Keep a copy of your will on hand, and review the contents periodically.  You can make a new will at any time; or if a minor change is required, for example, the estate trustee has asked to be replaced, or you want to change the trustee, add a codicil (amending document) to your original will.   Once a new will sign is signed and witnessed, you can retain the old will (and codicils) and write the word OBSOLETE across each page, or destroy the old will and codicils.

Do you need to make or renew your will?  Don't delay.  Do it today.

When you buy a home you want to be happy and satisfied on all counts, of which money is only one.

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