Cardinal Point Wealth Management
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Read a new article on Wealth Professional featuring Devan Legare, portfolio manager at Cardinal Point and co-founder of the Indigenous Finance Collective, where he discusses his mission to improve networking, financial education and literacy within the Indigenous community.
Probate is the legal process of administering a person’s estate upon their death. One of the key aspects of probate is the payment of probate fees, which vary depending on the jurisdiction. In Alberta, Nunavut, Northwest Territories, Quebec, and the Yukon, probate fees are relatively low. However, in other jurisdictions, such as Ontario, probate fees can be quite high.
Probate is the legal process of administering a person’s estate upon their death. One of the key aspects of probate is the payment of probate fees, and if adequate planning is not done to minimize those fees it can adversely impact the transfer of wealth to heirs. However, trying to avoid probate fees altogether by not obtaining probate may also create disadvantages – depending on your situation and your particular goals. Such planning can be particularly complicated if you reside in Canada but also have assets that are located in the United States.
Given the type of work that we do on behalf of clients, we have to be cognizant of the probate planning requirements that might exist for clients with property in the various provinces in Canada and states in the U.S. It is not uncommon to have a client who is – what we would call – the traditional snowbird in Canada. They might have their primary residence in Canada but spends time in a southern U.S. state where they might have a bank account or own U.S. real property. Probate and estate planning for that type of client would require an understanding of the requirements of the Canadian province that they live or have property in as well as the state they spend time in or have property as well.
From a Canadian perspective, in 2018, the Ontario Superior Court of Justice in the case of Eurig Estate confirmed that the Ontario probate fees were unconstitutional because they were a tax, not a fee, and as such had to be imposed by statute, not regulation. While the Eurig Estate escaped the tax, the Ontario government retroactively amended the legislation to protect its right to collect the tax.
Probate fee planning should never be done in isolation. There are potential problems with probate fee planning, including failure to distribute the assets of the deceased among beneficiaries in the way it was intended, increased income tax liability or missed income tax planning opportunities, and uncertainty as to the intention of the deceased for a joint account.
Strategies to reduce probate fees often have a large impact on the distribution of wealth on death. If a large portion of the assets of the deceased are passing outside the estate to avoid probate, it can be difficult, and sometimes impossible, to achieve estate equalization through the Will. A hotchpot clause in a Will is sometimes used to provide for an adjustment to the share of a beneficiary to account for property passing outside the estate. However, there must be sufficient assets in the estate to fund the adjustment.
It is not possible for a gift over for jointly held property. The multiple will strategy whereby a second will governs assets that can be transferred without a grant of probate (eg. shares of a private corporation and personal items) is approved by the courts in Ontario & British Columbia, but Nova Scotia has denied this strategy. Another option for reducing probate fees is the use of an alter ego or joint spousal trust, or an insurance trust (which can only be used to reduce probate fees on insurance proceeds). Alter ego and joint spousal trusts can be very effective estate planning tools to avoid probate. However, the settlors have to be over the age of 65 to establish these types of trusts.
Obtaining probate has its advantages, such as third parties, such as financial institutions, land registry offices, and others controlling title to property, permit a transfer of the property of the deceased into the name of the executor or beneficiary. It also protects the executor from liability in the event the Will is subsequently found to be invalid. However, not obtaining probate also has its advantages, such as savings in probate fees, privacy as the Will is not available for public inspection, and potential savings in executor’s fees and legal fees.
In conclusion, probate fee planning is a complex process that should be approached with caution. It is essential to consider the potential impact of the distribution of wealth on death, as well as the advantages and disadvantages of obtaining probate. It is recommended to seek the advice of a professional advisor before making any decisions regarding probate fee planning. If you would like to review your estate plan and determine if strategies might exist to reduce probate fees and that are consistent with your succession intentions, please reach out to us at contact Cardinal Point.
Planning for retirement is an important objective for owner-managers operating their business in a Canadian-controlled private corporation (“CCPC”). In this article, we discuss three available pension options:
Those who own and operate their own Canadian businesses have different pension plan options to consider as they do their retirement planning. Three of those are discussed in this helpful article, namely 1) Registered Retirement Savings Plans (RRSPs), 2) Canadian Pension Plans (CPPs) or Quebec Pension Plans (QPPs), and 3) Individual Pension Plans (IPPs). Which is the best choice for you will depend on factors such as how soon you will reach retirement age and what the plan’s rules are regarding the timing of withdrawals.
Each of these options requires a payment of salary or bonuses as part of the owner-managers annual remuneration strategy. Where corporate profits are retained within the corporation, a different strategy other than pensions must be used to fund retirement.
In general, a pension is a plan funded by an employer to provide payments to an employee once they are in retirement. Pension plans can be contributory, where the employee also contributes to the plan, or they may be fully funded by the employer. In Canada, pension plans are defined by provincial legislation and must be registered with the Minister of National Revenue to be deemed a pension plan under the Income Tax Act (ITA). Pension plans also have statutory contribution limits.
RRSPs
RRSPs share similarities with defined contribution pensions in Canada, including annual contribution limits and the tax-deductibility of contributions. Earnings within the plan, and amounts contributed, are not subject to tax until withdrawal and the plan must start to distribute funds at retirement or at a specified age. RRSPs have more flexibility than pensions, as withdrawals can be made at the discretion of the RRSP annuitant and can be made at any time − even earlier than the traditional retirement date. The ease of setting up an RRSP and its portability make it an attractive option. While pensions may only pass in a reduced form to a spouse, RRSPs can pass directly into an estate.
To make an RRSP contribution, the individual must have received in the prior taxation year “earned income,” including a salary or bonus as defined under subsection 146(1) of the ITA . The RRSP contribution is limited to the lower of 18% of earned income in that previous year, or a legislated annual limit. The annual limit for RRSP contributions in 2023 is $30,780 and in 2024 will be $31,560. To make the maximum RRSP contribution for 2023 would require a respective salary of $171,000 in 2022 and $175,333 in 2023. Unused contribution room carries forward and adds to the contribution limit calculated for the year before. No contribution can be made to your own RRSP after December 31 of the year you turn 71 years old (at that time your RRSP must be converted into a Registered Retirement Income Fund or RRIF) . But a contribution to a younger spouse’s RRSP can still be made. In addition, contributions do not need to be deducted in the year they are made. They can be carried forward and deducted in a future year, which is helpful if you expect that you will be in a significantly higher marginal tax bracket in the future.
It is important to note that there are penalties for contributing more than your RRSP limit (contribution room), although an over-contribution of $2,000 can sit in the plan without incurring penalties. RRSPs can also be used for income averaging, which is the strategy of reducing income by contributing during high-income years and making withdrawals during low-income years. Finally, once you reach age 65, RRSP income is eligible for pension income splitting with your spouse, to help reduce the overall tax paid on RRSP withdrawals.
CPP
As an owner-manager, making salary payments also includes contributing to the CPP. While regular employees only pay the employee portion of CPP, your corporation − as the employer − will also pay the employer portion of CPP premiums.
Owner-managers of incorporated businesses have the choice to pay either salaries or dividends to extract funds from their companies for personal use. For individuals who have close to the maximum 40 years of contributions to the CPP, paying dividends may be a good option. That can allow them to avoid the expected significantly increased CPP premiums starting in 2024, as the increased premiums will not result in any significant increase in the CPP pension. However, for younger business owners, the choice to pay or not pay salaries to avoid CPP premiums is subject to other considerations. Those include diversifying sources of retirement income, investing the savings for a higher return by not paying CPP premiums, and contributing to an RRSP if no salary is paid.
Note that it is possible to share CPP benefits with your spouse by making an application to Service Canada.
IPPs
IPPs are a form of defined benefit pension plan, and can be set up for just one person. An IPP is established by the employer corporation, funded by the corporation, and can be tailored for your individual needs. An IPP is subject to provincial pension rules and administrative requirements.
An IPP is often established in situations where the owner-manager has worked for the corporation for a long period and has not set aside retirement funds outside the company. An actuarial evaluation is required to determine the funding requirements for the pension for current and past service to the company. The most significant initial contribution will be for past service, which requires a history of paying yourself a salary/bonus from the company. Contributions set by the actuarial report are paid by the company and are deductible to the company in the year paid, or in the previous tax year if it is paid within 120 days of that tax year-end. Updated actuarial reports will be periodically required to ensure that the plan is adequately funded.
For entrepreneurs over age 50, the initial funding requirement should be significantly higher than for a younger employee and are likely more than can be paid into an RRSP. Note that participation in an IPP will almost eliminate your ability to continue contributing to an RRSP in future years. It is best to catch-up on RRSP contributions before instituting an IPP
Please contact Cardinal Point if you are a Canadian business owner-manager and would like to discuss available pension options for funding your retirement as part of your overall financial planning.
If you are an incorporated Canadian entrepreneur or business owner, you probably earn money through a salary or bonus – which is a deductible business expense but fully taxable on your personal tax returns as earned income. Or you may be compensated through dividends that aren’t deductible as a business expense – but offer some tax benefits to you personally. As is always the case when it comes to tax law, the rules can be complicated. But by understanding them and applying certain strategies, you can potentially lower your taxes to help preserve and grow your wealth.
If you are an incorporated Canadian entrepreneur or business owner, there are two general ways to pay yourself from your corporation:
The Canadian tax system is designed for integration, which aims to equalize the total tax paid − whether income is received as a salary/bonus or a dividend. However, the degree of integration varies by province/territory due to different tax rates, and there may be potential small advantages/disadvantages for total corporate and individual tax payable for each province/territory. These should be evaluated based on the current changes in tax rules and rates.
The salary/bonus and dividend options to pay yourself from your corporation have different personal and corporate tax implications. Those will vary for each person, and each unique set of circumstances. The best approach for you to take should be discussed with a knowledgeable tax accountant and financial planner. But these are some key factors to consider:
Please note that if you are also a U.S. citizen, additional tax and remuneration planning will be required that is beyond the scope of this article.
Every Canadian entrepreneur or business owner with a corporation should have an integrated annual remuneration strategy as part of their holistic financial plan. To review your current strategy or discuss how to optimize your annual remuneration, investing, and retirement strategies, please reach out to Cardinal Point.
If you or someone you wish to benefit in your estate plan is a US person, estate planning strategies aimed at minimizing the potential exposure to U.S. estate taxes are advised. That is especially important when the anticipated U.S. estate tax exposure exceeds the amount that can be protected by available deductions, exclusions, and treaty credits. If you are able to minimize a beneficiary’s unnecessary exposure to U.S. estate taxes, then estate planning for U.S. estate tax is certainly worthwhile. When considering any proposed plan or strategy, it is also important to factor in the associated costs and ongoing compliance requirements.
Canadians who wish to include U.S. residents or citizens in their estate planning as beneficiaries need to be aware that U.S. persons may be liable for significant estate taxes. But there are effective strategies that can be implemented as part of your Will & Estate planning to minimize or eliminate such tax exposure. That can help you preserve wealth as it is transferred to beneficiaries. It is also important to factor in any associated costs or ongoing compliance requirements that may arise as part of your Will & Estate planning.
Who is a U.S. Person?
A U.S. person is anyone who meets any of the following criteria:
There are certain exemptions to the Substantial Presence Test; and below are a few of the most common:
Where Both Spouses are U.S. Persons
If both spouses are U.S. persons and the gross value of one spouse’s estate, after taking into account any gift tax exclusion used prior to death, exceeds the exclusion amount ($12.92 million USD for 2023, indexed annually), they may be exposed to U.S. estate tax. In such cases, there are several planning options that may be available for the spouse who predeceases:
Where Only One Spouse is a U.S. Person
Non-U.S. person spouse’s Will: bypass trust to benefit a U.S. person spouse
If a non- U.S. person’s Will transfers assets outright to a U.S. person surviving spouse, those assets will be included in the U.S. person’s worldwide estate for U.S. estate tax purposes. To avoid additional U.S. estate taxes, it is important to transfer the assets to a “bypass trust,” which will not be included in the U.S. person’s worldwide estate on death, as long as certain requirements are met, including limits on the U.S. person’s participation in discretionary decisions. If these trust limitations are not made, the assets in the bypass trust may be subject to U.S. estate tax. For Canadian tax purposes, assets with accrued capital gains may be rolled over to a “qualified spousal trust,” which will be tax-deferred until they are disposed of or the surviving spouse dies.
U.S. person spouse’s Will: plan for utilization of spousal credit under the Canada-U.S. Tax Treaty
Under the Canada-U.S. Tax Treaty, a U.S. person spouse may take advantage of a spousal credit against U.S. estate taxes. To qualify for the spousal credit, the property must pass to the surviving non-U.S. person spouse in a manner that would otherwise qualify for the U.S. marital deduction, either outright or to a “qualified terminable interest property trust” (QTIP trust). The spousal credit is approximately equal to the lesser of: (1) the unified credit (exclusion amount up to $12.92 million USD for 2023, indexed annually) or (2) the U.S. estate taxes imposed on the qualifying property, allowing up to $25.84M USD (2023, indexed annually) of assets to pass from a U.S. person spouse to their non-U.S. person spouse, free of U.S. estate taxes.
U.S. citizen spouse’s Will: qualified domestic trust (QDOT)
A qualified domestic trust (QDOT) is a special trust that can be established in a U.S. citizen spouse’s Will. A QDOT allows the transfer of assets from a U.S. citizen spouse to a non-U.S. citizen spouse, which would not normally qualify for the U.S. spousal credit available to two U.S. citizen spouses. This allows a deferral of U.S. estate taxes until the death of the surviving U.S. citizen spouse. The U.S. estate tax that would otherwise be due on the death of a U.S. citizen spouse is instead paid upon distribution of any capital of the trust to the surviving non-U.S. citizen spouse, or upon the non-U.S. citizen surviving spouse’s death. However, the QDOT only defers U.S. estate taxes, much like the deferral of capital gains available for Canadian tax purposes for property passing between spouses. The deferred tax is generally imposed at the death of the non-U.S. citizen’s surviving spouse, based on the gross value of the property remaining in the QDOT. It is important to note that if the value of the QDOT increases, the tax at the time of the non-U.S. citizen surviving spouse’s death could be higher than if the tax had been imposed at the time when the first U.S. citizen spouse died. A QDOT must meet a number of complex requirements, including having at least one U.S. person trustee and being governed by the law of a U.S. state.
U.S. person spouse’s Will: credit shelter trust (bypass trust)
A credit shelter trust (bypass trust) can be established in a U.S. person’s Will in an amount up to the exclusion amount, in order to fully utilize the U.S. person’s estate tax exclusion. In this way, the trust assets may eventually pass to the non- U.S. person spouse free of U.S. estate taxes.
Life insurance
The non-U.S. person spouse may consider purchasing life insurance on the life of the U.S. person spouse, in an amount sufficient to fund the expected U.S. estate tax liability. Or life insurance on the life of the non-U.S. person spouse may be designated to a bypass trust for the benefit of the U.S. person spouse. The insurance may be owned through a special trust called an “irrevocable life insurance trust” as opposed to direct ownership, in order to exclude the value of the proceeds from the U.S. person spouse’s estate.
Holding assets between spouses
To minimize U.S. estate taxes, real property holdings between spouses should be carefully structured. Real property held in joint tenancy with right of survivorship is presumed to be included at its full value in the estate of the U.S. person spouse, except to the extent that the non-U.S. person spouse can establish the amount of their contribution to the purchase price. The value of any mortgage is generally not deductible from the property value. Canadian real estate may be held solely by the non-U.S. person spouse, so it’s not included in the estate of the U.S. person spouse − while any U.S. real estate might be held in the name of the U.S. person spouse. Assets of fixed value may be held in the name of the U.S. person spouse, while assets expected to appreciate may be held in the name of the non-U.S. person spouse. In that way, appreciating assets are excluded from assets subject to U.S. estate taxes.
When Intended Beneficiaries (including children/grandchildren) are U.S. Persons
If the intended beneficiaries of your estate are your children or grandchildren, who are now (or are likely to become in the future) U.S. persons, you may want to consider transferring assets to a bypass trust under your Will for their benefit. That will help protect these assets from U.S. estate taxes. The assets in the bypass trust will not be included in the U.S. person beneficiary’s worldwide estate upon their death, as long as the bypass trust meets certain requirements. Those requirements include restrictions on the U.S. person beneficiary’s participation in certain discretionary decisions, such as the decision to pay income or capital, so that they do not have too much ownership of the assets within the bypass trust. But if these restrictions are not in place, the value of the assets in the bypass trust could be included in the U.S. person beneficiary’s estate on their death and subject to U.S. estate tax. In addition to protecting assets from U.S. estate taxes, using a trust can also provide other benefits. Those include ensuring the preservation of wealth for future generations, minimizing probate fees, and providing protection from matrimonial claims and creditors. However, it is important to assess the differences in Canadian and U.S. taxation and compliance for these potential trusts. Please consult a qualified Canada-U.S. advisor for more insight in that regard.
Conclusion
If you aren’t sure whether you or one of your beneficiaries is a U.S. person, or if you would like a comprehensive review of your estate plan and financial plan, please contact Cardinal Point.