How to Minimize Probate Fees: Strategic Estate Planning for Canadians

When someone dies in Canada, they are generally deemed to have disposed of their capital property at fair market value immediately before death, unless a tax-deferred rollover to a spouse is available. Canada does not have a federal estate tax or inheritance tax like our neighbours in the United States. However, provinces may levy probate fees formally called the Estate Administration Tax in Ontario. Each province varies in how they calculate it.

So, what is probate? It is the legal process where a provincial court certifies that a Will is valid and that the named executor has the legal authority to manage the deceased’s assets.

Financial institutions (such as banks, insurance companies, and investment brokers) may require a court-issued probate grant before releasing assets to the estate, particularly when the assets are substantial or the institution wants confirmation that the executor has legal authority to act.
Because rules differ so much across the country, let’s use Ontario as a baseline example, which has one of the highest fee structures in Canada.

Here is an overview of Ontario’s probate structure:

• For estates up to $50,000, there is no probate tax in Ontario.
• For estates over $50,000, Ontario charges an Estate Administration Tax of 1.5 percent ($15 for every $1,000) on the value exceeding $50,000.

Case Study: John’s Estate in Ontario

Consider John, who passes away single and has not named specific beneficiaries on his registered accounts. His assets include:

• Principal home valued at $2,600,000
• RRIF valued at $1,300,000
• TFSA valued at $160,000
• Non-registered account valued at $2,300,000 (fair market value). The original purchase price (ACB) was $600,000.

In this example, the non-registered account has an unrealized capital gain of $1.7 million ($2.3 million fair market value less the $600,000 adjusted cost base).

All these assets would pass through his estate, resulting in a probate tax bill of $94,650.

Probate Tax = ($6,360,000 – $50,000) x 1.5% = $94,650

It is important to remember that probate tax and income tax are separate. While the probate tax in this example is approximately $94,650, the income tax resulting from the RRIF and non-registered investments could be significantly higher.

Are there ways people can reduce probate tax? Here are a few options to consider. Always speak to a legal or tax advisor before making any changes.

Named beneficiaries: If John had named his adult son, David, as the direct beneficiary of his RRIF and TFSA, those funds would generally bypass the Will and avoid probate. Although the RRIF may bypass probate, the estate may remain responsible for the tax liability unless the Will or beneficiary designation provides otherwise.

Spousal rollover for registered accounts: If John had a spouse and named them as beneficiary, the RRIF could generally transfer to the spouse on a tax-deferred basis. A TFSA can also pass to a spouse without probate if properly designated. Unlike a RRIF, TFSA withdrawals remain tax-free. On a side note, in Canada, naming a spouse as a “Successor Holder” allows the TFSA to seamlessly transfer to them and maintain its tax-free umbrella without affecting their own contribution room. If they are named only as a “Beneficiary,” additional administrative paperwork may be required after death.

Joint ownership: Assets held jointly with right of survivorship generally pass directly to the surviving owner and do not form part of the estate for probate purposes. The province of Quebec has separate rules. Make sure you understand your province’s rules before implementing.

Some people add an adult child as a joint owner to avoid probate. However, this can create problems, such as losing tax benefits on the family home, risking the assets if the child has debts, losing control over the assets, and causing family disagreements. Always get legal and tax advice before doing this.

Multiple Wills. Business owners sometimes have two Wills: a main Will and a secondary Will. The secondary Will can help avoid probate for certain assets, such as shares in a private company or personal loans. Multiple Wills are most used in Ontario and may not be available or effective in all provinces.

Trusts. Certain trusts can help avoid probate because the trust, not the deceased individual, owns the assets at death. Trusts may also be used to help carry out a person’s wishes after death, provide for dependent family members, protect beneficiaries, and maintain privacy. Trusts can be expensive to establish and administer, so they are generally more common in larger estates. Examples include Alter Ego Trusts (for individuals age 65 and older), Joint Partner Trusts, Testamentary Trusts, Henson Trusts, and Family Trusts.

Here is a quick checklist of what typically stays outside the estate:

• Registered accounts with valid named beneficiaries, such as RRSPs, RRIFs, TFSAs, and FHSAs (First Home Savings Accounts).
• Life insurance policies, as long as a specific person is named as the beneficiary (not “The Estate”).
• True joint properties, such as real estate held as “Joint Tenants with Right of Survivorship” (except in Quebec).
• Assets held in certain trusts, such as Alter Ego Trusts and Joint Partner Trusts, may also avoid probate because they are owned by the trust rather than the deceased individual.

Conclusion

Whether you need simple tactics such as updating your beneficiaries or more complex arrangements like creating multiple Wills and/ or Trusts, being proactive always pays off. Effective planning strategies can serve to reduce probate costs and most importantly, they will allow your wishes to be carried out seamlessly.

If you are looking for some guidance in reviewing and establishing your estate objectives, please reach out to us to set up a call with one of our experienced wealth advisors.