A number of clients have recently needed an explanation on the difference between beneficiaries named in a Will and beneficiaries named to a particular investment.
When an individual dies, the value of all assets held on the date of death are subject to a Provincial “Estate Administration Tax” (usually called Probate tax) except those that are in joint names or have listed beneficiaries. This tax applies to all assets from real property to investment accounts with the first $50,000 being exempt and the remainder of the estate at a rate of 1.5%.
Beneficiaries named in your Will inherit any assets that form part of the Estate as per your instructions. Accounts that have a named beneficiary are excluded from the Estate, i.e. accounts such as Tax-Free Savings (TFSA) and Registered Retirement (RRSP and RRIF) are paid directly to the designated individual; they do not form part of the Estate to be divided between all beneficiaries. Naturally, this needs to be taken into account when arriving at a fair distribution.
Some registered accounts expire upon death with no residual balance to pay to the Estate so you need to check with the holders of these accounts to see if designating a beneficiary is beneficial. If you have a life insurance policy, you should designate beneficiaries to avoid the Provincial Probate tax.
As for real property, it is rarely recommended that you add children to the deed of your home or cottage. Avoiding Probate tax isn’t worth the risk. Either the cottage or current home may qualify for the Principal Residence designation and exempt the full gain from being taxed. Ultimately the one with the largest increase in value since acquisition is likely the best choice. Changing the deed to your cottage to add children, for example, interferes with the Principle Residence exemption. Plus, when you add others to the title they become joint owners of the property. If one of them filed for bankruptcy, were sued, or separated from a partner it would be considered one of their assets. Changing the deed is also considered a deemed sale so you would have to pay tax on the assessed value at the time of change in ownership as well as incur other costs such as legal fees.
Non-registered investment accounts are subject to the same risks as explained above for real property.
This is a simplified overview that may not apply to clients with more complex assets or families, but it may provide some good conversation material over dinner this holiday season!
~Gwyneth James MBA CPA, CGA