There are many things to consider when planning the transfer of wealth within families. And while Canada doesn't have an inheritance tax, there are still other fees and taxes that could substantially reduce the value of your estate. One option available to minimize these costs is to “gift” a portion of the assets you intend to leave others while you're still alive. Known as “giving while living”, this approach has several advantages, not least of which is enabling you to experience your children making use of their inheritance.
As well as there not being an inheritance tax in Canada, there is no gift tax either, which means that any assets you give to others are not subject to a direct tax. For example, you can give your child (or even a friend) a gift of $100,000 in cash, and the money is not recorded as income to be taxed.
However, even though the recipient may not be required to pay a gift or inheritance tax, for some gifts your estate could be required to deal with a capital gains bill following your death. This is because non-registered assets—which are basically any assets not held in a registered account, such as an RSP—are deemed to have been disposed at the time of the holder’s death, and at the current market value. The estate is then required to pay the capital gains tax on any of these assets that have appreciated in value, and depending on how much the asset has appreciated, this could significantly reduce the remaining value of the inheritance.
We see this most often when it comes to property, and in particular with family cottages or other vacation homes. The family home is generally exempt from capital gains due to the Principal Residence Exemption (PRE), as we had covered in an earlier Oaken Blog post.
Reducing probate fees
Probate is the legal process of certifying a will, and the fee to complete probate varies by province. In Ontario, the estate is required to pay $5 per $1,000 of the estate’s value for the first $50,000, and $15 for each additional $1,000. For example, the probate fees for an estate valued at $500,000 is $7,000, which is calculated as follows:
($50,000 / $1,000) x $5 = $250
($450,000 / $1,000) x $15 = $6,750
Total probate fee due = $7,000
Giving away parts of your estate before you die reduces the value of your estate at the time of your death, and this will obviously reduce the amount your estate will be required to pay in probate fees. So if you intend to leave a particular asset to a child or other beneficiary, and there's nothing preventing you from giving it to them while you’re still alive, this will reduce future probate fees.
If you do intend to leave money to an adult child, and don't expect to have a need for these funds, why not give the money now and reduce your holdings? Not only will this reduce probate fees, but your adult children can make immediate use of the money for important things such as a down payment on a new home. In fact, giving money for a down payment is one of the more common ways to transfer wealth to the next generation.