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The Money Management Newsletter: Taxes and Estate Matters
Exercise caution when trying to avoid probate costs

Since June 1, 1992 when probate fees in Ontario were increased, we have noticed many clients taking extra precautions registering the ownership on GICs and mutual funds as well as designating beneficiaries on their RRSPs and RRIFs. Probate fees in Ontario are now $5 per $1,000 of estate value for the first $55,000 and $15 per $1,000 thereafter with no maximum. The former fee structure was limited to $5 per $1,000 of estate value.

Some cautions are in order however:

Non-registered funds

Ownership on GICs and mutual funds are now more frequently made joint with right of survivorship so that if one owner passes away, funds will pass outside of probate to the remaining joint holders of the investment. However, be aware that:

1. CDIC coverage combinations with one institution will be reduced if all registrations are in the same joint names (i.e. For two people, the limit would be $60,000 rather than a possible $180,000).

2. Joint registrations, especially with children will reduce flexibility and control of investments (i.e. child falls out of favor; some companies want joint agreements signed by all parties). Creditors of the joint holder can attack the joint holder's share of the investment.

3. Ensure that proper income tax reporting procedures are followed to avoid attribution problems.

Registered funds

With registered funds (RRSPs, RRIFs) naming a beneficiary within the plan will allow proceeds to pass to the beneficiary, outside of probate, upon the planholders demise. Be very cautious however, of the potential income tax repercussions for your estate.

If the named beneficiary is a legal spouse, a tax free rollover is permitted to an RRSP or RRIF in the beneficiaries name (there are separate rules for dependent children). Probate is also bypassed.

If any other type of beneficiary is designated i.e. a charity or non-legal spouse, funds will pass out of probate to the beneficiary, however the estate will be left with the tax liability since a tax free rollover is not permitted in his case. Tax liabilities can be as high as 48% (in Ontario) of the RRSP or RRIF value with a maximum of 30% withheld at source by a financial institution.

If the estate does not have any liquid assets with which to pay the tax liability, the executors and heirs may have to dispose of other assets such as the family home to raise funds (the beneficiary may refuse to part with any of RRSP/RRIF proceeds).

In situations where an individual wishes to pass registered funds onto someone who is not eligible for a tax free rollover, it may be prudent to name the estate as beneficiary and let the will provide for fund allocation after all taxes and fees have been paid. Probate fees will apply in this case but it may save a lot of grief for the heirs.

In all cases legal advice should be obtained when determining registrations or beneficiaries.

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© , Fiscal Agents Money Management Newsletter
25 Lakeshore Road
Oakville, Ontario
L6K 1C6
(905) 844-7700

 





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