230277
The-Last-Word

Fending off the greedy capital gains 'fairy'

Capital gains avoidance

I slipped it in a brief tax warning at the tail end of my last column.

I know, it was unfair to those struggling to stay awake to the bitter end.

So, let’s hit it head on. Buckle up. First, if you’re new to my column please read my last two, which explain how joint ownership can sidestep probate.

Canada is a fantasy land. A little fairy pops out the moment before we die and waves their magic wand. Poof! Everything we own has been sold and repurchased.

I’m not making this up.

Who did we sell everything to? The fair value monster. The monster pays us fair market value for everything we own.

The home Greg paid $440,000 for 10 years ago? The moment before Greg passes away, the fair value monster purchases it for $900,000, the exact amount it would sell for if listed for sale. Brilliant! No real estate commissions.

But Greg doesn’t get to keep the cash. The party “poofer” is Greg immediately buys it back for the exact same amount of money.

What does that have to do with tax? That fanciful little transaction triggered a capital gain.

A capital gain is when you earn money by selling something at a higher price than you bought it for. The capital gain Greg earned on the fanciful sale of his home was $460,000 ($900,000 market value minus the $440,000 he paid for it 10 years ago).

Thank goodness for the homeowner’s exemption or Greg would have to pay a boatload of tax on that massive capital gain.

Well, not Greg. He’s dead. That tax would be paid out of his estate.

But what if, when Greg purchased his home 10 years ago, he cleverly transferred title so it would be held in joint tenancy with his daughters, Maria and Grace, so they would avoid probate fees?

Over those 10 years, Greg owned only on-third of his home. As such, the little fairy trick triggers the homeowner exempt capital gain on only the 1/3 owned by Greg.

The joint tenancy trick works. Maria and Grace get the home fully in their names without having to pay probate fees.

But the massive capital gain on the two-thirds of the home Maria and Grace have owned for 10 years was not triggered. It will be triggered whenever Maria and Grace sell the home, and they will have to pay an amount of tax that makes probate fees look like chicken feed.

Does all this sound complicated? It gets much, much worse.

Let’s change things around. Instead of an owner-occupied home, it’s Greg’s Big White condo we re talking about and there is no homeowner exemption.

Greg puts the condo in joint names with only Maria because he has other assets of similar value that he’s going to give to Grace in his will. Maria is happy with getting a $900,000 condo because she and her family love to ski. Grace is happy as well, because she doesn’t like to ski and is getting $900,000 of other assets Hopefully they’re both sad about losing their dad, though.

The moment before Greg dies, the fairy trick triggers a capital gain on Greg’s 50% ownership of the condo. That’s a capital gain of $230,000 (50% of the $460,000.00 calculated above).

Whose capital gain is that? It’s Greg’s. And it’s paid out of his estate. That means it’s paid out of the $900,000 that was supposed to go to Grace. Not quite what Greg intended!

I’ve scratched only the surface of consequences of Canada’s little fairy, and only as related to real estate. The fairy’s wand applies to all assets—RRSPs, investment accounts, you name it.

And the fairy doesn’t care about fairness. There is a risk, with shares in closely held companies, of the fairy trick resulting in tax being paid twice on the same gain.

My head spins when delving into the nuances —and the clever strategies that estate tax accountants come up with to circumvent the fairy.

If you’re feeling the pressing need to consult with an estate tax accountant, I’ve achieved my goal.

Unless you’re way smarter than me and have the time to learn and stay up-to-date about the ever-changing tax laws, it’s dangerous not to get estate tax advice to avoid unfairness and ensure your estate passes the way you intend.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.





The pitfalls of putting adult children on property titles

Trying to avoid probate fees

Is it a good idea to hold bank accounts and property in joint names with your intended beneficiaries to avoid probate fees and expenses?

My last column explained how the probate process and associated legal fees can be avoided if joint ownership deals with all assets that would have required an estate grant. I ended the column with a caution that one should consider the potentially bad consequences of taking that step.

Brenda is a 78-year-old widow with two children, Jessica and Dave.

Jessica is a divorced mother of Brenda’s grandchild, Stacey, who has a wonderfully close relationship with Brenda. Jessica has been cohabiting with a new partner, Steve, for a number of years.

Dave goes in and out of relationships and has no children.

Brenda lives on a modest pension in a small condo worth $450,000. She has a TFSA worth $65,000 and a savings account that fluctuates but is usually above $50,000. She wants to make things as easy as possible for Dave and Jessica. She has decluttered her belongings, discussed with her children who will get anything of value, jewelry and furnishings, and has pre-planned and pre-paid for her funeral.

She read my column about how the time-consuming and expensive process of probate can be avoided and added Jessica and Dave as joint-owners of her condo and savings account. She also named them as beneficiaries of her TFSA, which is how that asset can go to them without probate as well. She threw my caution about joint ownership to the wind.

Dave makes a good living in the oil industry but overextends himself with an expensive lifestyle, driving an expensive jacked up pick-up truck and always has the latest quad and snowmobile. His financial world collapses when a quadding injury disables him from working. He doesn’t have disability insurance. Making matters worse, his quadding passenger is seriously hurt and pursues a legal claim because of Dave’s carelessness.

Intending to reimburse the account as soon as he recovers, Dave starts paying rent and making his high credit payments out of the joint savings account. Brenda gets the shock of her life when her son comes clean about draining her savings account. That’s when she also learns about the lawsuit which, if successful, will put her home in jeopardy because Dave is on title and has no other assets to pay a judgment.

Dave offers to remove his name from the title to protect the home from circling creditors, but he learns that property transfers made with that goal are unlawful and can be reversed.

Then there’s Jessica. She and her partner Steve have been living large, expecting to share in the proceeds from the sale of Brenda’s home after she passes away. But their relationship sours and they break up. Their separation would be clean and easy if not for Steve’s claim against Jessica’s joint ownership interest in Brenda’s home. Steve’s lawyer gets a court order freezing Jessica’s assets immediately upon their separation.

Yikes!

What about the wonderful scenario of Brenda finding love with someone she meets at her weekly bridge club. The two lovebirds decide to live their lives to the fullest, with plans to travel the world and indulge themselves with life’s expensive pleasures. To do so, Brenda needs to access equity in her home. The only way she can get a reverse mortgage is to get her children off title.

Jessica and Dave are concerned their mom, who has become more and more forgetful, has fallen for a shyster who is only after her money. They refuse to transfer title. Their well-meaning refusal causes a rift in their relationship with Brenda.

How awful!

Finally, consider a scenario where Brenda suffers cognitive decline and then Jessica dies of cancer. Brenda is unable to change things on Jessica’s death because she no longer has the cognitive capacity to do so.

The problem is when Brenda dies, everything will pass to her son with nothing for Brenda’s granddaughter Stacey.

Probate fees on a $450,000 home and $50,000 bank account are only $6,450. Adding legal fees might bring the expense to $10,000 to $15,000.

These nightmare scenarios, and many others I could come up with, make probate sound like a walk in the park.

And then there’s tax implications. One of the most significant tax breaks we get is the capital gains exemption for our principal residence. When you sell your home, you don’t have to pay tax on what is often a significant increase in value.

That exemption is not enjoyed by a joint owner who does not reside in the home with you. Trying to save a few thousand dollars of probate expense might result in tens of thousands of dollars of tax liability.

I recommend you invest the time and fees to consult with both an estate planning lawyer and an accountant with estate tax expertise so you can make fully informed and wise choices.

I do not provide estate planning services and I am not an accountant, but I will be happy to refer you.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.



Ways to minimize the financial burden on your kids when you die

Dealing with probate fees

How can we minimize the taxes and expenses our adult kids will face on our deaths?

Thanks for the question, Brenda.

This is an incredibly broad topic. I am going to cover joint ownership in this column. And it’s going to require a sequel.

The ownership of many assets cannot be transferred to your child after your death without a court document that gives an executor that authority. That document is called an estate grant.

What assets require an estate grant to transfer? Anything you are the registered owner of, such as accounts at banks and other financial institutions, vehicles, manufactured homes and properties registered in the land titles registry.

There are exceptions for low value estates. ICBC has a policy to transfer title to a vehicle if the total estate assets do not exceed a value of $10,000. Financial institutions might agree to transfer accounts in the $10,000.00 range without requiring an estate grant.

The legal process for obtaining an estate grant is called probate. Probate costs money.

One cost is for the process itself. If your child hires a lawyer to handle that rather complicated legal exercise, they will pay thousands of dollars in legal fees.

But while they might find it complicated, frustrating and time consuming, that largely administrative process can often be completed without hiring a lawyer.

The other cost are probate fees, which are levied by the government as a percentage of the value of your entire estate, not just the value of assets requiring an estate grant to transfer, all estate assets.

How much are probate fees? Nothing is payable on the first $25,000 but it’s 0.6% payable on the next $25,000 and 1.4% on everything over $50,000.

Those are very low percentages. Probate fees for a $100,000.00 estate will be only $850.00. For a $500,000 estate they will be $6,450.00 and for a $1 million estate they will be $13,450.

But probate fees are payable only if the probate process occurs.

If there are no assets requiring an estate grant, there is no need for probate and your beneficiaries avoid both the legal and the probate fees completely.

Let’s say you have $500,000 in a pillowcase, along with a bank account balance of $25,000. After you die, the bank will not transfer that $25,000 to your child without an estate grant.

When applying for the estate grant, your child must list the $500,000 of pillowcase cash along with the bank account, and pay probate fees on the entire amount.

Total probate fees would be $6,800. I get that number by attributing nothing for the first $25,000, 0.6% ($150.00) for the next $25,000 and 1.4% ($6,650.00) for the final $475,000.00.

If your child doesn’t have to deal with that bank account, they would not need an estate grant and could avoid the probate expenses altogether.

How could that be accomplished? One way is through joint ownership of the bank account. If one joint owner of an asset dies, the other joint owner becomes the sole owner. You simply add your child as a joint account holder before you die.

In fact, you could keep the entire $525,000 in a joint account and there would still be no need for an estate grant and therefore zero probate expenses. Your child would simply become the sole holder of that account after your death.

The joint ownership trick works for land title assets as well, i.e. a condominium apartment, house, patch of land or other asset registered in the land title system.

Let’s say you own a $2 million home. If you add your child to title of that home as a joint owner (called joint tenancy), then all your child has to do is file your death certificate with the land title system after you die and they become the sole owner. No need for an estate grant.

But before you rush off to add your child (or children) as joint owners of your assets, you need to consider potential bad consequences of taking that step, which I will discuss in my next column.

And while I am giving you very simple scenarios, your situation might have complexities. I always recommend you invest the time and fees to consult with both an estate planning lawyer, as well as an accountant with estate tax expertise. Failure to do so could cost your children dearly and result in outcomes you never intended nor conceived of.

Keep coming with the questions.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.





Legal columnist returns after four-year break

Hergott's column returns

Castanet welcomes back columnist, Kelowna lawyer Paul Hergott, who wrote a legal column here from 2014 to 2020. His new column will appear here every Sunday and will focus on legal issues.

Some of you will remember my previous column, Achieving Justice, which was originally published in the Westside section of the Capital News newspaper starting in January 2007.

My legal practice at the time was fighting for innocent injury victims against monolithic insurance companies like ICBC. There was no shortage of injustice for me to write about, though I often went on tangents into completely different topics that caught my attention.

I relish in exposing injustice. My heart warms at the thought I might help a David facing a daunting Goliath.

Road safety topics regularly crept in because most of my clients had been injured in entirely preventable motor vehicle collisions. I naively thought I might help break through the dangerous autopilot of inattention plaguing our roads.

The Capital News phased my column out of print in 2017 but continued to carry it online. Castanet picked it up the beginning of 2014.

After 13 1/2 years, I hung up the column-writing towel. My last column was published July 13, 2020. My legal practice, at the time, was incredibly busy and the column writing process added to very long work weeks away from my family. A weekly passion had become more of a chore and about coming up with a topic than words flowing from passion-filled fingers.

I concluded my last column on a hopeful note.

“So I’m hanging up my keyboard, at least for now. Perhaps when my work week is shaved down and I regain a writing passion, I’ll want to return. And, perhaps there will still be a media platform willing to publish what I’ve got to say.”

My legal practice has dramatically calmed down. In 2023, I got out of the personal injury business altogether in favour of a much more relaxed estate practice. Instead of helping injured victims achieve justice against insurance companies, I now help take beneficiaries and executors through the process of achieving court approval of how an estate will be administered after death. I’ve gone from the injured to the dead!

As boring as the legal field of estate administration and management might seem, it turns out that there are a whole lot of interesting and important topics to write about. Going through the estate side of things exposes all sorts of ways an estate could have been set up better before death to minimize expense and best achieve the testator’s wishes.

Apart from the legalities of the estate itself, it becomes clear that all sorts of steps taken before death can make things so much easier on those left behind.

With the luxury of time, a new field of law and various miscellaneous topics continuing to catch my eye, my writing itch has returned. And I am delighted to learn there are still media platforms willing to carry my column.

When I first started writing, my father warned me to keep my expectations very low for anything in the way of reader feedback. He knew what he was talking about, having been a columnist in his day. Wouldn’t you know, my low expectations were fulfilled.

So, feel free to buck the trend. Any questions you have about estates are probably shared by others. And, if a miscellaneous issue gets your goat, it might inspire me to write about that as well.

I invite you to e-mail me at [email protected] as you identify questions or topics you would like me to tackle.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.



More The Last Word articles



227125
About the Author

Lawyer Paul Hergott began writing as a columnist in January 2007. 

Achieving Justice, based on Paul’s personal injury practice at the time, focused on injury claims and road safety.  It was published weekly for 13½ years until July 2020, when his busy legal practice no longer left time for writing.

Paul was able to pick up writing again in January 2024. After transitioning his practice to estate administration and management.

Paul’s intention is to write primarily about end of life and estate related matters, but he is very easily distracted by other topics.

You are encouraged to contact Paul directly at [email protected] with legal questions and issues you would like him to write about.



230583
The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet does not warrant the contents.

Previous Stories



230877