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The New Ontario Estate Administration Tax Regime – What You Need to Know

Recent revisions to the Estate Administration Tax Act (Ontario) under which the Province charges tax of approximately 1.5% of the value of an estate when a will is probated by the court (colloquially “probate fees”) should be of concern to everyone because of the new reporting, enforcement and penalty provisions in the Act.

While the level of probate fees is not increasing at this time, we anticipate that existing popular methods used to reduce exposure to probate fees by avoiding, or partly avoiding, the probate process will become even more popular and important once the new measures come into effect. The new legislative measures, which apply for probate applications after January 1, 2013, will decrease privacy and increase expense and delay for estates requiring probate.

What are the New Estate Administration Tax Measures?

The regulations to be implemented under the revised Act which will set out the new required information to be submitted in probating an estate are anticipated very soon. They are widely expected to impose substantial new reporting requirements, including the filing of a complete inventory of the estate assets, possibly including assets passing outside of the estate as required by many other Provinces. The existing rules only require disclosure of the total values of personal property and real property in Ontario, but no further details are part of the public record.

The revised Act, for the first time, gives audit and verification powers to the Minister of Finance for probate fees, and makes it an offence to fail to provide the information required under the Act, or to give false or misleading information. The penalty for these offences is a minimum fine of $1,000, up to a maximum fine of twice the tax payable by the estate, or up to two years in prison, or both.

The penalty provisions will apply not only to executors who apply for probate, but to anyone who assists in making a statement under the Act, encompassing legal, tax and financial/investment advisors who advise the executor in this regard, and potentially even those who only provide information to the executor which is used for this purpose. The defence available under the Act requires appropriate due diligence to be undertaken. Causing considerable concern are the new audit and reassessment powers, because the Act provides no “clearance certificate” procedure to provide protection that all taxes have been paid, which may expose executors and professional advisors to potential liability for many years.

What Can Be Done to Avoid the Need for Probate?

Because Estate Administration Tax is imposed upon the value of an estate when a probate application is filed, the need for probate and exposure to probate fees can be minimized by using any or a combination of several popular planning methods, such as:

· setting up an inter-vivos trust into which assets are transferred during a person’s lifetime and which pass outside of the estate at death including for those 65 and over, an alter-ego or joint partner trust;

· executing multiple wills, which removes certain assets from being subject to probate fees;

· holding assets jointly with right of survivorship with the intended beneficiary, so the assets pass automatically to beneficiaries and not through a person’s estate;

· designating beneficiaries of RSPs, RIFs, TFSAs, and insurance policies so the assets pass directly to beneficiaries and not through a person’s estate; and

· gifting assets to intended beneficiaries during a person’s lifetime, which removes the assets from the person’s estate.

All of these methods are discussed in detail in our Client Advisory “Planning to Minimize Estate Taxes”.

Next Steps

Planning to avoid probate is about to get much more important, particularly in view of privacy concerns given the likely extensive asset disclosure required, and assisting an executor in relation to paying the tax will be much more complicated and expensive, likely requiring professional valuations and other verification of asset values which, when coupled with the lack of a clearance certificate procedure, will no doubt also cause delays for estates.

Some recent commentary has questioned the likelihood of whether the new measures will bring in any additional net revenue for the Province (which appears to be the objective for implementing them), although many believe adding a compliance regime to the Act is reasonable, and may even be overdue. Whatever your view of the new measures, if you are planning your estate or advise those who are, you should be prepared for their introduction and consider appropriate planning.

– By Susannah B. Roth

Look for our next blog on U.S. estate tax and U.S. securities – what is a U.S. situs asset and why you need to know.

The comments offered in this article are meant to be general in nature, are limited to the law of Ontario, Canada, and are not intended to provide legal or tax advice on any individual situation. Before taking any action involving your individual situation, you should seek legal advice to ensure it is appropriate to your personal circumstances.