PROBATE TAX PLANNING

Upon death, each province (except Quebec) levies a probate fee on the value of assets passed through the estate. That probate fee ranges from 0.4% in Prince Edward Island to 1.5% in Ontario. Only Alberta and the territories have maximum caps of $400 ($140 in the Yukon). For example, an Ontarian who wills her $500,000 Muskoka cottage to her kids would face a probate bill of about $7,500.

In fact, without proper planning, a vacation property could be subject to probate tax twice: once on the death of the original owner and, if left to a spouse or partner, again on the death of the survivor.

There are some common planning techniques that may be helpful to reduce or eliminate probate fees payable upon death.

Joint ownership

One common probate-avoidance technique is to register title of the property in joint tenancy (each joint owner has an undivided interest in the entire property). This type of joint ownership with right of survivorship means that upon the death of one owner the property is simply transferred directly to the surviving joint owner, bypassing the estate and therefore, not subject to probate.

The advantage of joint ownership, however, is mired in a plethora of other problems, some of which may be more significant than the probate bill. The biggest problem, and the subject of two 2007 Supreme Court of Canada cases, is proving the transferor's true intention - was it a gift or merely an estate-planning strategy?

For example, say Jack transfers his $1-million Whistler condo to joint title with his adult daughter, Jill, whose family vacations there on weekends in summer and skis there for two weeks during Christmas. Jack's other child, Jane, lives in Halifax, and does not use the property at all.

Upon Jack's death, the property will simply transfer directly to Jill's name, bypassing the estate and avoiding B.C. probate fees of $14,000 (at the 1.4% B.C. rate). But did Jack really intend for Jill to inherit the entire value of the condo, to the exclusion of Jane? What if the condo was the only major asset owned by Jack upon his death and there was little else left in his estate for Jane?

If the two Supreme Court of Canada cases (see sidebar) are any indication of what might happen in this hypothetical example, Jane would likely hire a lawyer and sue her sister for half the value of the condo, arguing that the transfer into joint ownership was merely an estate-planning ploy meant to avoid probate. Surely, Dad didn't intend to disinherit Jane - or did he?

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Cases from the Supreme Court of Canada - Joint Ownership

In May 2007, the Supreme Court of Canada released simultaneous judgments in two Ontario cases: Pecore v. Pecore (2007 SCC 17) and Madsen Estate v. Saylor (2007 SCC 18). What was at issue in both cases was the meaning of "joint ownership with rights of survivorship" (or JTWROS) of investment accounts and the true intentions of the original owners when the joint accounts were established.

In the first case, Edwin Hughes, father of Paula Pecore, put nearly $1 million of mutual funds into joint ownership with his daughter Paula. Upon Mr. Hughes' death, the assets in the joint account were transferred into Paula's name. Two years later, Paula and her husband, Michael Pecore, separated and, in the course of the divorce, Michael tried to go after the assets in the joint account since he was a beneficiary under his ex-father in-law's will. His argument was that the transfer of the joint account into Paula's name was not a true gift since it was done "for probate purposes only". Both lower courts disagreed and found that Paula legitimately inherited the account through JTWROS.

The second, very similar case, involved Michael Madsen who named only one of his three children, Patricia Brooks, as the joint owner of his investment accounts. After Michael's death, Patricia's brother and sister sued and claimed that their late father only named Patricia on the account "for convenience purposes" and thus no true gift was made. As a result, the monies in the joint accounts should be distributed in accordance with the will, with both siblings receiving a portion of the funds. Both lower courts agreed.

The Supreme Court of Canada (SCC) saw no reason to reverse either of these lower courts' decisions. The court found that due to the presumption of resulting trust, the onus falls on the surviving joint account holder to prove that the transferor intended to make a gift of any remaining balance in the account.

Factors that should be considered to determine the transferor's intent include: wording in any financial document used to open the account, control and use of the funds while the transferor was alive, whether a power of attorney was granted, who paid the tax on the account and any other evidence the court finds necessary to establish intent.

As a result of these two cases, it may be a good idea to document your intention when making your vacation property establishing a JTWROS. One way to do so is by signing a "Declaration of Intention" for joint assets. Legal advice is warranted here.

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Trusts, including "alter-ego trusts"

Using trusts to hold vacation property can help to avoid probate fees upon death since property inside the trust is not included in the value of your estate.

As discussed above, however, transferring the vacation property with the accrued gain into the trust could give rise to capital gains tax, which could negate the ultimate probate avoidance motivation.

That being said, if you are at least 65 years of age, you may wish to consider transferring the vacation property into an "alter-ego trust" or a "joint-partner trust", which can be done without having to pay immediate capital gains tax on the transfer. In order to be an alter-ego trust or joint partner trust, no one other than you (or you and your spouse or joint partner, in the case of a joint partner trust) can be entitled to the income and capital of the trust during your lifetime.

You can continue to maintain full control of the property through the trust, but you can name your children as the ultimate beneficiaries of the trust, who would then inherit the property upon your death. Since at the time of death you no longer own the property - it's owned by the trust - so it's not included in the value of your estate for the purposes of calculating probate tax.

The downside, of course, is that there may be income tax consequences associated with the deemed disposition of the property upon death as the property is deemed to be disposed of inside the trust, which is subject to the top marginal tax rate. The trust, however, may be able to claim the PRE for this property, as discussed above.

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Disclaimer:
As with all planning strategies, you should seek the advice of a qualified financial advisor or tax advisor to discuss planning opportunities for recreational properties.

Jamie Golombek, CA, CPA, CFP, CLU, TEP is the Managing Director, Tax & Estate Planning with CIBC Private Wealth Management in Toronto. As a member of the CIBC Retail Markets team, Jamie works closely with advisors from CIBC Private Wealth Management, Wood Gundy, Imperial Service and other partners to support their high net worth clients and deliver integrated financial planning and comprehensive advisory solutions. Jamie writes a weekly column called "Tax Expert" in the National Post, which is also syndicated across various CanWest newspapers in Canada. In his spare time, Jamie teaches an MBA course in personal finance at the Schulich School of Business at York University in Toronto.