Tag: Probate

Joint ownership

Prudence, perks & pitfalls in property transfer

Joint ownership is often the way that spouse/common-law partners (CLP) will own their matrimonial home, a recreational property and maybe other real estate held for investment. But when other owners are contemplated to be involved – for example, adult children – another arrangement may be more appropriate, including just leaving well enough alone.

Compared to tenancy-in-common

There are two common ways that property is owned by more than one person, joint ownership and tenancy-in-common, with a few key features distinguishing them:

 

Probate avoidance

Probate is the tax or fee charged by a court for confirming that a submitted Will is valid for the named executor to deal with a deceased person’s estate. The formal name varies by province. Some provinces just charge a flat filing fee of a few hundred dollars, and in others it can be up to about 1.5% of the value of the estate property.

The choice between the types of property ownership is often influenced by a desire to avoid probate. Specifically, the right of survivorship under joint ownership allows for the interest/rights of a deceased owner to bypass his/her formal estate, thereby avoiding probate.

While probate could total up to a significant dollar figure when viewed in isolation, it is usually a relatively small proportion of the cost of administering an estate, and there are trade-offs to consider before deciding to proceed.

Couples’ preference for joint ownership

Spouse/CLPs usually intend the other to be the primary or only beneficiary of their estate. Joint ownership can therefore simplify the estate by passing selected property outside the Will. This can put things beyond the reach of a Will challenge, insulate against estate creditors, and again escape any probate fee/tax.

In addition, appreciated property can pass between spouse/CLPs at its cost base, allowing couples to add one another to title without triggering a tax bill on the capital gain.

Involving adult children – Tread carefully

As children are usually the next stage of beneficiaries after a spouse, it may at first seem a good idea to add one or more as joint owners with the parents, or after one parent dies. While this may indeed streamline the legal transfer, it is an action that should be balanced with other legal, financial and practical considerations.

Income tax effect of transfer to joint ownership

Unless it is clear that the parent retains the beneficial rights to the property, tax will generally be triggered when a non-spouse is added. For example, if two parents add their adult child as a joint owner on an investment property, they are deemed to dispose of 1/3 of the property, thereby triggering tax on 1/3 of the current capital gain. A tax professional can advise the parents on appropriate steps and recordkeeping if they wish to avoid this result.

Relief and risk if it is a principal residence

A variation of the example above would be to put a child on title of the parents’ principal residence. While their principal residence exemption (PRE) may protect against capital gains tax when the child is added, if the property is not also the child’s own principal residence, future capital gains on the child’s portion may very well be taxable.

Legal and registration cost

Costs of transfer should be balanced with expected probate tax savings. According to province (and even regions within), taxes or fees on land transfers may be flat charges or be based on a percentage of the property value. Transfers to a spouse/CLP are often exempt, extending in some provinces to certain intra-family transfers.

Exposure to creditors of other joint owner(s)

If an added child runs into debt problems, creditors may decide to take legal action against the property. While the creditors’ claim will be limited to that child’s interest, if neither parents nor child have other assets to satisfy the claim, the creditors could force sale of the property to collect the amount due.

Matrimonial law implications

Adding a child as a joint owner may expose their interest to a property equalization claim on a later relationship breakdown. In most provinces if it is a gift to the child, then in principle it is not exposed, but this could be affected by how the property is used thereafter. In Ontario for example, a recreational property that is regularly used by a married couple may be considered a matrimonial home, making the value of the ownership interest equalizable.

Legal or beneficial transfer, and estate complications

When an adult child is gratuitously added as a joint owner, that is presumed not to be a beneficial transfer. On the parent’s death, the child holds the property as trustee for the estate beneficiaries. The presumption can be rebutted if the parent expressed otherwise at the time of the transfer, ideally in writing. This would be particularly important if there are other siblings not on title, especially if there is any existing family tension. Otherwise, the onus is on the child to prove to a judge that the parent intended that that child personally succeed to the property.

Application to financial accounts and other personal property

Property means something that can be owned, whether that’s real property (or real estate) or personal property. Personal property covers moveable things, including financial instruments like chequing and savings accounts, and non-registered accounts holding GIC/term deposits, individual marketable securities or mutual funds.

Joint ownership can also be used with personal property. As with real property, this can simplify and streamline estate transfers between spouse/CLPs, and where others are involved the cautions above again apply.

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

Applying a multiple will strategy for probate reduction and privacy

At issue

While we most often speak of a person’s last will and testament in the singular, the practice of using multiple wills has a long history.  There are a number of reasons why a testator might want to have more than one will, most commonly:

  • Reducing probate tax in jurisdictions where that is a material concern,
  • Protecting the privacy of the deceased and beneficiaries by shielding against potential disclosure of the nature and value of assets in public/court documents and processes, and
  • Providing for less costly, more timely and generally less complicated procedures for dealing with real estate outside the deceased’s home jurisdiction.

In a purely domestic arrangement, the usual process is for the lawyer to concurrently prepare a primary will that deals with the estate generally, and a secondary will that carves out certain assets.  This secondary will is often called the ‘non-probate’ will, assuming probate reduction is a prime motivation.  Though probate is a small percentage cost to an estate, where multi-million dollar assets such as private corporation shares are involved, the absolute dollar cost can be substantial. 

Where foreign real estate is added to the mix, things can be even more challenging.  Coordination is not only required among documents, but also from one lawyer’s office to another.  

Clearly, informed intentions and coordinated professional advice are critical to reaping the benefits of this sophisticated strategy.

Granovsky Estate v. Ontario, 156 DLR (4th) 557

Heard in 1998, this case involved a carefully executed dual will strategy isolating $25 million of private corporation shares in a secondary will.  The Ontario government sought to add the shares to the $3 million in the primary will for calculation of the probate fee (now known as estate administration tax).  This would increase the probate fee by $375,000 (in 1995 dollars).

Ontario Estates Act section 53(1) required that probate fees were to be paid “upon the value of the whole estate, including the real estate as well as the personal estate.” [emphasis added]  However, section 32(3) allowed for a limited grant of probate allowing an applicant to “set forth in the statement of value only the property and value thereof intended to be affected by such application or grant.” [again, emphasis added]

The court considered multiple wills cases as far back as the late 1800’s, reviewed the evolution of the current statutory provisions, and even marked the origin of probate fees in 1358.  Those fees originally applied only to personal property, not real estate.  

With respect to the Ontario legislation, the judge noted that “[it] was later added as real property within the jurisdiction, and this would account for the “whole of the estate” in s. 53 of the Act.”  So while s.53 extends the probatable estate to include real estate, s.32(3) allows a testator to select which assets will be governed by a given will, including using a secondary will for assets that do not require probate. 

McLaughlin v. McLaughlin, 2014 ONSC 3162, 2014 ONSC 5046, 2015 ONSC 3491, 2015 ONSC 4230, 2016 ONSC 481

In an effort to reduce probate/estate administration tax, a testator’s secondary will purported to deal with one parcel of real estate separate from other assets.  Unfortunately there were some clerical drafting errors that duplicated bequests from the primary will, and there was no residue clause.

The case serves as a lesson as to the need for carefully coordinated drafting.  As well, it illustrates how longstanding family conflict (over 20 years in this case) can carry through to estate turmoil, with the family returning to court five times, though in fairness two of those dates were to address costs rulings.  

Practice points

  1. Granovsky enables the use of multiple wills to reduce probate (estate administration tax) in Ontario, and it has been followed in some provinces.  However, some provinces specifically disallow the strategy, so a qualified lawyer should be consulted.
  2. Bear in mind that establishing the strategy and keeping it up-to-date requires some cost and effort.  The documents must be drafted such that they do not revoke one another, and so that no conflicting double-dealing arises.  
  3. As well, the wider the variety of assets referred to in the documents and the more frequent those change, the greater the cost of re-drafting and the possibility that something may fall between the cracks.