Don’t forget your digital assets

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Making a list of personal assets is one of the first things that people do when planning their estate. Included in this list are typically physical or monetary assets such as bank accounts, investments, real estate, jewelry and other personal effects. Usually, digital assets are left out of estate and incapacity planning – an oversight which has real consequences if an individual becomes incapacitated or passes away.

With the advent of e-mail, social media, electronic banking, online investments, and digital vaults, people increasingly have significant and valuable online presences. Many also use digital programs to safeguard family photos and music. As these assets and memorabilia continue to become digitized, there are important issues to be considered in the context of estate planning – such as if, and how, these assets will be accessed upon incapacity or death.

Digital assets are often overlooked in a will or power of attorney because they rarely have monetary value, but including them in estate planning is vital to having agency over how these assets should be managed after your incapacity or death.

Gaining Access to your Accounts

One of the biggest issues surrounding digital assets is the fact that they are typically username and password protected. If the executors of an estate are not provided with this information, they may encounter issues with accessing the account of a deceased person. In order to address this issue, individuals should consider providing friends, family and/or executors with a detailed list of any and all virtual accounts and the relevant information associated with each account. This list should be stored in a safe, secure place. Family members or executors should be given information regarding access.

Below is a list of common digital accounts to consider:

  • Online banking
  • E-mail
  • Social media
  • Sentimental items stored on your hard drive
  • Hardware, such as a cellphone, laptop, or tablet, that requires a password
  • Online accounts such as Amazon or PayPal

By planning ahead, individuals can arrange full access to digital assets at an appropriate time, and ensure that no valuable or digital property is overlooked.

Social Media Accounts

Prudent estate planning should also consider what will happen to Facebook, Twitter, Instagram, and other social media accounts on death. There are different ways in which people deal with such accounts. Some prefer to have the account removed and deleted, whereas others prefer retention – including the option to have certain accounts memorialized. Given these different approaches, it is wise to provide direction to executors in order to avoid any unnecessary issues. The key to preparing for a digital “afterlife” is important to indicate what is to happen with digital assets in writing.

For additional information on estate planning to include digital assets, please consult a TEP.

How is an estate taxed?

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Canada does not have an estate tax. However, capital gains and income taxes are generally triggered by death.

An executor must file the deceased’s final income tax return for the year in which they died and pay any tax owed up until the date of death (including taxes on any deemed disposition of assets, see below). This final return is called a “terminal return”.

An executor may also need to file an estate income tax return for each taxation year of administration to report income earned and capital gains and capital losses realized while the deceased’s affairs are being administered (i.e., until assets are distributed to beneficiaries).

Prior to distributing assets, the executor may request that the Canada Revenue Agency (CRA) issue a “clearance certificate”, which certifies that all taxes of the deceased for have been paid.

In addition, some provinces and territories also have additional taxes in the form of probate fees, sometimes referred to as Estate Administration Tax, Probate Tax, or Probate Charges.

Is a clearance certificate required from CRA?

It is important that the executor pays any final tax owed prior to distributing anything from the estate. An executor can be held personally liable for any outstanding taxes of the deceased if a clearance certificate is not obtained prior to distribution of assets. Accordingly, it is generally prudent to seek a clearance certificate from the CRA (though it should be noted that processing times for the clearance certificate can be quite long).

In some cases, executors may make interim distributions when:

  • The assets are sufficient to do so;
  • There is enough certainty with respect to the potential tax; and
  • The executor has obtained indemnities or releases from the beneficiaries.

What is a “deemed disposition” and why does it matter?

When someone dies, CRA treats any capital property owned at the time of death as though they were sold on the day the person died. For example, if the deceased owns stock, it would be presumed for income tax purposes that the stock was sold the day the person died. Any accrued gains (or losses) would be taxed accordingly.

Deemed dispositions of property may trigger additional capital gains tax to be included in the terminal tax return.

What is a Qualifying Spousal or Common-Law Partner Trust (QST)?

The creation of a QST allows the payment of capital gains tax to be deferred until both spouses or common-law partners are deceased.

A QST allows spouses to provide for the surviving spouse or common-law partner during their lifetime and then have any remaining assets transfer to their own chosen beneficiaries (e.g., children from a first marriage). The surviving spouse or common-law partner must be entitled to the QST’s annual income and can (but need not) be able to access the assets of the QST during their lifetime.

Detailed estate taxation planning – including setting up a QST should be undertaken with the assistance of a licensed professional such as a TEP.

How is an estate taxed?

A deceased’s estate is treated as a trust for tax purposes and a T3 trust tax return must be filed to report any taxable income earned during estate administration.

For the first 36 months from the date of death, the estate may qualify as a graduated rate estate (GRE). Qualification as a GRE may have significant tax advantages, including the ability to access graduated tax rates, certain exemptions, special tax rules regarding losses realized in the first tax year and flexible charitable donation claims.

What happens when property is distributed from an estate?

A deceased’s assets can be given directly to a beneficiary or as discussed below, put into a trust for their benefit.

Generally speaking, assets can be given to a beneficiary without triggering any further capital gains tax on any increases in value. Instead, the beneficiary will pay tax when they actually dispose (or are deemed to dispose) of the property.

What is a testamentary trust, and how is it taxed?

Generally, a testamentary trust is any trust that arises on death due to the operation of a Will.

A testamentary trust creates a legal relationship between the deceased person, the trustee and the beneficiaries. The trustee is often the executor, but can be a separate person named in the Will. The beneficiaries are the family members or other persons specified in the Will. The trustee is responsible for payments to the beneficiaries based on the terms specified in the Will. Beneficiaries can have a fixed interest or discretion may be given to the trustee to make allocations amongst the beneficiaries.

Since 2016 all ongoing trusts created under a Will (except qualified disability trusts) are subject to tax at the highest marginal tax rate for individuals. If the trust’s income is paid out to a beneficiary it will be taxed in their hands at their rates which may be lower than the trust’s tax rate. The trust must file an income tax return for each calendar year reporting its income earned and prepare a T3 reporting slip for any allocations made to its beneficiaries.

Why use individual trusts for my children?

If gifts are made to an adult child using a trust instead of being made directly, the adult child may be able to split the income of the trust with their own children. Depending on the number of grandchildren and their age, and the amount of income being produced in the trust, this could offer significant tax savings. For more information on the benefits of individual trusts, speak with a TEP.

Does this mean beneficiaries pay no tax for inheritances?

In most cases, inheritances are received after-tax and the beneficiary acquires the property at a cost equal to the deceased’s deemed disposition value. For instance, if a beneficiary is left a house, they will pay no tax on receiving that property. Once the house is in their hands, they will be liable for standard taxes such as property tax and income tax if the house is sold for a profit and was not their principal residence.

Note that some jurisdictions outside Canada tax beneficiaries by way of an inheritance tax. As such, it is possible that a foreign beneficiary will be subject an inheritance tax while the Canadian estate is subject to capital gains tax on the deemed disposition of the deceased’s assets. A TEP should be consulted for advice on how different tax systems will impact estate planning for foreign beneficiaries.

What are Probate Fees / Estate Administration Tax?

Probate fees (known in some provinces as probate tax, probate charges, or estate administration tax) are fees or taxes charged in relation to obtaining a grant of probate (or Certificate of Appointment in Ontario). The name of the fee/tax and amount of tax charged varies from province to province and territory to territory.

Are there any exemptions from Probate Fees?

The list of items and estates eligible for exclusion from probate fees varies from province to province. Estate planning can be undertaken in certain provinces to minimize probate fees through the use of Multiple Wills. For more information on probate exclusions and rates, please refer to the “What is Probate?” and “Probate by Province” sections of this website.

For further information or assistance in administering an estate, please consult a TEP.

Can I Exclude Dependents From Receiving Assets From My Estate?

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Some people may wish to leave money or other assets to individuals or organizations other than relatives in their Wills. These situations may arise when an individual feels a strong calling to leave most or all their assets to a charity, or in cases where family members are not perceived as those in the most need of subject assets.

While, in theory, a testator can dictate the distribution of their assets however they would like, the right to choose how assets are distributed may be limited by dependants’ relief legislation and family law obligations. Dependants’ relief legislation is in place to ensure that dependants who relied on loved ones for support are not unfairly left out of a Will.

Provincial law

In Canada, each province has its own law dealing with dependant relief. The relevant statutes include:

  • Ontario –Succession Law Reform Act
  • Quebec – Civil Code of Quebec
  • British Columbia – Wills, Estates and Succession Act
  • Alberta – Wills and Succession Act
  • Saskatchewan – Dependants’ Relief Act, 1996
  • Manitoba – Dependants Relief Act
  • New Brunswick – Provision for Dependants Act
  • Nova Scotia – Testators’ Family Maintenance Act
  • Newfoundland and Labrador – Family Relief Act
  • Prince Edward Island – Dependants of a Deceased Person Relief Act
  • Yukon – Dependants Relief Act
  • Northwest Territories – Dependants Relief Act

In British Columbia, the courts have wide latitude to vary a deceased’s Will if the court thinks the Will does not adequately provide for the spouse or children of the deceased. In that jurisdiction, is a moral obligation to provide for spouses and children in a Will, even if the children are self-supporting adults.

By contrast, in most other Canadian jurisdictions, an adult other than the deceased’s surviving spouse must demonstrate that they were dependant on the deceased for support in order to bring an action to vary a deceased’s Will (for example, the adult child of a testator). For advice on how to navigate dependants’ relief legislation in your jurisdiction, contact a TEP.

Who are my dependants?

Dependants eligible to challenge a Will typically include spouses and children who depended on the testator for support immediately prior to their death. Depending on the testator’s province of residence, this may include common law partners and stepchildren. A Court can vary the Will plan if it decides that the dependants are put into financial difficulty by the terms of the Will.

Avoiding disputes with your family

If there is any possibility that a Will may be challenged (for example, a controversial position is taken in the Will), a TEP should be consulted for advice on how to avoid expensive and draining litigation.

If you are concerned that family members may challenge a Will, you may wish to consider the following steps:

  1. Tell your family why you decided not to leave anything to them.
  2. Write a letter to accompany your will explaining your reasons.
  3. Get a doctor’s certificate confirming that you were of sound mind when you made the will, to minimize the risk that it can be successfully challenged on the grounds of mental incapacity.
  4. Clearly communicate your intentions to your TEP in writing.

For further information, or assistance with drafting a contentious Will, please contact a TEP.

I don’t believe it! Common excuses for not making a will

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Making a will is important for various reasons. Not only does executing a Will ensure that assets are distributed according to the testator’s wishes, it also saves family members the energy and expense associated with Court and filing an application to enable the administration of your estate. Despite the importance of making a Will, many people put it off for various reasons. This article is designed to provide you with some of the most common, misguided excuses for not executing a Will.

  1. I don’t need a will because my partner will get everything.

 A common misconception is that a romantic partner will automatically inherit all property left by the deceased, but this is not always the case. Without being legally married – even in cases of long-term cohabitation – surviving partners may, in fact, receive nothing if the other partner passes away. In addition, even married couples cannot count on automatic inheritance of all property left by the deceased. In the absence of a Will, the laws of intestacy determine the division of an estate.

  1. Making a will is too expensive.

 Individuals are often put off by the purported cost of making a will. This fails to take into account the fact that dying without a valid will(intestate) may cost the family and loved ones of the deceased much more in the long run. Moreover, simple wills are often not expensive and can be bundled with Powers of Attorney in order to reduce overall costs.  Focus on the value of having a valid will versus the cost.

  1. I don’t have the time.

 Making a will does not have to be time consuming. Compare it to the time it takes for commute to work or drive to the cottage. Creating a will brings peace of mind, encourages appropriate estate planning, and ultimately spares family and loved ones much more time after your death.

  1. I don’t have much to leave.

 Making a will  is a good idea for anyone, no matter how large or small their estate. A will serves several purposes in addition to determining the division of an individual’s assets. For example, any individual with minor children needs to ensure that their will appoints a guardian who is responsible for their care. It also enables one to appoint the person who is able to make decisions on behalf of the estate, and to deal with government agencies, banks, and other third parties.

Moreover, as an individual gets older, the value of their assets and real property is likely to increase. A will can ensure that the increased assets are distributed appropriately in the case of untimely death.

  1. I’m too young, I don’t need to make a will.

For adults, there is no age too young to create a will. People are rarely given time to plan for accidents and illnesses. Life can happen when you least expect it. A will brings the peace of mind of knowing that children will be cared for, assets will be distributed appropriately, or even that spouses will not have to sell the family home due to an untimely death.

Making a will is important for several reasons. Not only does executing a will ensure that assets are distributed according to the testator’s wishes, it also saves family members the energy and expense associated with to Court and filing an application to enable the administration of your estate.

Despite the importance of making a will, many people put it off for various reasons. This article is designed to provide you with some of the most common, misguided excuses for not executing a will.

1. I don’t need a will because my partner will get everything.

A common misconception is that a romantic partner will automatically inherit all property left by the deceased, but this is not always the case. Without being legally married – even in cases of long-term cohabitation – surviving partners may, in fact, receive nothing if the other partner passes away. In addition, even married couples cannot count on automatic inheritance of all property left by the deceased. In the absence of a will, the laws of intestacy determine the division of an estate.

2. Making a will is too expensive.

Individuals are often put off by the purported cost of making a will. This fails to take into account the fact that dying without a valid will (intestate) may cost the family and loved ones of the deceased much more in the long run. Moreover, simple wills are often not expensive and can be bundled with Powers of Attorney in order to reduce overall costs.  Focus on the value of having a valid will versus the cost.

3. I don’t have the time.

Making a will does not have to be time consuming, compare it to the time it takes for commute to work or drive to the cottage. Creating a will brings peace of mind, encourages appropriate estate planning, and ultimately spares family and loved ones much more time after your death.

4. I don’t have much to leave.

Making a will is a good idea for anyone, no matter how large or small their estate. A will serves several purposes in addition to determining the division of an individual’s assets. For example, any individual with minor children needs to ensure that their will appoints a guardian who is responsible for their care. It also allows appoints the person who is able to make decisions on behalf of the estate, and to deal with government agencies, banks, and other third parties.

Moreover, as an individual gets older, the value of their assets and real property is likely to increase. A will can ensure that the increased assets are distributed appropriately in the case of untimely death.

5. I’m too young, I don’t need to make a will.

For adults, there is no age too young to create a will. People are rarely given time to plan for accidents and illnesses. Life can happen when you least expect it. A willbrings the peace of mind of knowing that children will be cared for, assets will be distributed appropriately, or even that spouses will not have to sell the family home due to an untimely death.

For additional information, or advice in drafting a will, please consult a TEP.