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.