Marriage, divorce and the effect on Wills

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divorce, will

Marriage, Divorce and the Effects on Wills

Marriage

In many jurisdictions in Canada, getting married automatically revokes any pre-existing Will created prior to the marriage. This means that the Will is cancelled out in its entirety unless one of several conditions are met. These conditions include:

  1. A declaration is in the Will indicating that it was made in contemplation of the marriage;
  2. An election is filed with the provincial Estate Registrar within one year of the testator’s death; or
  3. The Will is made in the exercise of a power of appointment dealing with property that would not form part of the property of the deceased if they died intestate.

Divorce and Separation

Unlike marriage, divorce does not revoke a Will – or at least, not the entire Will. In many jurisdictions, gifts or appointments made to former spouses by Will are automatically revoked if there is a subsequent divorce. In many ways, Wills are treated as though the former spouse has predeceased the person making the Will. However, these laws should not be relied on as a substitute for updating Wills for a number of reasons:

  1. A Will is not revoked by the separation of legally-married spouses prior to a formal divorce;
  2. There could be unintended consequences if there are no substitute beneficiaries, the shares left to them are uneven, or they are no longer appropriate; and
  3. Gifts made by Will to former common-law partners are not revoked by separation and must be updated by a new Will or codicil.

In addition, in most cases, separation from a common-law partner does not affect any beneficiary designations relating to assets such as RRSPs, TFSAs, or insurance policies. Given the extensive differences in legislative regulations, it is imperative to consult an estate specialist in the Province or Territory to ensure that wills are compliant with the jurisdiction of current residency.

Depending on the jurisdiction where you live, separating spouses may discover that their separation impacts their estate plan. For couples that are separating, this process provides an opportunity to reconsider your entire estate plan and make changes to reflect the new situation.

For legal advice regarding updating your Will due to a change in family circumstances, please consult a TEP.

Making gifts during your lifetime

Posted on By Joanna Pegum
gift in the post

It has become increasingly common for parents to give gifts to their children during their lifetime rather than leaving it in a Will. Whether motivated by a desire to view the recipient enjoy the benefits of the gift during the lifetime of the giver, or by the circumstances of the recipient (e.g., a child needs to move out, buy a house, or attend university), gifts made during the lifetime of the giver warrant specific consideration.

Inter vivos vs. testamentary gifts

Gifts made during the lifetime of the giver are called “inter vivos” gifts. Gifts made by Will are referred to as “testamentary” gifts.

Is there a tax on gifts in Canada?

There is no tax on gifts in Canada, either to the giver or to the recipient. However, there may still be tax consequences to making gifts. The most common consequence is that when an asset – such as stock, real property, or even art – is gifted, the item is deemed to have disposed of by the giver at fair market value. Tax will apply to the increase in value, if any, of the asset. In general, the giver of the gift will be liable for tax on half the value of the increase at their marginal tax rate.

One potential advantage to an inter vivos gift is that, generally, any further appreciation of the asset is deferred until the beneficiary disposes of the asset. An inter vivos gift may be appropriate as part of estate planning in situations where the asset is likely to increase further in value.

To avoid adverse tax consequences property should not be sold to the recipient at a price below fair market value. This may result in double tax as the giver’s sale price will be based on fair value whereas the recipient will have a low tax cost equal to the price paid.

Inter vivos gifts as a means to avoid probate fees

Consider the motivation behind making inter vivos gifts carefully. While such gifts are appropriate when made out of a genuine desire to permit the recipient to have the asset, they may not be appropriate as a means to avoid probate fees. Gifting assets during the lifetime of a testator or setting up joint accounts as a means of avoiding probate fees may have unintended results, complicate the administration of an estate, incur unwanted taxes, and/or result in a disproportionate distribution of assets. Also, commencing in 2023, it may also require compliance with the new “trust reporting rules”.  It should be noted that there has been a great deal of litigation regarding gifts made to avoid probate, which is time consuming and expensive, so any attempts to reduce probate fees should be planned and documented appropriately.

For further information or to plan appropriately for inter vivos gifts 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.

What is Probate? What does it mean to probate a Will?

Posted on By Louise Polcaro
will, probate

Probate, from the Latin probare, “to test or prove,” involves the act of proving the legal validity of a Will. In certain situations (for example, to access a deceased’s bank accounts or to transfer land), a legal document must be issued by a Court proving that a Will is valid and the person named as Executor within the Will has the authority to act on behalf of the Estate. In most provinces and territories, the Court issues a certificate called ‘Letters Probate’, the ‘Grant of Probate’, or ‘Grant of Certificate of Appointment of Estate Trustee With (or Without) a Will’. The process is commonly referred to in short as “Probate.”

The process for verifying Wills in Quebec differs from the rest of Canada.

If the deceased left a Will

If the deceased left a valid Will, the document should provide who the appointed authorities are (i.e. Executor(s)) to look after the estate administration, who the beneficiaries of the Estate are, and any specific intentions as to how the deceased’s possessions, money or property are to be distributed to them.

The Executor named in the Will may be required to obtain Letters Probate (or Certificate of Appointment of Estate Trustee With A Will, in Ontario), in order to administer any estate assets or settle any claims of the deceased. If required, a probate application form would be prepared and submitted to the Courts, along with other required or supporting documentation. This process varies slightly from province to province. For more information regarding probate in the specific province of residence (determined with reference to the deceased), please click the name of the province below.

If the deceased did not leave a valid Will

If the deceased did not leave a valid Will, they are said to have died “intestate.” Generally, when a person dies intestate, an application must be made to the Court. The Court will appoint an authority (i.e. Administrator(s)) to administer and distribute the Estate according to specific laws called the laws of Intestacy. These laws determine who is eligible to receive assets in the estate, and they do vary province to province as well.

How does the Grant of Probate different than the Grant of Administration?

Although the naming varies slightly between provinces, Courts generally have three different grants they can issue when a person applies to administer an Estate. It depends if the deceased died with a Will or without one. It is the responsibility of the person applying to determine what type of grant they are applying for and to apply for the appropriate grant. Each type of grant will have different application requirements.

(1) If the Will names you as the Executor, you will apply for a Grant of Probate (or in Ontario, a Grant of Certificate of Administration with a Will).

(2) If the Will ‘does not’ name anyone as Executor or the person named as Executor is unable or unwilling to act, it will be necessary to apply for a Grant of Administration with Will Annexed (or in Ontario, a Grant of Certificate of Administration with a Will).

(3) If the deceased died without a Will, you will need to obtain a Grant of Administration (or in Ontario, a Grant of Certificate of Administration without a Will).

There are other grants for more complex situations, which may include replacing an acting Executor or Administrator, or recognizing a foreign Grant of Probate from another province or territory. It is prudent to seek legal assistance prior to making applications to a Court.

Most provinces will not issue grants of administration to people who reside outside the province. In provinces where grants of administration are made or made to people who reside outside the province, the court may require some form of security or bond to be placed by the person assuming the role of administrator. These requirements vary from province to province and a TEP should be consulted regarding the rules specific to the applicable jurisdiction.

Do I need a lawyer to probate a Will?

Estates vary substantially in terms of size and complexity. If the Executor is required to obtain the Grant of Probate, the application process can be very complex. Although most Probate applications do not require a formal appearance in Court, there are a number of legal forms that must be filled out correctly. Determining which forms are necessary, completing them accurately, and enclosing appropriate supporting documentation can be daunting. Legal assistance is recommended, although may not required for simple estates.

If an Estate is contested by a beneficiary or involves administration outside the scope of what is discussed in this overview, Executors should strongly consider seeking formal legal advice.

Is it necessary to probate a Will?

Not all Estates will require the Will to be Probated. The Grant of Probate will provide legal authority to an Executor(s) to handle any assets held by an Estate. Generally, any land or real estate held in an Estate may only be handled by and Executor who has received Probate. If the deceased died with bank accounts in excess of $25,000, the bank may only release those accounts to the Executor if Probate was issued by the Court. For Estates with assets of lessor value, banks may accept other forms of indemnity to handle those assets rather than obtaining the Grant of Probate.

Information on probate by province

How do I value my estate?

Posted on By admin
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Calculating the value of an estate can be useful for many reasons. In some instances, a personal representative may need to calculate the value of a deceased’s estate for tax and distribution purposes. In other instances, a testator may wish to calculate the value of his or her estate to help make informed decisions about their Will and provide a helpful starting point for their eventual personal representative to fully account for all the assets and liabilities of their estate. When calculating the value of an estate, it is essential to understand what the “estate” truly consists of and the ways in which a value can be assigned.

The principle is simple (even if the calculations are not); the value of an estate is the assets of the estate minus any and all debts or liabilities. The following steps form a quick guide to calculating the value of an estate.

Step 1: Select the Date of Calculation

Living Person’s Estate

Since the value of assets fluctuates over time, it is important to choose a specific date as of which the assets are valued. Items are typically valued with reference to their ‘fair market value’, which means that the valuation may be higher or lower than the original purchase price. When calculating the value of a living person’s estate, any valuation date may be chosen which is appropriate for the purposes of the valuation.

Deceased’s Estate

In choosing the calculation date for a decedent’s estate, the valuation date will generally be the date of death.

Step 2: Determine the Assets that Contribute to Your Estate and Calculate the Value

In order to calculate the value of an estate, the assets must be totalled. Real property, such as a personal residence, is typically the most valuable asset. Other assets include money held in bank accounts, and personal possessions such as motor vehicles, jewelry, household contents, etc.

Assets may also include:

  • Pensions
  • Savings
  • Life Insurance Policies
  • Stocks
  • Bonds
  • Mutual Funds

While they will not necessarily be relevant for valuation purposes, it is also useful to inventory assets without significant monetary value that are relevant to the administration and distribution of the Estate (for example, photo collections and digital assets such as social media accounts).

Step 3: Calculate Deductions

Deductions include debts owed by reason of the decedent’s death (such as any outstanding tax liabilities), as well any other debts owed at the time of death (or as of the valuation date). While this list not exhaustive, debts and/or liabilities may include:

  • Credit Cards
  • Loans
  • Mortgages

Note that most deductions (other than mortgages) will not be applicable for the purpose of valuing an estate for probate fees or estate administration tax (in jurisdictions where that applies).

For further information or assistance with with an estate valuation, please consult a TEP.