Take an island father, age 45, a widower. He's been living frugally, building up a small business. He draws $30,000 a year in salary, and has managed to sock away $100,000 to an RRSP, slightly over $20,000 in savings, and a stock portfolio worth $30,000. He hasn't done any estate planning -- after all, there's lots of time -- but, if he had, he would want his son to inherit. The son lives at home, working as a fishing guide.
The father dies, and his son visits his father's accountant. The accountant explains that Revenue Canada will assume his father to have disposed of all assets the day prior to death. The accountant figures the business interest is now worth $100,000, adds in the RRSP and earnings to date -- and ballparks the father's tax liability at $115,000.
But the son cannot find a buyer for the business. The accountant gently explains that Revenue Canada uses the fair market value of the business on the day prior to death, not on its sale price when -- or if -- a purchaser is eventually found. The accountant agrees, reluctantly, that, yes, Revenue Canada does have the ability to take the family home in lieu of taxes. But they would rather not, being too politically sensitive.
"And by the way," adds the accountant, "You've got five acres there, don't you? You realise that the personal residence exemption only applies to the first acre? We'll have to work out the capital gains on the excess four. . . oh, and, there's also a provincial land transfer tax to be collected on those four acres when you get around to registering title in your name. And the legal costs to get it done. Better allow for a contingency of another $5,000, at least."
The son tries to liquidate other assets. But the bank manager says, "Oh dear, terribly sorry, but our rules state that for amounts over $20,000 letters probate are required." The trust company managing the RRSP and the stock broker tell him the same: they require letters probate.
The son now visits his father's lawyer, who explains that probate is the process whereby a provincial court certifies the validity of a will and confirms the authority of a personal representative to administer the estate. To receive letters probate, the lawyer further explains, probate fees must be paid -- based on his father's full estate value, not just the accounts held by financial institutions. Son and lawyer now need to build an inventory of all possessions at the time of death, and present it to the court.
The father left a $100,000 residence, an island beater worth $2,000, the business interest, household furniture and other miscellaneous items such as runabout and fishing tackle.
The father left a modest estate, valued at $400,000. . . and left his son with a need to come up with up $5250 to pay provincial probate fees just so he can find a way to sell his inheritance to pay $115,000 income tax.
"And by the way," suggests the lawyer, "better add another $5,000 for contingencies, such as accounting fees, appraisals and maybe a specialized agent to sell your Dad's business."
It suddenly dawns on the son: He'll be fortunate -- after all fees (hidden, professional and probate), levies, taxes, charges, bills are paid -- extremely fortunate indeed to keep his home.
Good thing there was no mortgage.