Do Beneficiary-Designated Assets Avoid Probate in Ontario?

Many people hear that naming a beneficiary lets money skip probate. That is often true, but not always, and it does not mean the money is free of every claim or every tax.

This article explains which assets usually pass outside the estate in Ontario, how that affects Estate Administration Tax, and the exceptions that catch people by surprise.

What passes outside the estate

When a beneficiary is designated on a life insurance contract, the insurance money does not form part of the insured's estate and is not subject to the claims of the insured's creditors. For plans other than insurance, such as RRSPs, RRIFs and pensions, a participant may designate a person to receive the benefit payable on death.

For Estate Administration Tax, the estate value excludes assets with a beneficiary designation, jointly owned assets that pass automatically to the other owner, real estate outside Ontario, and registered plans (RPP, RRSP, RRIF, TFSA) with a beneficiary designation.

How this affects Estate Administration Tax

Estate Administration Tax is $0 on estates of $50,000 or less. Above that, it is $15 for every $1,000, or part of $1,000, of the estate's value over $50,000, for applications on or after January 1, 2020, with the value rounded up to the nearest thousand.

Because designated assets are left out of that value, they reduce the amount on which the tax is calculated. The Estate Information Return must still be filed within 180 calendar days after the estate certificate is issued, even if the estate's value is $0 or the tax is nil.

Exceptions that keep money in or reach it

• A designation in favour of the insured's heirs, next of kin or estate is treated as a designation of the personal representative, so the money goes through the estate.
• A designation in a will is revoked if the will is revoked, and has no effect against a designation made later than the will.
• If the insured and beneficiary die at the same time, or it is uncertain who survived, the money is paid as if the beneficiary died first, unless the contract or declaration says otherwise.
• For an Ontario pension, when a member dies before the pension starts, the spouse is entitled to the pre-retirement death benefit ahead of any designated beneficiary, unless the spouse was living separate and apart at death.
• For a dependant's support claim, life insurance owned by the deceased and plan designation amounts are deemed part of the net estate.

If a beneficiary is a minor, the Children's Law Reform Act allows money to be paid to a parent the child lives with up to $35,000 where the child has no guardian of property, and larger sums are normally paid into court through the Accountant of the Superior Court of Justice. An insured may also appoint a trustee for a beneficiary.

Taxes still apply even if probate does not

Most life insurance proceeds received on death are not reported or taxed, though income earned on them is taxable. For an unmatured RRSP, the annuitant is considered to have received the fair market value of the plan immediately before death, and that amount is taxed on the final return. No amount is included if a spouse or common-law partner is the sole designated beneficiary and all property is transferred directly to a qualifying plan by December 31 of the year after the year of death.

A TFSA beneficiary does not pay tax on amounts up to the fair market value at death, but earnings after death are taxable. The estate trustee may therefore have to pay tax from estate assets that did not come from the registered plan, so plan ahead for that.

What to do next

• List every asset and note whether it has a named beneficiary, a joint owner, or neither.
• Get copies of the current beneficiary forms for insurance, RRSPs, RRIFs, TFSAs and pensions.
• Check whether any designation names the estate, which sends the money through probate.
• If the deceased owned real property or assets held by a financial institution, expect that the estate normally has to be probated.
• Ask an accountant about the final return before distributing.
• Speak with a lawyer if a designation looks out of date, a dependant may claim, or a minor is involved.

Frequently asked questions