If you’re sitting on a house, cottage or second property or two in Canada, your estate is worth considerably more than it was 10 years ago.
In some places, house prices have doubled. And single-family homes in recreational property markets such as Canmore, Alta., and Whistler, B.C., were selling for more than $1 million on average last year, according to Royal LePage.
That presents estate-planning challenges for families and their advisors who are hoping to keep probate and taxes down. The most likely to be concerned are residents of Ontario, British Columbia and Nova Scotia, where probate fees are high. In Ontario, probate – or the Estate Administration Tax, as it is called – is 1.5 per cent of the value of the estate.
The effects of big jumps in real estate value can be mitigated using various types of trusts and joint ownerships, but every family’s needs are different, advisors say.
“You don’t let the tools of the planning drive the conversation,” says Andrew Higdon, lawyer in estates and trust law at KPMG Law in Ottawa. “It’s important to find out what the client is really interested in doing … what they want to see happen with their assets and how they want assets to be enjoyed in their lifetime and after they pass.”
Just sell all the homes and cottages
One option is selling before you die.
“If creating an estate that is simple to administer … is a high priority, then it could be appropriate in some circumstances to start liquidating, transferring the value from real estate to some other kind of property at some point,” says Higdon.
But clients shouldn’t feel they need to divest real estate if it is still important and meaningful to them, he says.
If the principal residence exemption is not being used for the property, or the property being sold is not eligible for that exemption, an early sale will trigger capital gains tax, rather than deferring that charge until death, she adds.
But property in the United States, which is of course subject to U.S. estate tax, is another matter, she says.
“A lot of times we’ll talk with clients about planning options there, which are very complicated and costly to implement, but can save you a significant amount of tax. A lot of them respond, ‘I’m planning to sell this before I die. I’m not undertaking any complicated planning.’”
Joint ownership
For married or common-law partners, Peikes says she would typically check to see whether property is in both partners’ names. When real estate is held jointly with right of survivorship it automatically passes to the surviving spouse on the death of the first spouse. It doesn’t go through the estate and isn’t subject to probate.
But even this typical ownership arrangement shouldn’t be automatic, Peikes says. It could be a second marriage where there are children from a prior marriage, or one spouse may have creditor concerns that could complicate the situation.
Likewise, putting a child whom you want to inherit the house on the title to avoid probate carries other complications, advisors warn.
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“It’s usually not a good idea. That’s the short answer,” says Peikes. “The longer answer is it can be done with proper advice. A lot of people don’t get proper advice and it leads to disputes and litigation and the savings they were trying to achieve just results in more costs to the estate.”
Among the risks are opening up the property to the child’s creditors or matrimonial claims and interfering with the property’s principal residence exemption from capital gains, she says.
If the testator has only one will, then the property may still require probate, Peikes says, so primary and secondary wills are needed in Ontario to separate assets subject to probate and those that are not.
Higdon says joint ownership with an adult child needs to be done in consultation with an advisory team.
“It has to be done carefully with a mind to other side events,” he says.
Trusts are an option, but there’s a wrinkle
Trusts, including alter ego trusts and joint spousal trusts, have special qualities under the Income Tax Act that may create tax advantages, says Higdon. They also can be useful for probate planning.
Assets, including real estate, held in trust don’t pass under the will when you die and therefore they’re not considered under that probate calculation, he says.
Because the terms of a trust can specify what happens after death, they can be a flexible tool, allowing for possibilities such as a payout on death or holding the asset over time for the descendants.
However, tax rules have changed this year, and bare trusts will now be required to file an annual tax return, the T30 trust return, says Peikes. That, coupled with new annual filing requirements under the Underused Housing Tax Act, may affect how many clients use bare trusts for estate planning, she says.
The new legislation affects non-Canadian citizens or non-residents with real estate in Canada, as well as any private corporations or trusts holding Canadian real property.
The tax accountant fees for annual filings could eat up any probate savings for younger clients, she adds.
Other factors to keep in mind
Probate isn’t the only consideration. An eye should be kept on capital gains taxes, too.
The principal residence exemption provides a shield for capital gains, Higdon says. “It’s important to recognize that whether it’s a vacation home or the home you live in most of the time, that’s immaterial for the purposes of the principal residence exemption. You are permitted to declare which property is your principal residence according to which is most tax-advantageous to you.”
The test is “ordinarily inhabit,” and that’s a lower threshold than the place you live in most of the time, he says.
Another issue to consider is the land transfer tax. Rules vary from province to province.
In Ontario, property can be transferred from the beneficial owner to a bare trust corporation without triggering the land transfer tax, Peikes says.
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