Estate planning: Understanding taxes and probate fees
Canada does not have “estate taxes.” Estate taxes exist in the United States, but not Canada.
When someone passes away, that person’s legal representative (executor or estate administrator) has to file a final income tax return. The estate is everything that a person owns when they die, including their property and their debts.
Like all other debts, income tax has to be paid by the estate first, before people can inherit; this is called “settling the estate.” The notice of assessment for the deceased tax return is one of the documents the legal representative needs in order to get a clearance certificate and distribute property from the estate.
Due date for the return is determined by the date of death
If you pass away between January 1 to October 31, the final return is due on April 30 of the following year. If you pass away between November 1 to December 31, then the final return is due six months after the date of death.
What is taxable to the estate?
All income earned from January 1 to the date of death must be reported on the final or terminal return. Two of the biggest sources of tax at death include:
- Capital gains tax. Upon death, the government determines that you have sold everything. Consequently, you will have to pay income tax on any capital gains. Capital gains taxes can be avoided when you leave your assets to your spouse or a spousal trust. You don’t have to pay capital gains taxes on your principal residence when you die.
- Tax on your RRSP or RRIF. When you die, the federal government regards all of your assets (RRSPs, RRIFs, stocks, mutual funds, real estate, etc.) as disposed of for tax purposes. The entire amount remaining in your registered plans will become income and subject to income tax when you die (unless you leave it to your spouse, or a disabled financially-dependent child or grandchild).
Probate is the legal process that occurs after death and is intended to prove that a will is indeed the Last Will and Testament of a deceased person. At the conclusion of a probate process, a court of law grants an executor the power to settle an estate. The probate process involves various expenses, including court fees and lawyer’s fees. Without a grant of probate, the institutions that hold or register your assets are unlikely to deal with your executor. Those institutions include banks and the land titles office.
Many provincial governments also levy probate taxes or probate fees at death. In Alberta, the fees are some of the lowest in Canada.
· $25 probate fee for estates of $10,000 or less
· $100 probate fee for estates over $10,000 up to $25,000
· $200 probate fee for estates over $25,000 up to $125,000
· $300 probate fee for estates over $125,000 up to $250,000
· $400 probate fee for estates over $250,000
Many provinces do not have a maximum fee and probate can cost thousands of dollars. In Alberta, the maximum probate fee is only $400.
To see probate fees from other provinces, here’s a handy chart from the Canadian Tax Resource.
You can minimize probate fees by moving assets outside of your estate before you die. For example, this can be done before you die by giving assets away, by transferring assets to trusts or just by spending your assets before you die. Maybe there’s something to be said about smaller, simpler estates.
The information in this article was sourced from Jim’s book Smart Tips for Estate Planning. Jim is also the creator of My Estate Organizer, a tool to help people organize, diarize and share their estate information with the people they love. It is a tool designed to help beneficiaries and executors.
Having difficulty finding a true independent financial adviser. They claim to be independent and in the same sentence state they’re paid by the company whose investments they recommend. None are listed in phone book.
Jim – you’ve probably addressed this in a previous post, or maybe part of this post is addressing this, but what about an inheritance? Are they taxed? Sorry….might be a generally understood topic and therefore a dumb question.
Not a dumb question at all. Inheritance is not taxed – only the estates the inheritance comes from. When someone gets an inheritance, the taxes are usually paid already. It’s the estate that is responsible for the tax.
Thanks for the reply Jim. Much appreciated.
If the estate is mostly RSPs this will happen: when the estate does its final tax return the RSP is deemed to be 100% taxable income to the estate. Then the RSP is distributed to the beneficiaries. Then the estate will try to pay the tax out of the remaining assets in the estate (e.g. out of the non-regisistered accounts). If it can’t do that then the estate is bankrupt. Revenue canada will then come after the beneficiaries to get the outstanding taxes.
Is capital gains tax payable on the principal residence on the second ?
Do not overlook the total cost of probating. Law firms in Alberta typically charge a flat fee plus a percentage of the estate. I am ok with fee for service, but the surcharge is not equitable and not based on services performed. The forms package costs around $20.00 at the Queens Printers. With care and patience a probate application is quite painless. But requires great care and attention.
Hi Jim, Is it legal for a lawyer to change her fees on an estate a year after probate? Is holding 150,000 back for future land taxes reasonable, when taxes are 1500 a year?
Not sure if you can answer this for me. I just lost my husband and I have a home and I am on my own.I have a Very simple will . My one child is my executor and gets everything . However I’m not sure how to leave my house to her as she already owns a home. I would like to have her sell this home and take the profits. What is the best way to do this and is there capital gains or probate on this. What is the best way for her to inherit it . Should she inherit it then sell and if so what would she have to pay because it’s a second house for her or just say in my will she as executor is to sell the house then profits go to her. Which is the best way? I’m at a loss. I want her to get the most without paying too much and the best way to do this. Any advice on which way I should handle this.
Hi Jim would you please discuss best options to minimize taxes owed
in dealing with a modest estate, largely a principal residence, when there is no spouse
An interesting follow on to this article would be a general timeline for a relatively simple estate from death through probate to beneficiaries receiving inheritances.