In recent years, an increasing number of people began to prioritize estate planning. An important element in this process is tax planning.
Today, Sabrina – Lawyer at Varity Law – will teach everyone about the 2 taxes involved in estate distribution and how to reduce them.
What is Estate Administration Tax?
We are very lucky to not have inheritance tax in Canada. For many beneficiaries, getting a lump sum estate (for instance, worth one million dollars CAD) tax-free is likely the highest tax-exempt income they will receive in their lifetime.
However, before inheritance can be passed on to the beneficiaries, the estate itself must pay for 2 types of taxes.
First is the Estate Administration Tax (“EAT”). The estate must pay EAT to the Court that issued the certificate appointing an estate trustee.
EAT is calculated as follows:
- $0 – $50,000 estate value – tax exempt
- $50,001 or higher estate value – for every $1000 estate value, $15 of EAT is charged
This amount is calculated on the total estate, not the net estate. The only estate debt that may be deducted from this amount is mortgage.
Feel free to use the calculator below to see your EAT:
https://www.attorneygeneral.jus.gov.on.ca/english/estates/calculate.php
Just like income taxes, it pays to make advance planning to reduce the EAT amount. For instance, you can try to organize your estate into the following asset types, which are EAT-exempt:
- Any insurance or investment products with designated beneficiaries – such as life insurance, RRSP, TFSA;
- Any jointly held assets – such as real estate properties owned as joint tenants, or bank accounts owned as joint account-holders;
- Trusts – which can be set up and updated by Varity Law.
What is Terminal Income Taxes?
The second type of taxes is terminal income taxes.
Although the deceased has already passed on, the estate would still need to file for his/her last year of income taxes.
Potentially, there could be a lot of income taxes. This is because when passing down your inheritance, unless it’s going to a spouse, usually CRA will treat that you “sold” the assets to your beneficiaries at fair market value, although you really gave it to them for free.
Thus, if the deceased have a lot of assets, CRA may regard that the deceased “disposed” or “sold” all those assets during the year he/she passed away. Therefore, the estate must pay income taxes on all of the deceased’s assets, which CRA deemed he/she sold to the beneficiaries at fair market value.
There are 2 good ways to reduce terminal taxes:
- For every person or family, there is a property that is used for daily living, and that is considered your principal residence. This property is tax-exempt when sold. Hence, the beneficiary could sell the estate principal residence as the estate, meaning that the estate is the seller. This is preferable to the executor first transferring the property into the beneficiary’s name, meaning that the beneficiary must sell the property as the beneficiary. In the latter case, if the estate property is considered as the beneficiary’s investment property, then the beneficiary must pay capital gains after selling it.
- When doing estate planning, you could place more assets into a trust. The assets in the trust would not form part of the estate, and does not need to be distributed to the beneficiaries all at once – which could trigger a lot of income taxes. Instead, you could set up rules for gradual distribution to the beneficiaries.
Conclusion
The two main taxes in estate distribution are EAT and terminal income taxes. In certain cases, the combined taxes could be very high. But not to worry, with proper estate planning, many families can significantly reduce those taxes, and instead leave more estate to their loved ones.
Varity Law Prof. Corp. is skilled at providing one-stop shop services in Real Estate and Wills & Estates. We invite everyone to book an initial 30 minutes free consultation with us by calling 905-597-9357 or emailing hello@varitylaw.ca
This article is meant to offer general legal information, not specific legal advice that applies to your situation. For specific legal advice, please speak to a licensed lawyer.
