John and Marie, a hardworking Canadian couple, spent their lives building a nest egg to ensure they could enjoy their retirement and leave a substantial legacy for their children, Emma and Alex. They have built up together just over 1 million Canadian dollars and always assumed that their well-intentioned will would seamlessly transfer their assets to their children upon their passing. Unfortunately, they didn't anticipate the complexities of estate transfer in Canada.

Upon John and Marie's passing, their children were confronted with the harsh reality of taxes, probate fees, debt and liabilities.

Taxes

In Canada, the estate is considered a separate entity by the Canada Revenue Agency (CRA), and upon the death of an individual, their assets are deemed to have been disposed of at fair market value. This "deemed disposition" can result in a significant capital gains tax.

For example, if John and Marie had investments outside of registered plans that appreciated $400,000 in value, half of this gain ($100,000) would be taxable. Depending on their province and marginal tax rate at death, which could be as high as 53.53% (as of 2021 in Ontario, for example), the tax on these capital gains could exceed $100,000.

Additionally, any remaining balance in John’s Registered Retirement Income Fund (RRIF) or Marie's Registered Retirement Savings Plan (RRSP) would be fully taxable on the final return unless rolled over to a surviving spouse or financially dependent child/grandchild, which was not an option in their case. This could easily result in tens of thousands of dollars in income taxes, depending on the size of the accounts.

Probate Fees

Probate fees (or estate administration tax) vary by province. In Ontario, for instance, the rate is $5 for every $1,000 of the estate's value up to $50,000 and $15 for every $1,000 thereafter. For an estate valued at $1 million, as in John and Marie's case, the probate fees would be approximately $14,500. This is a direct cost out of the estate before any distributions to beneficiaries.

Debts and Liabilities

Upon death, all of John and Marie's outstanding debts would need to be settled by the estate before any assets could be distributed to Emma and Alex. This includes mortgages, car loans, credit cards, and personal loans. If John and Marie had a remaining mortgage of $250,000 and other debts totaling $50,000, the estate would need to pay $300,000 to creditors.

The Cumulative Impact

Adding up taxes, probate fees, and debts, John and Marie's estate could easily see more than $400,000 of their intended $1 million legacy consumed before Emma and Alex receive anything. Leaving around 600,000$ to the kids and this does not account for any legal fees or costs associated with resolving disputes between the siblings or with creditors, which could further diminish the estate.

The Emotional and Financial Toll

The lack of a comprehensive estate plan also meant that specific assets were not clearly allocated, leading to disputes between Emma and Alex. Arguments over who should inherit the family home, the cottage by the lake, and John’s cherished classic car, which had significantly appreciated in value, began to tear the siblings apart. The emotional strain of losing their parents was compounded by the stress of legal battles over their assets, battles that could have been avoided with clear, legally binding instructions in an estate plan.

The Cumulative Impact

Without strategies like insurance policies designated directly to beneficiaries outside of the will, or the establishment of trusts to manage the distribution of assets, a large portion of John and Marie’s wealth was consumed by taxes and legal fees, instead of supporting their children’s futures and grandchildren’s education as they had hoped.

This devastating scenario underscores the critical importance of seeking professional estate planning advice. With the right guidance, John and Marie could have safeguarded their assets from excessive fees and taxes, ensured a smooth and harmonious transfer of their legacy, and preserved the family bond they worked so hard to strengthen.

Estate planning is not merely a financial task—it’s an act of love, ensuring that your legacy nurtures your loved ones rather than becoming a source of conflict and loss.