Tag: EstateAdministration

Spousal rollover … or not?

To defer, or prefer to incur

After a good long run, dad died midway through his 99th year. Mom and we kids will miss him dearly – they actually called each other “dear” – but it was his time.

Mom is nearing the mid-90s herself. Customarily, everything would roll to her to get around the tax on deemed dispositions at death that would otherwise erode dad’s estate, of which mom is the sole beneficiary – But could we do better for her?

It’s one of those mantras of financial planning to arrange beneficiary designations and joint accounts to allow streamlined continuity to a spouse. Even so, it’s equally important to pause and consider whether to opt out, particularly for deaths early in the year. Dad died in January, so with only a couple weeks of income, there remains plenty of room to make use of his basic personal credit and low bracket tax rates.

Following are some steps we undertook, along with the odd snag along the way.

Pension rollover

To begin, notice was given to the administrator of the defined benefit pension that was their primary income source. As surviving spouse, mom will continue with a reduced pension, emphasizing the need to be tax-conscious with her other income sources. There won’t be any residual value when she dies, but with the two of them living well into their nineties, they got their fair actuarial share out of the deal.

RRIF on death

Mom handled the house when we were youngsters, followed by a lengthy run as a school trustee. Dad took early retirement at 60, then kept busy with teaching and consulting gigs into his 70s. Thus, despite having a dependable pension, both had moderate accumulation in registered retirement income funds (RRIFs), each naming the other as beneficiary. Their financial advisor (a friend to us all) readied the paperwork to roll dad’s RRIF to mom.

Acting under power of attorney (POA), we instead declined the receipt of the RRIF on mom’s behalf. Accordingly, the amount will be included in dad’s final year income, soaking up the remainder of his basic personal credit
(i.e., at zero tax), with the rest tagged with the lowest bracket rate.

RRIF minimums

In their later years, we have been managing their finances under POA. This included instructing on taking the minimum RRIF withdrawal early in the year. That meeting was still in the upcoming calendar when dad died.

The RRIF minimum, based on the preceding year-end value, is required to be paid in the following calendar year. Per CRA and the administrator’s practice, as it had not been paid before dad’s death, that portion had to be paid and taxed to mom as the named beneficiary (though again as noted above, the bulk had been declined, to be taxed in dad’s final year).

TFSA rollover

One great thing about a TFSA rolling to a spouse is that it continues to be a TFSA, without requiring or using up the receiving spouse’s TFSA room. Notably, unused TFSA room does not roll to a spouse, nor to anyone else for that matter. Fortunately, mom and dad were consistent TFSA contributors, with the combined amounts now being with mom, except for the lost room for dad’s final year due to the contributions not having yet been made.

(Not) naming beneficiaries under POA

For registered accounts in Ontario (and most common law provinces), attorneys under POA cannot initiate or change beneficiary designations. However, many financial institutions will carry over an existing designation on an incoming registered plan, which was helpful as we were consolidating their financial holdings when their faculties had significantly declined.

Unfortunately, dad had one small TFSA without a designation. As we could do nothing about it, probate was inevitable for dad’s estate. On the bright side, it bolstered our decision to allow the RRIF to fall into the estate, with the projected income tax savings well exceeding the nominal bump in probate tax.

Joint non-registered account

The proceeds from their home sale years ago went into mom and dad’s joint non-registered investment account. That’s helped service their later accommodations, while also appreciating nicely. Probate was bypassed at dad’s death, with mom continuing as sole legal and beneficial owner by right of survivorship.

By default, capital property rolls at adjusted cost base (ACB) to a spouse on death. This applies when held through a joint account as in this case, or if dad had an account under his name alone that was then migrated to mom as estate beneficiary (as long as the individual securities in the account were not sold in the process).

Alternatively, dad’s estate can elect out of the automatic rollover, on a per-property basis. This will allow us to optimize for mom’s future needs by choosing which securities to rollover, and which to have taxed in dad’s final return. As mom could conceivably blow right past dad, the century mark and beyond … that extra financial flexibility will be welcome comfort for her as she moves into this next chapter.

US estate tax & estate returns – For Canadians

Exposure when owning American property at death

As Canadians, we may expect (though not look forward to) tax being imposed on us by our government at death. In particular, the value of tax-sheltered retirement accounts is brought into income at death, as are the capital gains on the deemed disposition of capital assets – both of which may be deferred by transfer/rollover to a spouse or common law partner (CLP).

For those owning property in the United States at death – ranging from real estate to financial assets to personal belongings – there may be US Estate Tax due (capitalized in this article to distinguish from generic tax references), and US estate filing obligations even if no such tax is owed. The tax is based on gross value, not just the capital gain that Canada targets, and even when there is a rollover to a Canadian spouse/CLP. As well, US financial assets are counted whether in non-registered form or in tax-sheltered accounts like RRSP/RRIFs and TFSAs.

Whether you are pre-planning against your own future exposure, or acting post-mortem as an executor, professional advice is imperative in this extremely complex area. This article outlines the key terms and major steps involved, to help prepare for that professional engagement.

Who is exposed to the Estate Tax?

This article focuses on the tax and estate implications for Canadians who own US property at death, with emphasis on the Estate Tax. To lay the groundwork, we begin with an overview of how that regime applies to Americans domestically, paving the way for the discussion of its application to Canadians that follows.

US citizens and domicilliaries

The Estate Tax applies to the worldwide estate at death of US citizens wherever they may be living, and of
non-citizens domiciled in the US. Domicile is like residence, though technically based on a person’s country ties.

If the fair market value (FMV) of a deceased’s worldwide estate exceeds the year’s asset exclusion amount – US$13.16 million in 2024 – tax may be due on the amount over that threshold. Historical exclusion amounts are shown in Table 1 on the last page of this article. Though the table shows increasing amounts year-to-year, it is slated to return to its pre-2018 indexation formula in 2026 (roughly halved to about US$7 million), absent further legislative changes.

Credits and deductions are then applied to reduce this preliminary figure to the amount upon which the tax is calculated, applying graduated rates ranging from 18% to 40% as shown in Table 2 on the last page of this article.

In addition, the US has a gift tax and generation-skipping transfer tax (GSTT). The gift tax applies to lifetime transfers above an annual exclusion amount per donee, currently US$18,000 in 2024. The GSTT limits transfers to beneficiaries at least two generations younger than the donor/giver. Without getting into the arithmetic, to the extent that the gift tax and/or GSTT apply during lifetime, this can erode the asset exclusion amount for the Estate Tax.

One important note before continuing: Though the rules and figures are expressed on an individual basis, there are plenty of ways to defer, deduct and double-up when planning with a spouse. Professional advice is recommended.

US non-residents, including Canadians

Relevant to this article, the Estate Tax can also apply to a deceased Canadian who is a non-resident of the US, if:

    1. FMV of the deceased’s US-situs assets (detailed following) exceeds US$60,000, and
    2. FMV of the deceased’s worldwide estate exceeds the current year’s exclusion, again US$13.16 million in 2024.

However, whereas US citizens and domiciliaries pay based on the full FMV above the exclusion, the calculation for a non-resident Canadian is a proration of US-situs assets to the worldwide estate (again, above the exclusion).

Threshold and deadlines for filing a US estate return, and paying Estate Tax

The executor of a deceased Canadian must be careful not to confuse the test for the Estate Tax with the test for the requirement to file a US estate return. If a deceased Canadian owned US-situs assets in excess of US$60,000 at death, an estate return must be filed with the US Internal Revenue Service (IRS), regardless of the size of the estate. Generally, the executor must include a certified copy of the Will or court order when filing.

The IRS clearance certificate facilitates the executor’s ability to deal with estate assets. Without that proof, financial institutions may refuse to take instructions from the executor, and US real estate transfer agents may be unwilling to register an intended transaction. As well, the estate’s reporting provides the tax cost basis for heirs’ future real estate dealings, without which they may face higher tax on a later sale, or may not be able to sell the property at all.

Important deadlines for executors:

    • A US estate return is due within nine months of death, along with payment of the Estate Tax. A six-month filing extension is generally granted if application is made before the due date.
    • Extension of the Estate Tax payment due date is distinct from an estate return extension. Executors must be aware that while this will avoid late payment penalties, interest will accrue from the original due date.

Categorizing assets

US-situs assets

The IRS defines “situs” as “The place to which, for purposes of legal jurisdiction or taxation, a property belongs.” Though a non-exhaustive list, here are some examples of the most common US-situs assets, also phrased as “US-situated assets” in some IRS publications:

    • Real estate (including time-shares), generally being the full value even if held jointly with right of survivorship
    • Tangible personal property (furnishings, vehicles, boats, art, collectibles) owned and located in the US
    • Shares of US corporations (public or private), even in a Canadian brokerage account or registered account
    • Bonds and debt issued/owing from a US individual, corporation or government
    • US retirement plans, common types being 401K and 403B plans, and individual retirement accounts (IRAs)
    • Contents of a safety deposit box in the US, including cash, regardless of currency/country of denomination
    • US property held in a trust if the deceased had power of appointment, including an alter ego or joint partner trust

NOT US-situs assets

Some financial assets may have US elements, but due to their underlying structure or the way that ownership is held, they are not considered to be US-situs assets. Some examples, again non-exhaustive:

    • US securities in a Canadian mutual fund trust or corporation, segregated fund or exchange-traded fund (ETF)
    • Personal property that is merely in-transit, for example jewellery worn by a Canadian who dies while travelling
    • US marketable securities or investment real estate held in a Canadian corporation, noting however that vacation property may come under IRS scrutiny for avoidance, especially if it is the corporation’s only asset
    • American depository receipts (ADRs), as they do not hold US securities
    • Deposits in a US bank account (but not US brokerage account), as long as it’s not part of a US business activity
    • Excepted US government and corporate bonds under the “portfolio interest exemption”
    • US-denominated bonds of a Canadian issuer providing US exposure without holding US securities
    • Life insurance on a Canadian who is a US non-citizen/non-resident

Worldwide estate

A deceased’s worldwide estate is determined according to US rules, whether the property is in the US, Canada or elsewhere. This may include assets of significant value, about which careful decisions and actions may have been taken to alleviate or circumvent Canadian income tax or provincial succession issues, but which nonetheless remain countable for the Estate Tax, including:

    • Canadian registered plans, including RESPs, RDSPs, TFSAs, RRSPs, RRIFs, and survivor pension benefits
    • Life insurance owned by the deceased (or sometimes a deceased’s corporation), even with a named beneficiary
    • FMV of private corporation shares, after payment of a death benefit from corporate-owned life insurance
    • Gross value of real estate and non-registered accounts, even when held jointly with right of survivorship
      (with limited exception if the survivor is a spouse with a proven contribution to the asset acquisition)
    • Property in a trust considered to be a US grantor trust, likely capturing a Canadian alter ego or joint partner trust

Tax calculation

Once it is determined that a deceased Canadian meets the threshold of both US-situs assets and worldwide estate, attention may turn to calculating the tax liability. The calculation begins with the gross value of the US-situs assets.

Deductions

A variety of deductions and credits may be taken, most of which must be prorated based on the proportion of US-situs assets to worldwide assets. The main deductions are:

    • Funeral and estate administration expenses
    • Liabilities of the deceased at or as a result of death, including foreign (i.e., Canadian) income tax
    • Death taxes paid to a US state
    • Charitable donations (generally must be made to a US entity, with payment made in the US)
    • Non-recourse debt on US property (i.e., lender’s claim is limited to the pledged asset) – Fully deductible.

Taxable estate

The deductions are applied against the gross US-situs assets to arrive at the taxable estate. This figure is then used to calculate the preliminary Estate Tax amount by applying the graduated rates in Table 2.

Unified credit

Any deceased who is a non-resident and non-citizen of the US may apply the unified credit against the calculated preliminary Estate Tax. The minimum unified credit is US$13,000, which is equivalent to the Estate Tax on an estate of exactly US$60,000, as can be verified by viewing columns [A] and [C] on Table 2.

Alternatively, the executor may claim the unified credit under the Canada-US Tax Convention (the “Treaty”), which allows Canadian residents to claim the same as is available to a US citizen or domiciliary – US$5,389,800 in 2024, equal to the tax on a US$13.16 million estate – as can be verified by viewing the first row on Table 1. This is then prorated based on the proportion of US-situs assets to worldwide assets.

Thus, the formula for a Canadian resident is:

 

Marital credit

The Treaty allows a marital credit for property passing to a Canadian or US resident spouse who is a non-US citizen. It is restricted to legally married spouses as defined under US law. The credit is equal to the lesser of the prorated unified credit and the Estate Tax payable on US-situs assets transferred to the spouse. The net result is that it can effectively double the prorated unified credit.

Canadian federal tax credit for US Estate Tax paid

As noted in the introductory paragraph of this article, Canadian tax law deems capital property to be disposed upon death. This applies to the worldwide assets of a Canadian resident, including US-situs property. As of June 25, 2024, a 1/2 capital gains inclusion rate applies to the first CA$250,000 of capital gains in a year, with 2/3 inclusion applying to capital gains above that threshold. The included amount, or “taxable capital gain” is added to the taxpayer’s income for the year. When a person dies, the terminal taxation year is January 1st to the date of death.

Under the Treaty, a foreign tax credit may be claimed against Canadian federal tax related to US-situs property.
The credit is limited to the Canadian tax liability on that property, noting that there is no terminal year tax on RRSP/RRIF accounts (including any US-situs investments therein) rolled to a surviving spouse.

At present, no province or territory allows a foreign tax credit for the Estate Tax.

Planning options to limit Estate Tax

There are both simple steps and complex strategies that can be taken to reduce Estate Tax exposure. Each has its costs, benefits and drawbacks, with some able to be used in combination, and some mutually exclusive of others.  Following here are some approaches that can be explored more deeply with a qualified cross-border professional.

Lifetime gifting or selling

If a given property is not owned at death, then the Estate Tax will not apply, at least not directly. Depending on when and to whom assets are transferred, gifting could affect the eventual exclusion amount available at death. The other immediate consequence to consider is early realization of capital gains that would otherwise be deferred until death.

Relocating property out of the US

Vehicles, jewellery, artwork, collectibles and other personal belongings are considered US-situs property if housed in the US. It may be preferable to transport any such property back to Canada if not required for current living needs.

Choosing/changing form of investments

While US securities are US-situs property, there are ways to have US market exposure that still shields against Estate Tax. One of the simplest ways is to own US mandates in Canadian mutual funds, segregated funds or ETFs. Large accounts can command fees comparable to individual security portfolios, so cost is not a material issue.

Life insurance, with or without an ILIT

Assuming an adequately healthy person, life insurance can provide liquidity to pay the Estate Tax. Unfortunately, the death benefit will be included in the worldwide estate if owned by that person. Alternative owners could be another person or an irrevocable life insurance trust (ILIT). In the latter case, it is best to have the ILIT acquire the policy from the outset, as there is a lookback attribution to that person if transferred within three years of death.

Non-recourse mortgage financing

Non-recourse debt is fully deductible against US-situs assets without proration based on one’s worldwide estate.
As enforcement is limited to the property being mortgaged, it may be difficult to source a willing lender. Additionally, such arrangements inevitably have higher interest charges and other potentially onerous covenants.

Canadian holding corporation

Assets held in a Canadian corporation will not be subject to the Estate Tax. While beneficial on its own, this must be balanced with the Canadian corporate tax treatment, particularly in light of the increased 2/3 capital gains inclusion rate for corporations as of June 25, 2024. As well, if residential/vacation property is held in a corporation, its use by a shareholder or other non-arm’s length individuals will likely be treated as a taxable shareholder benefit.

Canadian discretionary trust

A trust may be preferable to a corporation for either or both investment holdings and vacation property. Though trusts are taxed at the highest bracket rate (including that they too now face the 2/3 inclusion rate on capital gains), they can often be drafted such that income is allocated to one or more beneficiaries. For vacation property, the terms can allow for its use by a wide range of beneficiaries, and there is no corresponding concern like shareholder benefits with corporations. As trusts are subject to deemed disposition of capital assets every 21 years, periodic monitoring and occasional adjustment or distributions may be necessary.

Distinguishing US and non-US gift recipients

Whether giving in life or at death, it may make things more manageable for the next generation if you isolate or skew the allocation of US-situs property to US persons only. They will have to grapple with US succession rules on all their assets anyway, whereas non-residents will only be exposed if they hold US-situs assets.

US dynasty trust

If you expect one or more of your beneficiaries to remain permanently in the US, an irrevocable dynasty trust may be worth considering. If drafted in accordance with US law, it can minimize the impact of the Estate Tax, gift tax and GSTT, and as a US resident trust it is not subject to the 21-year deemed disposition of capital property.

Reference tables

 

Probate

Profits and perils of planning around a formal estate

For some people, even the thought of creating a Will casts a pall over their mood. Yes, a Will deals with a person’s death, but the broader process of estate planning is about caring for the most important people in your life. Having an up-to-date Will is central to that process.

There’s no word that seems to strike greater fear when people approach their estate planning than the spectre of “probate”. It’s not an everyday word, so its nature and implications are a mystery to many. Without a clear understanding, you open yourself up to added anxiety and potentially misguided actions that may be more harmful than helpful.

Your first priority is a sound estate plan for yourself and your beneficiaries. Once that’s satisfied then yes, why pay more probate than is necessary?

The many faces of probate

Probate has historically referred to estate matters in a variety of ways, from the name of the courts to the description of the application and process – and of course, the tax.

We’ll use the term “probate” in this article, understanding that many provinces now use different terminology. Readers are encouraged to consult an estate planning lawyer to learn the appropriate language in their province, and to discuss how the principles in this article apply to their situation.

When is a probate application needed?

A person’s Will is the legal authority for an executor to take control of that person’s property at death, in order to ‘execute’ the instructions in the Will. Like probate, “executor” is not the official term in all provinces.

Despite the Will being the source of the executor’s legal power, a probate application is often necessary to prove that authority to others who are in possession of the deceased’s property. For example, a financial institution has to be careful before releasing funds from an account as the Will may not have been executed properly. Or, there may be a subsequent Will that supersedes the one the executor offers or it may even be a forgery.

Even without such a demand, a formal application may still be necessary for other reasons:

    • Where there are minor age beneficiaries, the provincial Public Guardian’s office usually requires that official procedures be followed as part of its obligation to protect those beneficiaries’ interests
    • Most real estate cannot be transferred out of an estate without a probated Will
    • An executor requires a formal appointment to give instructions in any lawsuit involving the deceased or estate

Probate for an executor’s peace of mind

A probate application is often desired by the executor to guard against personal liability. While not completely protected from the cost and inconvenience of litigation, an executor who acts in a bona fide manner is generally protected against liability to the estate when acting under a formal probate appointment.

Undertaking the probate process

It is the executor’s responsibility to see to it that the probate application is properly completed. Often the executor will hire a law office or trust company to assist with the application. This may be for the sole task of filing the probate application, or it may be part of a continuing retainer for the duration of the estate administration. Either way, the executor remains legally responsible to oversee all hired professionals.

The executor must first gather sufficient information about the deceased and the beneficiaries to begin the application. Once submitted, the court processing time depends on the volume of applications in the queue, which may mean weeks or months. The law office or trust company can provide guidance, based on their experience.

Property subject to probate

A summary of the deceased’s assets will have to be prepared. In a simple estate this may be part of the initial court application, but often the executor will need time to identify and gather assets. In that case, an initial outline and estimate may be provided, with a legal promise to complete the information over time. In some provinces the court handles the initial legal appointment, and another government department oversees property details.

Most provinces assert jurisdiction over real estate within the province and personal property wherever it may be located, including bank/deposit accounts, individual investment securities and mutual funds, vehicles and vessels, clothing, furniture and personal belongings, as well as intangibles and business interests. Property beneficially owned by the deceased but held in another person’s name must also be accounted for.

The cost of probate

While every province has a probate process of some sort, not all provinces levy a probate fee or tax.

In Alberta, Manitoba and Quebec, there are only court filing fees, amounting to a few hundred dollars at most.

In the other provinces, the property value (usually less mortgages on real estate) is multiplied by either a flat or graduated percentage rate. The maximum rates are: British Columbia 1.4%, Saskatchewan 0.7%, Ontario 1.5%, New Brunswick 0.5%, Nova Scotia 1.695%, Prince Edward Island 0.4% and Newfoundland and Labrador 0.6%.

Acceptable probate avoidance strategies

Despite the wide range of property open to probate, there are a number of ways to legally escape its application.

Common planning practices

    • Lifetime gifts – The tax applies to property owned at death, so legitimate gifts made to others during a person’s lifetime will not be brought into the calculation.
    • Beneficiary designations – Where there is a named beneficiary on an insurance policy or registered investment plan (eg., RRSP, RRIF, TFSA), the proceeds will pay to the beneficiary outside the estate.
    • Joint ownership – When someone holds property in joint ownership with others, that person’s interest does not fall into his or her estate, but instead passes by right of survivorship to the other registered joint owners.

Situation-specific strategies

    • Secondary Wills – A multi-Will strategy uses a secondary Will to isolate property that is not expected to require court authority for the executor to take control, often shares in a closely-held private corporation.
    • Alter ego trusts & joint partner trusts – A person over 65 may transfer select property to this type of trust whereby he/she/spouse is life beneficiary, and then contingent beneficiaries receive what remains at death.
    • Corporations – Non-registered portfolio investments and associated investment loans might be held in a corporation so only the net value of the investments is subject to the probate calculation.
    • Real estate outside of province – Not really a strategy, but a reminder that extra-provincial real estate will not be subject to probate in the deceased’s province, though it may be exposed in that other jurisdiction.

And the perils?

Recall that even the highest probate tax is less than 2% of the value of estate property. Consider that in proportion to what is expected to be gained by any probate avoidance steps, as they may alter ownership rights, open creditor exposure and incur income tax. Legal and tax advice should be obtained before taking any action.

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APPENDIX – Provincial reference material

Below are provincial government websites or resources referenced from those sites. Underlined text in the PDF version of this article are hyperlinks. Full text of the links are on the next page. This is intended as a starting point for resources in each province. Consult an estate planning lawyer in the province for further information.

British Columbia

    • Guidance – Probate Fee Act s.2 – Court forms
    • Summary – The probate fee does not apply to the first $25,000. It is 0.6% from $25,000 to $50,000, and 1.4% on the amount over $50,000.

Alberta

    • Guidance – Court Fees: Surrogate Matters – Court forms
    • Summary – Surrogate Court fee is based on net value of Alberta property: $35 up to $10,000; $135 over that to $25,000; $275 over that to $125,000; $400 over that to $250,000; and $525 if over $250,000.

Saskatchewan

Manitoba

Ontario

    • Guidance – Estate administration tax – Court forms
    • Summary – Estate Administration Tax is 1.5%, with the first $50,000 of estate assets exempt. Prior to January 1, 2020, the charge on the first $50,000 was 0.5%. Real estate is valued net of mortgage/encumbrances.

Québec

New Brunswick

    • Guidance – Probate of the Will – Court fees – Court forms
    • Summary – The probate fee is $25 for an estate valued up to $5,000; $50 if up to $10,000; $75 if up to $15,000; $100 if up to $20,000; and 0.5% of the value over $20,000.

Nova Scotia

    • Guidance – Probate court practice – Court forms
    • Summary – The probate fee is $85.60 for an estate valued up to $10,000; $215.20 if up to $25,000; $358.15 if up to $50,000; $1,002.65 if up to $100,000, plus 1.695% of the value over $100,000.

Prince Edward Island

    • Guidance – Information for executors – Court forms
    • Summary – The probate fee is $50 for an estate valued up to $10,000; $100 if up to $25,000; $200 if up to $50,000; $400 if up to $100,000. For larger estates, the fee is $400 plus 0.4% of the value over $100,000.

Newfoundland and Labrador