Estate planning can help you consider the legacy you want to leave behind. Yet many Canadians find that estate taxes, final income taxes, and probate fees can significantly reduce the compensation intended for their beneficiaries.
Understanding these costs and how to plan around them can help protect more of your wealth for the people and causes that matter most to you. Read on to learn more about estate taxes and probate costs, where they come from, and strategies to reduce their impact.
Understanding Estate Taxes in Ontario
Estate taxes in Canada differ from those in other countries. While other countries have an “estate tax,” in Canada, your estate is responsible for settling final income taxes. In Ontario, the probate fee is 1.5% on any amount over $50,000.
What They Are and How They’re Calculated
When you pass away, you’re deemed to sell your capital assets at fair market value (FMV). This is known as “deemed disposition at death”. This can trigger capital gains taxes that must be reported on your final tax return. Those taxes must be paid before your executor can distribute assets.
Another way to look at it:
Beneficiaries won’t need to pay taxes on their inheritance in Canada. Instead, the deceased’s estate pays taxes before any distributions are made. Registered accounts, such as Registered Retirement Savings Plans (RRSPs), can also generate additional income tax unless they are:
Federal vs. Provincial Considerations
While Canada has no federal estate tax, each province governs its own probate rules. In Ontario, there is no inheritance tax, but the province charges an Estate Administration Tax (EAT) when an estate applies for an official estate certificate, also known as a probate.
This tax aims to administer the deceased’s assets and is based on the fair market value of the estate’s assets at death. The tax is paid upfront when applying for the probate, but if no certificate is required, no EAT is payable.
The Real Costs of Probate
A probate is the legal process that validates your will and confirms your executor’s authority to act. It’s required when financial institutions or government agencies need proof that the executor can manage or transfer assets.
Common Probate Fees and Delays
In Ontario, probate fees are calculated at about 1.5% on the estate’s value over the first $50,000, with estates under $50,000 being exempt.
For example, a $100,000 estate is required to pay fees only on the $50,000, resulting in approximately $750 in fees, while larger estates ($1,000,000) incur roughly $14,250 in costs.
Delays in probates can happen for various reasons. Here are three common ways:
- The executor must file the will with the court.
- Application for a Certificate of Appointment of Estate Trustee.
- Once granted, file an Estate Information Return with the Ministry of Finance within 180 days.
Failure to file can result in penalties, and executors are personally liable for ensuring taxes are paid.
How Probate Affects Heirs and Beneficiaries
Probate affects beneficiaries in two ways:
- Delays access to funds, sometimes for several months.
- Reduces the estate’s value, as probate fees are paid before distribution.
Certain assets could bypass probate fees, such as joint ownership or accounts with designated beneficiaries. These strategies can avoid probate and reach heirs more efficiently, often prompting families to consider reducing the amount of assets subject to probate.
Strategies to Reduce Estate Taxes and Avoid Probate Costs
Thoughtful strategies can reduce taxes and preserve more for your beneficiaries.
Trusts and Gifting Strategies
Transferring assets to a trust can avoid probate if the total value is below the $50,000 threshold. Different types of trusts include:
- Living trusts
- Alter ego trusts (for those 65+)
- Joint partner trusts
Gifting assets while still living, rather than including them in the will, may also reduce your estate to below the probate threshold. However, gifting can trigger capital gains, making it essential to assess whether the long-term benefit outweighs the immediate tax impact.
Joint Ownership and Beneficiary Designations
Joint Ownership: Holding assets in Joint Tenancy With Right of Survivorship (JTWROS) allows the asset to pass directly to the surviving joint owner, bypassing probate entirely. Many families use this strategy for real estate, personal accounts, and investments, though joint ownership should be used carefully to avoid unintended tax or family implications.
Beneficiaries: Naming beneficiaries on life insurance policies ensures these assets flow outside the estate:
- Registered Retirement Savings Plans (RRSPs)
- Registered Retirement Income Funds (RRIFs)
- Tax-Free Savings Accounts (TFSAs)
Life insurance proceeds and TFSA funds with a named beneficiary are typically received tax-free.
Life Insurance as a Planning Tool
Life insurance can play a strategic role in preserving your estate. Proceeds can be used to:
- Bypasses probate and reduces fees by paying tax-free benefits directly to a named beneficiary or trust.
- Preserves family assets by providing rapid liquidity to cover capital gains, debts, and estate costs.
- Supports tax-efficient wealth transfer through structures like trusts or corporate planning.
Ultimately, life insurance offers an efficient way for loved ones to receive funds quickly and without erosion.
The Role of Professional Guidance
You deserve a plan that reflects your values, your goals, and the legacy you want to leave. Having the right team can provide clarity and confidence for estate planning.
Financial Advisors
A financial advisor helps you understand:
- Tax implications of your estate
- Models different planning strategies
- Ensures your investment, insurance, and retirement plans work together
At GDLF Wealth Management, we help you create an estate strategy that reduces uncertainty and protects what matters most.
Estate Lawyers
Estate lawyers can help guide you through probate requirements, interpret beneficiary designations, and create trusts when they align with your goals. Their process includes:
- Drafting wills
- Completing legal documentation
- Ensuring that your structure aligns with Ontario law.
A coordinated approach, your advisor and lawyer working together, builds a more robust, future-ready plan.
Final Thoughts: Protecting Your Legacy
Your legacy represents more than assets; it reflects your values and the impact you want to leave behind. When you understand how estate taxes and probate fees work, you take meaningful steps to protect your family from unnecessary costs and delays. A thoughtful estate plan ensures your wealth transfers with purpose and clarity, helping safeguard the people and priorities you hold close.
If you’re ready to explore how estate planning can strengthen your long-term strategy, GDLF Wealth Management is here to guide your financial journey.
Book a conversation today to build a plan that protects your life’s work.