Can transferring ownership of a house help avoid probate tax?

While beneficiaries do not have a specific inheritance tax, that does not mean that estates are entirely tax-free. When someone passes away, their estate may still be subject to various taxes, such as probate fees, which are levied on the estate’s value on the date of death and subject to the calculation of the specific province or territory where the estate is located. Additionally, any assets that have appreciated in value since they were acquired may be subject to capital gains tax on the deceased’s final tax return or estate tax return. 

Strategies for reducing or avoiding probate on the home 

As the cost of living continues to rise in Canada, plenty of families focus on reducing probate fees for their estates. Let’s talk about probate: it’s the legal process of confirming a will’s validity. Even with a will, probate is often necessary to make sure everything is legally binding and to deal with certain assets, such as real estate or investments. Without a will, probate becomes even more important as provincial laws decide who handles your estate and how assets are divided. Probate helps ensure the deceased’s wishes are honoured and can prevent family disputes. 

With the fees associated with probate calculated on the total market value of an estate’s assets on the date of death, families are left facing significant financial burdens when it comes time to settle the affairs of a loved one. As a result, parents seek ways to minimize these costs and ensure that more of their hard-earned assets are passed on to their beneficiaries rather than being eaten up by probate fees. Let’s review the strategies for our most significant asset—the house—together, Mary.

Joint ownership: In a previous article I wrote for MoneySense, I discussed the concept of joint tenancy and how it can help parents reduce probate taxes when transferring property ownership. By having the property in joint tenancy with their children, parents can potentially avoid probate and decrease the tax owed upon their passing. However, it’s crucial to note that transferring ownership of a house while the parents are still living can have its own tax implications. While it may help reduce probate, there are other factors to consider, such as capital gains tax for the child and potential changes and needs in the parents’ financial situation in the future. Before making any decisions regarding joint ownership of a house, it’s recommended to consult with a tax professional or financial advisor to fully understand the implications and ensure that it aligns with your overall financial goals and plans.

Bare trusts: A bare trust is a legal arrangement where a trustee holds property or assets on behalf of a beneficiary, who has the absolute right to the property. A bare trust could be used for a home by transferring ownership of the property into the trust while still living, helping to avoid the need for probate upon the home owner’s death, as the property technically no longer belongs to them but to the trust. As a result, the property would not be considered part of the home owner’s estate and would not have to go through the probate process. Therefore, streamlining the property transfer to the beneficiary could potentially save time and money. This is a more complicated strategy, and it is essential to consult with a lawyer to ensure that a bare trust is set up correctly and aligns with your estate planning goals and the Canada Revenue Agency’s requirements.

Transfer complete ownership: Transferring the parents’ home into a kid’s name can have both pros and cons, Mary. On the positive side, it can help avoid the lengthy and costly probate process after the parents pass away. It means the house has already been transferred to the child prior to the parents’ death without the need for court approval. However, there are also potential downsides to consider. One major con is the capital gains implications for the child versus the parent. If the child eventually sells the house, they may be subject to capital gains tax on the increased value of the property since it was transferred to them. This could result in a significant tax bill that the parents may not have had to pay if they had retained ownership, as the home would have been their principal residence and not subject to capital gains tax. It is important to weigh these factors carefully before deciding to transfer ownership of a home, especially with the federal government’s proposed change to the capital gains inclusion rate, which will increase from 50% to 66.7% on gains exceeding $250,000 in any one year. While this may seem more beneficial than paying the provincial probate tax, it could potentially result in a higher overall tax burden for the child, especially if they already have their own significant assets with large capital gains.

Do nothing: It may be more beneficial to not change the ownership of a home for a parent and to pay probate upon death, for several reasons. By maintaining ownership of their home, the parent retains control and security over their living situation. For example, if the child experiences marital issues or bankruptcy, the home could be subject to their spouse’s or even creditors’ claims. By maintaining home ownership, the parent can better protect their asset and ensure their living situation remains stable and secure. It is important to consider the potential consequences carefully and weigh the risks before making decisions regarding home ownership transfer. 

The bottom line

As you can see, Mary, transferring ownership of a house while parents are still living can have a significant impact on probate tax, but it’s crucial to consider all the ramifications before making a decision. Consult with a lawyer, tax professional or financial advisor to fully understand the implications and ensure it aligns with your overall financial goals and plans. Whether you choose joint ownership, a bare trust, complete ownership transfer or to do nothing, it’s essential to make an informed decision that best suits your family’s needs. Remember, careful planning now can help protect assets and ensure a smooth transfer to beneficiaries in the future.

Read more from Ask MoneySense:

• Should you top up your RRSP before converting to a RRIF?
• How annuities work in Canada
• Are home renovations tax-deductible?
• Should you buy insurance to cover estate taxes?

About Debbie Stanley, TEP, MTI

Debbie Stanley is an estate and trust professional, and CEO of the estate firm ETP Canada. She is a writer, speaker and regularly featured guest on Zoomer Radio.

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