Nova Scotia charges the highest probate tax rate in the country, exceeding the rates charged in Ontario and B.C., Canada’s two other high-probate tax jurisdictions. But while Ontarians and British Columbians can employ a dual-will strategy to mitigate the effect of probate taxes on their estate, Nova Scotians are prevented from doing so under the province’s estate law and case law.
“You can’t have separate assets under two wills and only submit one into probate [in Nova Scotia],” said Paul Thorne, director of advanced planning with Sun Life Financial in Dartmouth, N.S. “The [provincial] probate court requires the entire value [of the estate] to go through probate.”
A dual-will strategy involves establishing one will to hold estate assets — such as real estate or non-registered investments — that are subject to probate taxes, and a second will to hold assets — such as shares of a private company — that aren’t subject to probate taxes. If all estate assets are held in one will, then the value of all assets in that will is subject to probate taxes, regardless of the type of asset.
Employing a dual-will strategy is a relatively inexpensive option for probate planning relative to establishing an alter ego trust (AET) or joint-partner trust (JPT), other common strategies for wealthy people to mitigate probate taxes, Thorne said. “It’s not like you’re paying [a lawyer] double the costs to get two wills [done],” he said. “And [the wills] only come into effect on death, so it’s a onetime cost” to establish the wills, as opposed to the costs associated with filing trust returns annually.
In some provinces and territories, probate tax is effectively a nonissue. For example, Alberta charges fixed, tiered probate fees capped at $525 for estates valued at $250,000 and above.
However, three provinces stand out as high-probate tax jurisdictions.
Nova Scotia charges fixed, tiered probate tax for small estates under $100,000. For estates valued at more than $100,000, probate tax is $1,002.65 on the first $100,000 and 1.695% on estate assets above that threshold.
Ontario charges no probate tax on the first $50,000 of estate assets, but 1.5% above that amount.
British Columbia charges no probate tax on the first $25,000 of estate assets, 0.6% probate tax on estate assets between $25,000 and $50,000 and 1.4% on amounts above, plus a $200 probate application fee on all estates valued above $25,000.
For a $2 million estate, probate taxes and fees would be $33,207.65 in Nova Scotia, $29,250 in Ontario and $27,650 in B.C.
Taxpayers often bristle at the prospect of their estate being subject to probate taxes, Thorne said. That leads some to implement “do-it-yourself” strategies that may be effective for avoiding probate taxes, but also may result in family conflict, costly litigation and other negative consequences if undertaken in isolation from other estate planning considerations.
For example, a client could gift assets to heirs before death to avoid probate. However, that may result in a capital gains liability for the person making the gift. The client also would permanently lose control of the asset.
A client could transfer an asset into joint ownership, with right of survivorship, with a family member. At death, the asset would transfer to the family member and not form part of the deceased’s estate.
However, transferring an asset into joint ownership with someone other than a spouse may trigger a tax liability. In addition, because the asset now is jointly owned by someone else, it may potentially be subject to creditor and matrimonial claims against that person.
A disgruntled beneficiary also might dispute whether the deceased intended the transfer of an asset into joint ownership to be a gift or to be held in trust for the estate. If a court finds the intent to be the latter, the asset falls back into the estate and becomes subject to probate.
A client can designate a family member to be a beneficiary of a registered plan, meaning that the proceeds in the account pass outside of the deceased’s estate. However, designating a beneficiary on registered plans may lead to family conflict if heirs receive unequal amounts, or if the person who receives the proceeds of a plan is not the same as the taxpayer who is liable for the taxes on that plan.
Finally, unhappy beneficiaries also might dispute beneficiary designations on registered plans if the deceased did not document their intentions.
In Nova Scotia, in the absence of the dual-will option, tax practitioners often recommend high-net-worth clients consider establishing an AET or JPT, Thorne said. Assets held in these trusts pass to beneficiaries on death, and don’t form part of the estate.
Clients must be aged 65 or older to establish an AET or JPT. The client should consult with their advisor to see if the potential savings in probate taxes justify the cost of establishing and maintaining the trust over the settlor’s lifetime, Thorne said.
This article appears in the December issue of Investment Executive. Subscribe to the print edition, read the digital edition or read the articles online.
Regulators must stand firm on binding authority for OBSI
Editorial: The idea that OBSI is biased against the industry doesn’t fit with the facts