An important, though oft misunderstood, component of estate planning is that Wills may operate as substantial tax saving vehicles.  While people generally focus on the use of a Will to deal with the distribution of their property upon death, a Will can be used to achieve additional objectives, such as the mitigation of income tax and Ontario Estate Administration Tax (commonly referred to as “Probate Tax”).

Testamentary Trusts

The first such tax saving tool is the use of Testamentary Trusts.  Such Trusts arise on the death of an individual, and are generally created by the individual’s Will, which sets outs the Trust’s terms and conditions.  The key benefits to such structures are as follows.

First, a Testamentary Trust is subject to the standard set of graduated income tax rates that individuals are generally subject to (although Testamentary Trusts receive graduated tax treatment just like living individuals, they do not receive the basic personal exemption of roughly $10,000.00). To offer an example, this means that roughly $37,700.00 of income can be taxed at the lowest available rate of tax (20.05%) versus the highest rate (46.41%) through the use of a Testamentary Trust.  The tax savings resulting from this (compared against the highest rate) are roughly $9,370.00 per year per Testamentary Trust that is established.  Further savings may be realized by allocating income amongst beneficiaries (including beneficiaries who are minors, though some additional calculations are required).  A person’s Will may provide for a Testamentary Trust for multiple beneficiaries (for example, one for each child), further multiplying the tax savings that can be realized.

An additional benefit to the use of Testamentary Trusts is that such Trusts may be structured so as to provide some protection for family law purposes.  Further, such Trusts also provide an element of creditor proofing, as the assets are technically the property of the Trust, and not the beneficiary.

While, Testamentary Trusts do provide a wide array of tax savings, they are generally only adopted when the size of the estate in question warrants the additional cost of establishing these specialized Trusts. Further, while a spouse and his or her partner may each create Testamentary Trusts for their children (further maximizing the potential tax savings), taxpayers must be cautious in establishing multiple Trusts for multiple beneficiaries (under a variety of circumstances) to ensure that the Canada Revenue Agency does not tax them all as one entity under subsection 104(2) of the Income Tax Act (Canada).  In determining whether or not to apply this provision, the CRA will assess whether or not there was an intent by the testator (the individual who established the Trusts in his or her Will) to create separate Trusts:

(1) Whether the Trusts  had common beneficiaries;
(2) Whether or not the assets of each Trust were segregated;
(3) Whether the assets were accounted for separately; and,
(4) The conduct and powers of the trustees.

Double Wills

A second major tool that should be considered when structuring a Will is the possible use of Double Wills.  While Testamentary Trusts are generally utilized to mitigate the impact of income tax, Double Wills are generally adopted to mitigate the impact of estate administration tax or “probate tax” as it commonly referred to.  Pursuant to subsection 2(6) of the Estate Administration Tax Act, 1998 (Ontario), a “probate tax” of $5 per thousand on the first $50,000 of an estate and $15 per thousand on the remaining assets is charged to all estates by the province of Ontario upon the application for a “Probated Will” (technically, a Certificate of Appointment of Estate Trustee with a Will).  Such a document is required for assets such as real estate or investment accounts that are not jointly-owned. Closely-held corporate shares are normally exempt from the Probated Will requirements.  Thus, where individuals have high values invested in closely-held corporate shares or other assets that do not require a “Probated Will”, Ontario law permits individuals to draft a second Will to avoid the potential application of “probate tax”.

In conclusion, when retaining counsel to draft a Will, be sure to consider the various tax saving options outlined above that might be appropriate to utilize to enable your beneficiaries to benefit from a variety of tax saving measures which will allow them to stretch the dollars they receive from your estate further.