Is probate an inevitable cost for a surviving spouse?

Q. My husband and I have lived in our principal residence for 40 years. The house is held solely in his name, and I am the beneficiary of his will. Would the house have to be included in probate of his estate, should he predecease me?
–Sandra

A. Your seemingly simple question has a historic twist pointing to the possibility of a second will, which makes it difficult to answer. 

Let’s start by reviewing probate—what it is and why it exists, along with its relevance to other taxes. 

Each province has its own version of probate and I am assuming your husband’s estate will be subject to Ontario probate rules.  

What is probate?

Probate in Ontario is really called Estate Administration Tax (EAT), but everyone refers to it and knows it as probate. Probate is required if:

1. a third party, such as a bank or other financial institution requests it; or  
2. legislation requires it before the executor can deal with certain assets, such as, in your case, real estate.

Why is probate necessary?

Once you have a probate certificate, all third parties, banks and other financial institutions will know the court has validated:

• the will as the last valid will of the deceased; and
• the executor of the will.

In short, probate is a safety measure.   

How much does probate cost?

In Ontario, probate tax is $5/$1,000 on the first $50,000; and $15/$1,000 thereafter. On an $850,000 home, that would work out to $12,250 calculated as shown below:

While probate tax may appear expensive, the cost sometimes pales in comparison to other taxes that may creep into an estate. For example, consider the amount of tax the estate of the last surviving spouse may have to pay on the following, assuming no other income for the year: 

• $850,000 RRIF: $415,659 in tax
• $850,000 non-registered account with a capital gain of $200,000: $23,907 in tax

When looking for ways to maximize a wealth transfer from one generation to the next, be sure to consider all of the possible estate assets. Further, watch that a strategy to reduce probate does not end up costing more than the probate itself.

Now, to answer your question:

Will your husband’s estate have to pay probate?

In most cases, when a home is owned by one person and that person passes away, the estate will have to pay probate—even if the estate is represented by the spouse of the deceased. 

What makes your case different is the length of time your husband has owned the property where you both live. 

About 40 years ago, the Ontario Government began switching from the Ontario “Land Registry System” to the “Land Titles System,” and with that came the “first dealings” exemption.  

If your home was originally registered through the old “Land Registry System,” you may not have to pay probate even though it has likely been transferred to the new “Land Titles System.” But there is a catch.

How big will your husband’s estate be? If your husband has other assets that will attract probate, then the home will also be included in the probate process. To avoid this, your husband’s estate must be small enough that probate isn’t requested, or he’ll need to get a second will. Here’s how that works: The primary will covers items subject to probate, and the secondary will covers items not subject to probate. Yes, you can do that, and corporate business owners often do.     

Should a spouse’s name go on title?

Assuming your home still qualifies for the “first dealings” exemption, maybe not.  

Under joint ownership, if either you or your husband pass first there will be no probate— but there will be probate when the surviving spouse passes.  

With the “first dealings” exemption, if he passes first, the property will pass to you without probate; then, when you pass, there will be probate. However, if you pass first, there is no probate because you don’t own the home. In this case, when your husband eventually passes, there is no probate under the “first dealings” exemption. It is possible no probate will ever be paid.

I’ll bet you didn’t expect an answer like this, did you, Sandra? Now it’s up to you to decide whether it is worth hiring a lawyer to confirm if your home qualifies for the “first dealings” exemption with the possibility of needing a second will, or do nothing, or move to own the home jointly, which will require hiring a lawyer. Will your costs in time and money be worth the probate savings?

Allan Norman is a Certified Financial Planner with Atlantis Financial Inc. and can be reached at www.atlantisfinancial.ca or [email protected].

MORE ON REAL ESTATE:

• Is now the time to buy a vacation home?
• Capital gains taxes, explained
• “Who’ll pay for the cottage if I die?”

About Allan Norman, MSc, CFP, CIM

With over 30 years as a financial planner, Allan is an associate portfolio manager at Aligned Capital Partners Inc., where he helps Canadians maintain their lifestyles, without fear of running out of money.

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