Estate Administration Tax Act – The New Reporting Requirements

Estate Administration Tax Act –   The New Reporting Requirements by Dave Thomas

A new reporting regime has started for Estate Trustees in Ontario.    Anyone who has, after January 1, 2015, applied for and received a Certificate of Appointment as Estate Trustee from the Superior Court, must file a detailed Estate Information Return with the Ministry of Finance.    This is a new form, requiring full detail on estate assets and their value, and is subject to audit and assessment for a four year period.

This paper will examine the Ontario Estate Administration Tax Act, 1998 (“EATA”).  We will review how we got here, what has changed, and what this will mean in practice.

Probate  – What is it? Why and when is it needed?

The Court process of approving wills, and certifying people to carry them out, has a long history.  The process was for many years referred to as “Probate” – literally the “proof” of a will.    It is a court process in which a judge certifies that a will is in fact the valid last will and testament of a deceased person. The process also confirms the name of the person who has the legal authority to deal with the assets of the estate, and to carry out the terms of the will.

Probate is needed so that the beneficiaries, the executors, and in particular, third parties,  can know with legal confidence that a will is in fact the valid will, and they can rely on it.

Without probate, everyone is at risk, if it turns out that the will they have been using is not in fact valid.  Beneficiaries may have to give back what they thought they inherited.   Executors may be liable for what they have done with the assets.  Third parties who have given up assets under their control, may be liable to the true beneficiaries.  A banker who gives the estate’s money to a person with an un-probated will, may be faced the next week with a better, newer, valid will – and may have to come up with the same amount of money again.

A person relying on a probated will is protected, even if a better will is later discovered.  Therefore, most banks, securities issuers and other financial institutions will require probate before giving up assets.  Probate is also required for some government purposes, such as most transfers of property in the Land Titles office.

Terminology

A few definitions will be helpful.   A lot of the legal terminology changed in 1995, but the old terms are often still used in practice.

“Estate Trustee”.   This is the current Ontario term for the person who has the legal authority to act for an estate.    This person was formerly known as “Executor” or “Administrator”, and these terms are often still used in practice.

“Certificate of Appointment of Estate Trustee”.    This is the Court document which legally confirms that a will is valid and confirms who the Estate Trustee is for an estate. This was formerly known as Letters Probate.  It is a court document, attached to a copy of the will.

“Executor”   This is the person appointed in a will, and confirmed by the Certificate of Appointment of Estate Trustee, to be the person legally entitled to control the assets of the estate.

“Letters Probate”.    This was the term used for years in Ontario (and still used many places in the world) for a probated will.   It is now known as “Certificate of Appointment of Estate Trustee with a Will”.

“Letters of Administration”.  This was a court document that was issued where there was no will.  The Court appointed a person to be the administrator of the estate – with similar power to an executor, but governed by the laws of succession rather than by a will.   This is now called “Certificate of Appointment of Estate Trustee without a Will”.

“Estate Administration Tax”.   This is the tax which must be paid in order to apply for a Certificate of Appointment.

“Probate Fees”.  This is the old term for what is now the Estate Administration Tax.

Estate Administration Tax

In order to apply to the Court for a Certificate of Appointment in Ontario, an application form must be filed with the Superior Court.  It is a simple form, and has not changed under the new regime.   Among other things, it requires the executor to set out the value of the assets of the estate.   The tax is levied based on this value.

The rate of tax has for a long time been based on the value of the estate, and has increased over time.  Until 1960 the rate was 0.25%.  It increased to 0.3% in 1960, and then to 0.5% in 1966.

The tax stayed at 0.5% until 1992.  In 1992, the rate on the value of an estate above $50,000 tripled, to 1.5% (or $15.00 per $1,000.00).

The large increase in 1992 led to a bit of a revolt. Since then, people have spent more and more time and imagination finding ways to minimize the tax, or to arrange their affairs to avoid the probate process entirely.  Some commentators suggest that so much tax has been avoided by various techniques that the Province of Ontario would have been better off leaving the tax at the old rate.  Even at 1.5%, the tax is still small.  For larger estates, however, the tax bite is sufficient that people feel it worthwhile to arrange their affairs to avoid or reduce it.   Lawyers and accountants are often at pains to ensure that in doing so, their clients do not make things worse, or stumble into unintended consequences.

What is the Estate Administration Tax levied on?

The tax under the EATA is levied on the “value of the estate”.     This phrase is defined, in Section 1 of the Act, to be

“the value which is required to be disclosed under section 32 of the Estates Act… of all of the property that belonged to the deceased person at the time of his or her death less the actual value of any encumbrance on real property that is included in the property of the deceased person….”.

Section 32 of the Estates Act states as follows:

“Evaluation

  1. (1)The person applying for a grant of probate or administration shall before it is granted make or cause to be made and delivered to the registrar a true statement of the total value, verified by the oath or affirmation of the applicant, of all the property that belonged to the deceased at the time of his or her death. R.S.O. 1990, c. E.21, s. 32 (1).

“Evaluation of subsequently discovered property

(2) When after the grant of probate or letters of administration any property belonging to the deceased at the time of his or her death and not included in such statement of total value is discovered by the executor or administrator, they shall, within six months thereafter, deliver to the registrar a true statement of the total value, duly verified by oath or affirmation, of such newly discovered property. R.S.O. 1990, c. E.21, s. 32 (2).

“Evaluation of limited grant

(3) Where the application or grant is limited to part only of the property of the deceased, it is sufficient to set forth in the statement of value only the property and value thereof intended to be affected by such application or grant. R.S.O. 1990, c. E.21, s. 32 (3).”

Generally, the tax applies to the following types of assets owned by the deceased:

  • Assets that are owned by the estate and that are covered by the Will being probated (more on this point later).
  •  Real Estate in Ontario, valued net of registered encumbrances
  • All other assets, valued at fair market value

The tax can be paid based on estimated value, but additional tax must be paid if values are determined to be wrong, or more assets are discovered.

Assets taxable may include assets not registered in the deceased’s name, but where the deceased was the beneficial owner.  For example – assets which are held in joint ownership with an adult child, where there is no evidence of intent that the child would become the absolute owner on default.

What is NOT taxable?

A number of classes of assets are not covered by the Tax.

  • Real estate outside of Ontario
  • Assets that are not beneficially owned by the deceased.
  •  Assets that are owned in joint tenancy with right of survivorship, with someone who outlives the deceased and therefore retains ownership as surviving joint tenant (e.g. jointly owned home, jointly owned bank accounts). Note: not all assets owned by multiple owners are owned with right of survivorship.
  •  Insurance death benefits that are payable to a named beneficiary (i.e. not payable to the estate).
  •  RRSP proceeds payable to a named beneficiary.
  •  Assets owned by a trust, such as a spousal trust, alter ego trust, where there are provisions that direct the assets to other parties on death.

What do people do to minimize tax?

People are very imaginative in trying to set up their affairs to avoid probate entirely.  Some examples:

  • All assets are held in joint tenancy – most commonly with spouses, or in some cases, with children. (This can be risky if not handled properly).
  • All major assets are held in an alter ego trust, family trust, or similar vehicle
  • Investments are held in products with designated beneficiaries, such as insurance policies, RRSPs, or segregated funds

Multiple Wills   Where it is not possible or practical to totally avoid the need for probate, people sometimes divide their assets between two or more wills.

One will is for the assets that will require probate, such as:

  • Bank accounts
  • Real estate
  • Publicly traded securities and  other investments with financial institutions

This will is often referred to as the “Primary Will”.   On death, this will would be submitted for probate, and the tax will only be payable on the value of the assets specifically covered by this will.

The other will, often referred to as the Secondary Will, is for assets which can be administered without probate. These will commonly include:

Shares and debt of closely held corporations

  • Real estate that does not require probate (such as homes owned for a long time)
  • Debts owed by family members
  • Personal possessions, jewelry, furniture
  • Beneficial interests in other assets, where probate is not required (such as assets held in joint ownership in some cases)

 The New Regime

The EATA was changed about three years ago, to require Estate Trustees to file an Estate Information Return after a Certificate of Estate Trustee is issued.   The operation of this requirement was suspended pending publication of new regulations.   During this period there was a lot of speculation, but no real facts about what was to come.

The new Regulation was finally published in late 2014, and came into effect for estates where an Application for Appointment of Estate Trustee is submitted on or after January 1, 2015.   The new regime does not change the probate process at all, and the Application for Appointment of Estate Trustee remains exactly the same, and the tax is the same.

However, the law now requires the filing of an Estate Information Return, within 90 days of the issuance of the Certificate of Appointment.

Estate Information Return                              

The form is a seven page form that is filed with the Ontario Ministry of Finance.  It can be found online and in a fillable pdf format.

It is filed by the Estate Trustee, and requires some basic information, and then gets into detailed information about assets of the estate:

  • Real estate – Properties are to be listed individually, showing their value, less encumbrances
  • Bank accounts – to be listed separately
  • Investments – to be listed separately
  • Vehicles, boats, of all kinds – to be listed separately
  • “Other property” – this includes
    • Business interests
    • Copyrights
    • Patents
    • Household contents
    • Art
    • Jewelry
  • o   Loans receivable

All are to be listed, and totaled, and the tax calculated.  If the value is above or below the amount declared on the original application, additional tax must be paid, or a refund requested.

Audit and Assessment

The Return is subject to audit and assessment by the Ministry of Finance.    No notice of assessment is sent in most cases. No news is good news, but there is no provision for clearance certificates.   The return is open for assessment by the Ministry for four years.

Because of the long assessment period, Estate Trustees may wish to hold back some money from distribution until the four years is up.

Estate Trustees may be personally liable for any additional tax if they have not held back funds.

There are penalties for failing to comply. There are also penalties which can be assessed against anyone (including presumably valuators, appraisers, lawyers or accountants, who advise executors on the Return) who make or assist in making false or misleading statements on the Return.  Penalties can be between $1,000 and double the tax, and/or up to two years in jail.

An Estate Trustee is able to file a Notice of Objection if unhappy with the assessment.   The objection procedure is the same as under the Retail Sales Tax Act.

Estate Trustees must keep all records for four years at their principal place of business or residence, so they can be audited.

Guide to the Estate Information Return

The Ministry has published a 13 page guide to the Return.

http://www.forms.ssb.gov.on.ca/mbs/ssb/forms/ssbforms.nsf/GetFileAttach/9955E~2/$File/9955E_Guide.pdf

It is a step by step guide to the Return and it is easy to read.

Valuation

Estate Trustees need to take steps to value estate assets, and to keep written records to substantiate the values used.   Valuation is to be as of the date of death.

For real property, estate trustees should get an appraisal, and not just rely on the MPAC assessment, which may not be up to date.    Real property values are only reduced by registered mortgages – no unregistered debts can be deducted.

Valuations of partial interests in assets are based on the proportion equal to ownership percentage. There is no discount for minority interest.    For assets held in joint tenancy, each joint tenant is deemed by law to own an equal share.

For vehicles, use the wholesale value in the “Canadian Red Book”

For boats, use the “Boat Value Book”

Valuations for business interests may be more problematic. In order to be able to survive an audit, and avoid penalties, it will be important to have a credible valuation that can be scrutinized by the Ministry.  The Guide doesn’t give a lot of guidance on what would be considered acceptable.

Limited Grant

If the Court has issued a “Certificate of Appointment of Estate Trustee with a Will Limited to the Assets Referred to in the Will” with respect to a limited will (the Primary Will, in a dual will situation), only the assets covered by the limited will have to be listed in the Estate Information Return.  Assets covered by the Secondary (non-probated) will, do not have to be listed.

Planning Points

There are still ways to minimize or avoid the Tax.  However this requires careful planning:

  1. Dual wills This technique will continue to be useful, to minimize Estate Administration Tax Payable, and may in fact become more common.

Secondary (unprobated) wills should be carefully drafted to include such things as

  • Private company shares and debt
  • Non-arm’s length debt (e.g. debts owing by family members)
  • Beneficial interests held through bare trusts and resulting trusts, and other trusts where the estate continues to have a beneficial interest.
  • Real estate which can be transferred without probate

Joint Ownership.  If assets are held in joint tenancy with adult children, care should be taken to ensure there is written evidence of an intention to pass ownership to the surviving joint tenant.  Recent court decisions have held that there is a presumption in some circumstances that no survivorship right is created. As a result, the asset is considered to be held by the survivor in trust for the deceased (and thus taxable).   This can be rebutted by clear evidence.

Alter Ego Trusts. These trusts will continue to be useful. The advantage of such a trust is that there is no tax payable when they are created, the beneficiary maintains full control of the assets, and on death they pass to the beneficiaries without probate, and are not included in the Estate Information Return.

Conclusion

The new regime is not as disruptive as some people had feared. However, there are significant new responsibilities on estate trustees relating to the Estate Information Return, and the requirement to value individual assets.  The four year audit period adds risk and uncertainty.

It is likely that this will end up costing estates more time and money.  It is also likely that the urge to avoid the probate process, in whole or in part will continue.

It will remain very important to plan one’s affairs carefully, to get good advice, and to document values as carefully as possible.  Fortunately, there are lots of good accountants and lawyers who can assist.

Dave Thomas is a Senior Partner within the Corporate & Commercial Department of Lancaster Brooks & Welch and he may be reached by calling 905-641-1551.

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