How have you put your real estate into your estate plan?

Intro Speaker:  

Hello, and welcome to Matters Beyond Wealth with your host, Leanne Kaufman, president and CEO of RBC Royal Trust. For most of us, talking about subjects like aging, late life, and estate planning isn’t easy. That’s why we’re going to help get the conversation started on this podcast while benefiting from the insights and expertise of some of the country’s top experts. We want to bring you information today that will help to protect you and your family in the future. Now, here’s your host, Leanne.

Leanne Kaufman:

Real estate is a hot topic today, mostly of course the price of it, but real estate is also an important topic when it comes to estate planning in a number of different ways. Whether you are accelerating a gift or some inheritance to help a child or a grandchild buy their first home or you’re wondering what might happen to your real estate after you’re gone, today’s topic is all about putting the “real” estate in estate planning.

Hello, I’m Leanne Kaufman and welcome to RBC Wealth Management Canada’s Matters Beyond Wealth. With me today is Rachel Goldman Robinson, a partner in Torkin Manes LLP’s private client services group. Rachel has more than two decades of experience helping individuals and families navigate the complexities of estate planning and administration. She’s a recognized thought leader and frequently presents at seminars and educational sessions—some of which have been aimed specifically at educating women on estate planning and financial literacy—and she’s been a guest lecturer at Osgoode Hall Law School.

Rachel, thanks for being here with me today to talk about the impact of real estate and what it can do in estate planning and in estates, and why all of this matters beyond wealth.

Rachel Goldman Robinson:

Thanks for having me. Great to be here.

Leanne Kaufman:

So, let’s start with some upfront planning issues when it comes to dealing with real estate. I’m sure you have clients who are planning their estates and seek your advice on how or maybe whether to accelerate part of their children’s inheritance by gifting them money to help them buy their first home. What sort of advice do you give to those clients?

Rachel Goldman Robinson:

So, we see this kind of thing all the time. The number one piece of advice I give is to document as much as our clients can. So documenting intention is really important, whether it’s through: 

• a deed of gift evidencing that this is a gift that has been made from the client to the child; or
• putting a mortgage on title to a property; or
• documenting it through a proper loan document like a promissory note where money has been loaned to the child and the child is actually indebted to the parent.

Either way, it’s really important to have it in writing so that the intention is clear and then we talk about the treatment of how that’s going to be dealt with if it’s still in existence at the time of death. Certainly, with the promissory note, what’s going to happen to that loan? Is it going to be forgiven on death? Is it going to be equalized? These are really important conversations to have with the client.

We also talk about having an open conversation with the other children. For example, I’m working on an estate right now where there are four children and there’s been different amounts of money that’s been loaned to different children throughout my client’s lifetime, and all the children are aware of the different amounts that have been given and there are family meetings. There’s actually a document that the children are signing right now agreeing upon what’s been given, what is owing. So that at the end of the day when the client passes away, there are no surprises and the potential for fighting is actually quite minimized because everyone’s been involved throughout the lifetime. That being said, it’s not always practical. Some clients really value privacy for their children and they don’t want to unduly embarrass the child.

The other thing to really consider, and I stress this with my clients a lot, is being careful about giving away money during their lifetime and depleting their own estate. Because we’ve seen it. I’ve seen horrible situations where clients want to be overly generous and then at the end of the day, they don’t have enough funds to care for themselves. We try to guard against that situation where a client ends up depleting their own assets and doesn’t have enough money for their own end-of-life care.

Leanne Kaufman:

Yeah, it’s important that it’s done as part of a bigger holistic financial plan, isn’t it in most cases?

Rachel Goldman Robinson:

Absolutely.

Leanne Kaufman:

And I’m sure there’s also considerations, although neither you nor I are family law lawyers, there’s probably a lot of careful considerations from a family law perspective too, if the purpose of the gift is to buy a house. So we’ll leave that for another lawyer on another day to talk about, but one more red flag, I think.

Rachel Goldman Robinson:

Yeah.

Leanne Kaufman:

So, you spoke about sometimes there needs to be an equalization or if one child needs help and another doesn’t, it isn’t always going to be dollar for dollar in this inter vivos or during someone’s lifetime gifting. What sort of advice do you give around equalization? Or I guess some of it’s a personal choice, do they want to equalize or not at the end of the day, but what sort of advice do you generally end up giving around that?

Rachel Goldman Robinson:

Yeah, so I always start by talking with my client about whether they actually want to have an equalization done on their death or whether they’re intending to benefit the child with the greater needs today more than the other children and just to leave it at that. I see all sorts of situations, all sorts of different wealth among children where they might have…clients might have a child that is very wealthy and another child that has great needs. In those situations, clients tend to steer away from the idea of an equalization because at the end of the day, that really wealthy child might not need the money the same way the other child does.

That being said, there’s always the emotional component involved with estates. And while that very wealthy child might not need the extra money, that child might have a lot of emotional baggage that comes with, “Well, mom and dad favored the other child.”

So, we talk this through—we talk through what the relationships are like and what the client’s intention is. And like I said, sometimes they don’t want the equalization, but I would say more often than not, clients do want to have some form of equalization in the Will, this hodgepodge wording that we do to sort of at the end of the day have everybody come out equal in one way or another. This really helps to avoid fighting because the typical response is that the next generation somehow ends up fighting over, “you got more than me” or that sort of thing.

Regardless of what they want, if they want an equalization or not, again, I stress the importance of documenting this. Whether this is through actual documents that I’ve talked about or a side letter, a memo of wishes, an expression of intention, so that the clients can really write out to their children what it is that they were doing, what they were intending to do. So there’s no doubt as to what the client intended at the end of the day.

Leanne Kaufman:

And like you say, less room then for fighting or a lack of agreement on what the intentions were because sometimes there’s vested interest in that lack of agreement as well.

Rachel Goldman Robinson:

No, for sure. It’s also really important that the Will is drafted properly. So, if the amount that was given was a loan and it was documented as a promissory note and there’s wording that it’s going to be equalized, the Will also then has to have wording that it’s forgiven because you don’t want it to remain outstanding as a debt owing to the estate when there’s an equalization provision. I’ve seen some really horrible situations where the drafting lawyer didn’t actually take that into account, so the child technically still owed the money to the estate even though it was also taken off the share of the child. So you got to kind of get it right with the client.

Leanne Kaufman:

Well, let’s talk about the situations now where someone passes away, and we’re not going to talk about gifting to kids anymore, but now talking about real estate in the context of an estate as an asset of the estate. First of all, can you tell us what happens when a couple owns property jointly? And I know there’s a couple of different ways that you can own property jointly, so can we just talk about that for a second?

Rachel Goldman Robinson:

Yeah, for sure. The two main ways are through either joint tenancy or as tenants in common. And oftentimes the clients don’t know the difference and they just say, “Well, we own the property jointly.” So, we always search title to see how are they actually recorded as owners on the property.

With joint tenancy, it means that if the husband and wife own the property together, on the first to pass away, the surviving spouse automatically becomes the owner on death. It’s dealt with outside of the Will and the property becomes the ownership solely of the surviving spouse, and regardless of what the provisions of the first to die’s Will say.

With tenants in common, each owner owns a percentage of that property, whether it’s 50/50 or however it’s documented on title, and the ownership of that deceased spouse falls into that person’s estate and is dealt with under the terms of the deceased’s Will. So, it’s very different than the joint tenancy.

You can also have ownership where there are other people on as trustees. So I’ve seen situations where a parent or grandparent puts the children on or grandchildren as joint tenants, but there’s a side trust document showing that they’re actually on as trustees. So either way, that still is through the joint tenancy arrangement where the intention is on the first to die, the surviving owners get the property outside of the estate.

Leanne Kaufman:

So, let’s say the property is in the name of only one of the spouses. There is a married couple, but the property’s only registered in the name of one of them, then that right of survivorship isn’t going to happen, but what happens there?

Rachel Goldman Robinson:

So, if only one spouse owns the property, then that property forms part of that deceased person’s estate. If that spouse who owned the property dies, the property goes into his or her estate and it’s dealt with under the provisions of his or her Will, assuming that there’s a Will in place. That’s subject to the terms of any domestic agreement. So, if there’s a marriage contract or a prenup agreement that specifically deals with the property, that overrides the provisions of the deceased’s Will. But in any event, that asset physically goes into the deceased’s estate, it may be subject to probate fees, which I’ll talk about. The surviving spouse, a married spouse, has matrimonial rights to live in the property for a 60-day period following death, but it does not give the surviving spouse any automatic ownership rights in the property. Again, subject to the terms of a domestic agreement.

But if there’s no agreement in place, then that property is an asset of the first to die’s estate. Then probate fees are going to be payable on the value of that property if it’s only in the deceased’s name—subject to a certain exception called the First Dealings Exemption that we would look into to see if that property qualifies. But assuming it doesn’t qualify, then in order to get that property into the estate’s name, into the deceased’s estate, it would be subject to a 1.5 percent probate fee.

So often when I point this out to clients and their intention is, let’s say, to have the property go to the surviving spouse automatically, then a natural planning advice that I would give them would be to put it into their names as joint tenants because you avoid the probate fees and you avoid the administrative hassles and it just passes to the surviving spouse. Really, relatively simple planning.

Leanne Kaufman:

And that 1.5 percent are of course the Ontario probate fees, but those rates vary right from province to province. If a listener happens to be in Alberta, it’s a much different and much lower probate rate, so not necessarily having the same kind of level of consideration as we do in Ontario and some of the provinces where these probate fees are deemed to be quite high.

So, let’s talk about tax for a minute because you mentioned the probate fees, which is sometimes considered a tax, right? Because although it’s not defined as a tax, it’s sometimes called a probate tax, but that is separate and distinct still from income tax. So what are some of the tax implications of real estate in an estate?

Rachel Goldman Robinson:

Sure. So, when a person dies, they are deemed to have sold all of their assets to the extent that they own any capital property like real estate, capital gains tax is normally payable, which means that 50 percent of the gain on the property from the time of acquisition until the time of death would be taxed. That capital gains tax is levied on that gain in value, but there are certain exceptions to this:

• One exception is for any assets passing to a surviving spouse either outright or through a spousal trust, the capital gains tax that would otherwise be owing on death of the first spouse is deferred until the second spouse’s death. So that doesn’t even have to do with real estate, it’s just normal planning where any asset passing to the surviving spouse defers the capital gains tax.
• With real estate, there’s something called the principal residence exemption, and this exempts the property that qualifies as a principal residence from the capital gains tax that would otherwise be payable on the sale of that property or on death. So, it’s available to the estate on the death of the testator, but you can’t have it for multiple properties at the same time. So normally, they would look at which property has the highest gain and can it qualify as this principal residence. If that property’s not passing to the surviving spouse, the capital gains tax would otherwise be payable, then they would elect for this principal residence exemption to apply to shelter that tax.

Leanne Kaufman:

Can you just then, to put a fine point on it, describe the difference between income tax that you’ve just mentioned and the probate fees we talked about earlier?

Rachel Goldman Robinson:

Sure. So income tax is a capital gains tax that’s payable on debt, and that is through the tax filings. Like I said, although you can do the principal residence for one property, clients with multiple properties will have capital gains tax on the other properties to the extent that they don’t pass to the surviving spouse or on the death of the surviving spouse. So while I said we can defer that capital gains tax, you can’t avoid it. So on the second spouse’s death that tax is going to be payable. They won’t let us get away from it. So at some point in the future, the capital gains tax is payable on everything other than what is exempt through that principal residence exemption.

I always tell my clients that consideration should always be given to having sufficient liquidity in the estate to fund that eventual tax that’s going to be owing on these properties and on these assets, shares of companies, which we can talk about on another day. But clients really have to consider how that is going to get funded. Life insurance or joint lapse to die policies are really a good way to get that liquidity. So this is separate from the probate fees.

So the probate fees, the 1.5 percent is an approximation. In Ontario, it’s actually on a scale, but since the estates are usually larger than the exemption, and we say it’s usually 1.5 percent. It’s really an administrative fee, it’s not an income tax that’s levied. And it’s owing on assets that require what we call a probated Will in order to be transferred. So that’s sort of a slang term for a certificate of appointment that is issued by the court. In order to get this certificate, the executors have to file an application and they have to include the value of if there’s only one Will, they have to include the value of the entire estate. And that value, the 1.5 percent probate fee is levied on it as a fee, as a tax.

In Ontario, we do dual Wills oftentimes where we get around having to pay that probate fee on certain assets like corporate interests. For real estate specifically, we put structures in place using what we call bare trustee corporations where we take a piece of real estate that would otherwise need this probated Will and be subject to the probate tax and we put legal title in a corporation and we have a dual Will, a secondary Will, that takes that corporation and  through this structure, it avoids the probate fees and you avoid having to pay the 1.5 percent. So it takes an asset that otherwise would be probatable and makes it non-probatable. So, for clients that have significant real estate, it’s a really good planning tool to avoid this probate fee, but again, you need two Wills. So, each person needs two Wills in order for this to be successful in Ontario.

And like you mentioned before, different jurisdictions have very different rules. Alberta is much lower in terms of probate fees. BC has a whole different system. So whenever we have clients with real estate, especially in different jurisdictions, not only within Canada but throughout the world, we often will suggest that they have counsel in that specific jurisdiction to help with the planning, whether or not it’s probate fees or tax or ownership. And we work very closely with lawyers in other jurisdictions to get that done properly.

Leanne Kaufman:

The complexity of some of the stuff that you’ve mentioned just really points to the importance of having really good legal and tax advice and in the jurisdiction where the real estate is held.

There’s one other little nuance to income tax that I just want to touch on briefly before I let you go. And that’s something that the CRA brought out not that long ago, but not everyone might be aware of it, called the Underused Housing Tax. So just briefly, can you tell us what is that and how might it impact an estate?

Rachel Goldman Robinson:

So, there’s been a lot of talk about the UHD, as we call it. The Government of Canada introduced this Underused Housing Tax on the ownership of vacant or underused housing in Canada. It took effect on January 1st, 2022. Affected owners of residential property on December 31st, have to pay this Underused Housing Tax for the residential property for the calendar year, and the tax is one percent of the taxable value of the property.

Now, for many of our clients, it doesn’t actually apply and they’re not subject to the tax, but there are filing requirements for certain people. So there was a lot of commotion and a lot of confusion over who has to file and what does this actually mean for homeowners. It generally applies to foreign nationals, but it can apply to certain Canadian owners, certain partners, trustees and corporations.

They have these exclusions and excluded owners don’t actually have to file the return or pay the tax, this does include Canadian citizens. But for affected owners who do have to file, there’s a whole stage of exemptions. Deceased individuals or personal representatives or co-owners are exempt from paying the tax. So even if an exemption applies and the ownership of the residential property is exempt from the tax for a calendar year, the affected owner still has to file a return.

So you have to figure out whether you’re an excluded owner and you don’t have to file or whether you do have to file, but you are then excluded from paying the tax. My answer to everybody on this is speak to your accountant. It’s best to have the accountant involved, our clients deal with the accountants for these filings, for the bare trust filings that I was talking about before, and we can work together with the accountants to get this done properly.

Leanne Kaufman:

I think it’s safe to say that the tax issues surrounding real estate, whether it’s in an estate or not, have gotten a lot more complicated in the last few years.

Rachel Goldman Robinson:

Absolutely.

Leanne Kaufman:

Rachel, I know we just did a real flyby on a number of topics related to real estate and hopefully gets our listeners thinking about some of these and seeking some additional advice as they require it. But if you hope our listeners just remember one thing from this conversation, what would that one thing be?

Rachel Goldman Robinson:

Can it be two things? I have two things.

Leanne Kaufman:

You can do two things.

Rachel Goldman Robinson:

I would say two things are to document your intentions, put things on paper. The whole idea of estate planning is to help ensure a seamless transition after you pass away. One of the best ways of doing that is for you during your lifetime to write out your intentions and when you’re structuring something, what your thoughts were and what your intention was behind that structure. So that’s number one.

And I think number two is to hire good advisors. I’m not just saying hire a good lawyer, but certainly investment advisors and accountants, have the proper team in place to help with your planning and working together so that you can avoid leaving a mess for the next generation.

Leanne Kaufman:

Both great pieces of advice for all of us. Well, thank you so much, Rachel, for joining me today to talk about real estate and estates and why this matters beyond wealth.

Rachel Goldman Robinson:

Thank you for having me.

Leanne Kaufman:

You can find out more about Rachel Goldman Robinson at the Torkin Manes website or on LinkedIn. If you enjoyed this episode and you’d like to help support the podcast, please share it with others, post about it on social media or leave a rating and review. Until next time, I’m Leanne Kaufman. Thank you for joining us.

Outro speaker:

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Thank you for joining us on this episode of Matters Beyond Wealth. If you would like more information about RBC Royal Trust, please visit our website at rbc.com/royaltrust.