If you have spent years paying off your home, you have probably wondered how much of it your kids will actually keep when you are gone.
Here is what most people do not realize. Before your kids can inherit your home, your estate may have to pay a tax called probate. Today I am going to show you five legal ways to shrink that probate, or skip it completely.
But I have to give you one warning right up front. Do not focus on probate alone. Almost every move that saves you probate can trigger income tax instead. Sometimes the probate you save is not even worth the income tax you create. So we will look at both, every step of the way.
Before we go further, let me be clear about what home I am talking about. I mean your primary residence. That is the home you actually live in, not a rental and not a cottage. And I am going to assume one thing all the way through this article. You own this home, and you have always lived in it as your own home. That is what lets it qualify for a powerful tax break called the principal residence exemption, which I will explain in a minute.
One important caution here. If you ever rented out this home, even for just a few years, the tax math can change. Renting can shrink your principal residence exemption, so part of the growth in value could become taxable. If that is your situation, the numbers in this article may not apply cleanly to you, and you should get advice on your specific rental years.
Now let me explain how probate works, since that is what we are here to beat.
Probate is officially called Estate Administration Tax. It is a fee your estate pays to the government just to move your home into your kids’ names after you pass away.
In Ontario, your estate pays nothing on the first $50,000. After that, it pays $15 for every $1,000 of value, which is about 1.5%. And it is based on what your home is worth the day you pass away, not what you paid for it.
Let me use one home for the whole article. You bought it for $350,000. Today it is worth $700,000. And when you pass away, let us say it is worth $1,000,000. We take off the first $50,000, and the probate on the rest is about $14,250.
Good news first if you are married
Before we get to the five options, here is something that clears up a lot of confusion.
Most couples own their home together as joint tenants with right of survivorship. That is a way of owning a property together where, when one owner passes away, their share moves to the other owner right away, all on its own.
So when the first spouse passes away, the home goes straight to the surviving spouse. There is no probate at that point. And there is no income tax either, because the rules let a home pass between spouses with no tax.
Probate only becomes a problem when the second spouse passes away too. Because now the home has to move down to the kids, and there is no spouse left to catch it. That is the moment probate gets triggered.
So really, everything in this article is about that second step. Getting the home from the last surviving parent down to the kids, without handing the government more than you need to.
The income tax you cannot ignore
That brings us to income tax, so you can see the trap.
When your home goes up in value, that growth is called a capital gain. A capital gain is the profit you make when something you own goes up in value, and it can be taxed.
While you live in your home, your principal residence exemption wipes out that tax. So you usually pay no income tax on your own home, no matter how much it went up.
But here is the catch. When you move the home to your kids early, and they do not live there, they usually do not get that exemption. So the growth on their share becomes a taxable gain that lands on them later. And that gain does not disappear. At some point, someone will pay tax. That is the general rule in Canada.
So here is the rule that guides everything below. Probate is what we are trying to save. But never chase it blindly, because saving a little probate is not worth handing your kids a bigger income tax bill. You have to weigh both.
Now let me show you the five ways.
Option 1. Add your kids using Joint Tenancy with Right of Survivorship
This is the one most people have heard of. You go to your lawyer and you add your kids to the title of your home. And you already met the ownership type that makes this work, joint tenancy with right of survivorship, back when we talked about spouses.
Remember how it works. Everyone owns an equal share. And when one owner passes away, their share moves to the other owners right away, all on its own. It never goes through the estate. So there is no probate on it.
This part is important. Joint Tenancy with Right of Survivorship is the only way to legally avoid probate by adding someone to your title. If you want to skip probate through ownership, and do it above board, this is the one that works.
Here is an example. You and your spouse add your two kids as joint tenants. Now four people are on title, and each one owns an equal 25% share. When you and your spouse both pass away, your shares move straight to your two kids. No estate. No probate. On our $1,000,000 home, that beats the full $14,250.
So it beats probate. But now watch income tax show up.
When you add your kids this way, you are giving away part of your home today. And your kids do not get the principal residence exemption on their shares, because they do not live there. So the growth on their shares becomes a taxable capital gain later.
Let me put numbers on it. You add your kids today, when the home is worth $700,000. Each child gets a 25% share, worth $175,000. Years later the home sells for $1,000,000, so each 25% share is now worth $250,000. That is a capital gain of $75,000 for each child. Part of that is taxable, so each child could face a real tax bill, often around $15,000 each depending on their income.
So look at the trade. Option 1 beats the $14,250 probate, but it can hand your two kids even more than that in income tax down the road. That is why you never rush this.
There is one more risk. Once your kids are on title, their share is exposed. If a child goes through a divorce or runs into money trouble, your home can get pulled into it.
Option 2. Add your kids using Tenants in Common
There is a second way to share ownership. It is called Tenants in Common, and it works very differently.
Under Tenants in Common, each person owns their own separate share, and that share can be any size. Mom could own 49%. Dad could own 49%. And each child could own 1%.
The big difference is control. With Tenants in Common, you own your share outright, and you get to decide who receives it when you pass away. Mom could leave her 49% to her brother. Dad could leave his 49% to the older daughter. When one owner passes away, nothing moves to the other owners on its own. Each person has the freedom to choose where their share goes, through their will.
That freedom is the upside. But watch what it does to probate.
Some families use this setup to shrink the income tax problem from Option 1. They add each child as a tiny 1% owner and keep the rest. Here is why. Each child owns just 1%, worth $7,000 today when the home is worth $700,000. When the home sells for $1,000,000, each 1% share is worth $10,000. So each child’s capital gain is only about $3,000. Tiny income tax bill. That is the appeal.
But here is where I have to be straight with you, because this is the probate side.
Because each share passes through your will, and not automatically to the other owners, that share still goes through probate. So the parents’ 98% does not skip anything. On our $1,000,000 home, that 98% is worth about $980,000, and you are still paying nearly the full $14,250 in probate. You barely saved a thing.
Some people set up the 1% owners and then argue the home should pass without probate anyway. But a recent court case looked at this exact move and said it does not work, because it is not true survivorship. Plenty of families still try it. Some get away with it. But if you get caught, your estate pays the probate.
So see the trade now? Option 1 wins on probate but loses on income tax. Option 2 wins on income tax but loses on probate. From the title alone, you rarely win both.
Option 3. Give your home to your kids now, while you are alive
Here is an option most people forget. You do not have to wait until you pass away. You can simply give your home to your kids today, during your lifetime.
This is different from Options 1 and 2. You are not just adding a name to the title. You are handing over the whole property. Your kids become the full owners now, and you step off the title completely.
On both taxes, it looks great at first. Once you no longer own the home, it is not part of your estate, so there is no probate on it at all. And for you, giving away your main home usually creates no income tax, because your principal residence exemption covers your years of living there. You also get to see your kids enjoy it while you are still here.
But this is a big decision, and it comes with real downsides. So let me be honest with you.
First, you lose all control. The home belongs to your kids now, not you. They could sell it. They could borrow against it. If you ever needed to move back in, or needed the money later in life, that choice is no longer yours.
Second, your kids take on your future income tax bill. When you give them the home, they take it over at today’s value. If they do not live there, they do not get the principal residence exemption. So when they sell one day, they may owe capital gains tax on all the growth from today onward, on the whole property, not just a share.
Third, the entire home is now exposed. If a child goes through a divorce or runs into money trouble, the full property is on the line, not just a slice of it.
Giving your home away early can work, and for some families it is the right call. But you are trading away your control and handing your kids a future tax bill. Never do this without talking it through with a professional first.
Option 4. Put your home in a trust
This is the strongest option, and it is the one most people have never heard of.
A trust is a legal arrangement where someone holds and manages property for someone else. When your home sits inside a trust, you no longer own it. The trust does. And here is the key point. If you do not own it, it is not part of your estate. So there is no probate on it at all. On our home, that is the full $14,250 gone.
There is a special kind of trust built for this. If you are single, it is called an alter ego trust. If you own your home with your spouse, the version for couples is called a joint partner trust. You can use either one once you turn 65.
Here is what makes it powerful, and why it wins on both taxes. You move your home into the trust with no tax at the time of the move. The home stays out of your estate, so no probate. You can still claim the principal residence exemption while you live there, so no surprise income tax. And unlike giving it away outright, you keep control while you are alive.
So what is the catch? Cost and paperwork.
A trust costs money to set up. And it has to file its own tax return every year, called a T3, which costs money too. So this option makes the most sense for a valuable, paid off home, where the probate you save is bigger than the ongoing cost.
This is technical. It must be done properly, with an accountant and a lawyer working together.
Option 5. Check the Ontario First Dealing Exemption
This last one is a hidden gem, and it costs almost nothing. But it only fits certain homes.
If you have owned your home for a very long time, and you have never changed the title or added anyone to it, your home may qualify for something called the Ontario First Dealing Exemption. In plain terms, this is a rule tied to Ontario’s move from an old land registry system to a new one. A long held home that never moved into the new system may pass to your kids with no probate at all.
If this is you, it can be the simplest win of all. No trust to run, kids added to title. No extra tax created.
But there are two musts. First, you have to confirm with a real estate lawyer that your home actually qualifies, because not every home does. Second, you need a proper will, and it has to be set up so this home is kept separate as an asset that is not subject to probate. If you mix everything into one will, the benefit can be lost.
The real takeaway
Remember, the goal is to save probate. But never look at it alone, because the income tax on each move is what tells you whether it is worth doing.
- Joint tenancy, beats probate but raises your kids’ income tax.
- Tenants in common, lowers income tax but does not really beat probate.
- Giving it away now, beats both taxes but costs you all your control.
- A trust, beats both and keeps your control, but it costs money each year.
- The First Dealing Exemption, beats probate for almost nothing, but only if your home qualifies.
None of these should be done without advice, because your own situation and your own years of ownership change the answer. Your job is to control the timing and keep more in your family’s hands. This is about managing tax, not escaping it.
Next Steps
If you want to make sure your file can stand up to a second look, Book a consultation with my team today. We help everyday Canadians navigate the confusing world of taxes so you can keep more of what you earn.
Until next time, happy Canadian Real Estate Investing.
Cherry Chan, CPA, CA
Your Real Estate Accountant
