We all want to protect our heirs from having to pay a large chunk of taxes. To do that, we need to be versed in two aspects of estate taxation: When assets are taxed and which taxes apply.

Many people think the estate is taxed when their heirs receive it. In reality, it is taxed before it goes to beneficiaries. In addition to regular income earned during the year of death, assets are disposed of at fair market value (FMV) and the net gain or loss is reported on the final return.

Once the value is determined, two taxes apply:

1. Probate Fees. This is a provincial tax levied on most assets in the estate. The fees, which vary by province, are calculated on the gross value of the estate. Debts, with the exception of mortgages, are not deducted.

Assets that go directly to the beneficiaries, such as joint bank accounts and insurance proceeds with a named beneficiary, aren't subject to probate fees.

2. Income Tax. This is imposed on certain assets at the date of death, regardless whether they pass into the estate or go directly to a beneficiary. The potential tax consequences vary with the type of asset. Generally speaking, the following applies:

• Fixed Income Assets, such as bonds or term deposits, have no tax implications except on the interest earned to the date of death.

• Registered Retirement Savings Account (RRSP) or a Registered Retirement Income Fund (RRIF), generally the balance is paid out and is taxed to the estate as income. Talk to your accountant for tax effective ways to distribute registered assets.

• Principal Residence: This generally has no tax implications for the period of time that you lived there, if you have only one residence and the property is less than one acre.

• Small Business shares and Qualified Farm Property are subject to a very specific definition. The value of the business is assessed and if it qualifies as a closely held corporation, there is no capital gains tax on the first $750,000 of value in the business. Otherwise, shares or property are taxed like any other capital property and there is no exemption.

• Mutual funds, stocks, or equity in other assets such as real estate are taxed on the gain in their value since they were purchased. In some cases, a special Capital Gains Election made in 1994 has bumped the cost of the asset.

Caution: Trying to avoid probate fees can make assets subject to the income tax. And by putting your assets into joint tenancy, you may not be giving equal distribution to your heirs. If you aren't familiar with all the tax issues, your heirs could end up with problems. Talk to your accountant to ensure you make the right choices.