Recent court case offers some tax relief
Probate fees can be a thorn in the side of many clients who sometimes resort to questionable tactics to avoid paying them. This can bring about other tax or legal problems as a result.
A recent Tax Court decision (Brosamler Estate v The Queen, 2012 TCC 204), however, may pave the way to tax relief, which will help alleviate the burden associated with paying probate fees and the associated legal fees often expended to get a will probated.
The case involved Gunnar Brosamler, who died on April 8, 2008, in Germany. At the time of his death, Brosamler was a resident of Germany but still owned three rental properties in Vancouver that he bought several years earlier. As a result of the deemed disposition upon death, his capital gains on these three properties totaled nearly $6.4 million.
Linda Leonard was the sole executrix and the sole beneficiary under Brosamler’s will. As a result of the significant capital gains realized because of the deemed disposition of the properties upon Brosamler’s death, as well as the large inheritance tax payable in Germany, Leonard decided to sell at least two of the properties to generate approximately $3 million in cash. Two of the three properties were indeed sold within the first year following Brosamler’s death, and in each case a capital loss was realized.
The executrix used the election under the Income Tax Act to carry back a capital loss realized by the estate to Brosamler’s terminal tax return.
Brosamler’s will was originally probated in Germany but it was determined that the Estate would not be able to sell the properties to a third party unless the conveyance from the late Brosamler to the Estate was registered in compliance with B.C.’s Land Title Act. This could only happen if the probate was “resealed” in the province. Legal fees and B.C. probate fees were then incurred to obtain ancillary probate in B.C.
A portion of these fees were added to the adjusted cost base (ACB) of the properties held by the Estate, which ultimately increased the amount of the capital loss realized by the Estate on the disposition of the properties. This capital loss was then carried back to Brosamler’s terminal tax return to reduce the deemed capital gain upon death.
The Canada Revenue Agency (CRA) subsequently denied this adjustment to the ACB. It claimed that probate fees and legal fees could not be added to the ACB (nor could they be deducted as an outlay or expense incurred for the purpose of disposing of the properties) to reduce the capital loss by the amount of the denied expenses.
The judge presiding over the tax case determined that the property that was ultimately sold by the Estate could only be acquired by the Estate from the deceased “if it complied with the requirements of the Land Title Act, which were that probate had to be resealed in British Columbia and the appropriate probate fees had to be paid.” The judge therefore concluded that a portion of the legal and probate fees were incurred to acquire the title to the properties that were sold, which resulted in the capital losses realized by the Estate, and that these fees could be added to the ACB of the properties acquired by the Estate.
The judge went on to state that even if the amount for probate fees and legal fees could not be added to the ACB of the properties, these fees were clearly outlays or expenses that were incurred for the purpose of disposing of the properties. As a result, these expenses should be properly deductible in determining the capital losses realized by the Estate on the disposition of such properties.
Whether the appropriate amount is included in determining the ACB of the properties or deducted as an outlay or expense incurred for the purpose of making the disposition of the properties, the amount of the capital losses realized by the Estate (deemed to be Brosamler’s capital losses) will be the same amount.
The Department of Justice indicated in July that it would not be appealing this decision (they have until mid-September to confirm); however, because it was heard under the Tax Court’s “informal procedure” under the Tax Court of Canada Act, “[it] shall not be treated as a precedent for any other case.”
That being said, informal procedure decisions, while not technically legally precedential, often influence other judges; however, it may take another case involving probate and legal fees decided under the Tax Court’s general procedure before we know for certain whether such fees can always be added to the ACB of property acquired by an estate.