Is there tax after death?

Hey there, time traveller!
This article was published 05/10/2020 (1828 days ago), so information in it may no longer be current.

Dear Money Lady,

I have heard that you (or, rather, your estate) have to pay taxes upon your death. Is that the case in Canada? And how is it determined?  
As an older man I am worried about whether or not I will be able to afford this, and I would prefer to not make my children pay for it.

John

Dear John,

We do not have a “death tax” in Canada but we do have probate. In the U.S., death tax is assessed on all assets of a deceased person, calculated at the date of death.

This is not something we do in Canada.  I think what you are thinking of is “probate tax,” which is determined provincially and is very different from death tax.  

Essentially, probate is a process which provides judicial approval that a will is not to be contested, that it is the only will in existence, and that the executor has the authority to act and be recognized by the courts. All banks, investment companies and financial institutions usually require a probated will to ensure they are dealing with the authorized executor. If there are any lawsuits or claims against the estate, a will must always be probated.

Probate is not a tax but there is a probate fee that varies by province. In some provinces it is a fixed amount, while other provinces charge a prescribed rate on the gross value of the entire estate.

So, are there ways to reduce a probate fee?  

Yes. One way would be to have assets bypass probate and pass directly to beneficiaries.  Tax-free savings accounts, registered retirement savings plans, registered retirement income funds or the proceeds of life insurance are not subject to probate, however the tax associated with any registered plans will need to be paid by the estate, so one should always ensure your estate has liquidity. Another way to avoid the potential cost of probate would be to “gift” cash or assets to family members prior to death. It is advisable to discuss this option with a good tax accountant to ensure there are no adverse income tax consequences.

Property can also be sidestepped from probate by simply holding it in joint tenancy with right of survivorship.  This is how most spouses hold assets — jointly, so that property passes to the survivor on the first death with no requirement to obtain probate.

Remember to seek professional advice.  Talk to your accountant, your adviser or your estate planner. They will know your situation best and can provide other ways to avoid probate, such as testamentary trusts, inter-vivos trusts or perhaps the use of multiple wills.  

Christine Ibbotson is the author of How to Retire Debt Free and Wealthy. If you have a money question, please email her through her website at: www.askthemoneylady.ca