The reason many people consider transferring property before death is to avoid or reduce the amount of tax their heirs will have to pay when the will is probated.
Probate is the legal process of dealing with someone’s estate and ensures their wishes, usually contained in a will, be carried out.
In Ontario, the tax payable on a probate application is $5 per thousand up to $50,000 of estate value and then $15 per thousand for anything over that. Therefore, the probate tax for an estate of $1 million would be $14,500.
With proper tax planning, you can reduce the amount of tax payable. Improper planning can cost you a whole lot more.
Here’s an example: Mr. and Mrs. Depedrina lived on a two-hectare property in Langley, B.C. Five years before Mr. Depredina died, he and his wife transferred ownership of the property to their children, thinking that would take care of their inheritance. The couple retained a life interest in the property which meant they could live there until both died. Mr. Depredina died in 1983 and his wife in 1997.
The kids sold the property the following year for $1.85 million, but ended up paying more than $700,000 in tax. Had the title remained in their parents’ name, no tax would have been payable, since it was their principal residence.
The family went to court arguing that this result was not fair and not what their parents intended. In a case heard in a B.C. court in 2005, the judge was sympathetic, but could not change the outcome because everything had been done according to the parents’ legal wishes.
People always ask whether there is any way to reduce probate fees or not pay anything at all.
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This article originally appeared on Moneyville.ca