Thursday, March 23, 2006

How the Choice of Business Structure Can Affect British Columbia Probate Fees

As I wrote in my October 22, 2005, post here, in British Columbia when a will is probated, the provincial government charges a tax based on the value of the estate assets. The tax approaches 1.4 % of the value of the assets. In my November 27, 2005, post here, I explained that in calculating the value of the assets, the amount the deceased owed on a mortgage (or other security debt) may be deducted from the value of the asset, but unsecured debts are not deductible in for arriving at the value of the estate assets. I gave an example of how this can lead to perverse results with the personal representative of a relatively wealthy person paying less probate fees than the personal representative of someone with greater assets but less net worth.

How the deceased structured a small business can have a significant effect on probate fees. If George owned a clothing store as a proprietorship, with assets worth $1 million, and debts of $500,000 that are not secured against George's assets, then on his death his estate would have to pay probate fees of $14,000 in respect of his clothing store (assuming his other assets were worth at least $50,000).

If instead of owning his clothing store as a proprietorship, George had incorporated a company in which he owned all of the shares, and at George’s death the company owned the clothing store, the probate fees would be lower. When applying to probate the will George’s personal representative would pay probate fees based on the value of George’s shares and shareholder loans owed to George. If the company’s assets were $1,000,000 and the unsecured debts of $500,000 (owing to people other than George), then the value of the company’s assets net liabilities is $500,000. George’s personal representative would then list the value of the shares, which the personal representative could reasonably value at $500,000. The probate fee burden on the estate in respect of the clothing store would then be $7,000 instead of $14,000. Of course, if any of the $500,000 debt were owed to George as a shareholder loan, then the amount of the loan would be an estate asset, subject to probate fees.

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