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Change, It Is A-coming: Update on Estate Administration Tax

The current Ontario Government has implemented a couple of changes to the calculation of Estate Administration Tax (“EAT”, often called probate fees) and the process for EAT refunds which are due to take effect January 1st. It has promised further changes to the deadlines for filing an Estate Information Return (“EIR”) which is part of the EAT reporting regime.

These changes will affect all estates which go through the probate process, and raise the issue of whether advance planning might be beneficial for your estate to avoid or minimize EAT and its requirements.

Currently, EAT is levied at a rate of $5 per $1,000 on the first $50,000 of value of a deceased person’s assets at date of death and $15 per $1,000 on the value of these assets over $50,000, rounded up to the nearest $1,000. EAT is paid at the time the deceased person’s estate trustee files a probate application with the Court. Effective January 1, 2020 (i.e. for probate applications filed on or after January 1, 2020), EAT is eliminated for the value of all estates under $50,000. As a result, any estate valued at $50,000 or less will pay no EAT and estates valued at more than $50,000 will pay $250 less in EAT.

If the deceased person’s date of death asset values are not certain, not all assets have been located or only estimated values are available at the time the probate application is filed, the estate trustee can file an estimated estate value and provide an undertaking to the Court to make a further filing based on an accurate, final value at a later date.

If the final estate value is more than originally estimated, the estate trustee will pay the additional EAT. If the estate value is less than originally estimated, the estate trustee can request a refund. Additional EAT must be paid if additional assets are discovered.

A refund would also be requested if, for example, the estate trustee discovers a mistake was originally made in calculating the value of the estate’s assets, resulting in an overpayment of EAT. As of January 1, 2020, only refunds requested after the probate certificate has been granted will be made to the Ontario Ministry of Finance with somewhat different documents filed. Ministry of Finance representatives have cautioned that a refund request may trigger a review and possible audit of the EIR filed for the estate as part of the process to determine if the refund should be issued.

The Ontario Government has also promised to extend the current EIR filing deadlines, essentially doubling them. The initial EIR, not to be confused with income tax filings as the regimes are completely separate and do not interact, must be filed with the Ontario Ministry of Finance by the estate trustee within 90 days of the date of the probate certificate being issued by the Court. Any amended return, which must be filed with the Ontario Ministry of Finance if the estate trustee receives updated or additional asset information or certain other information on the initial EIR changes, is due within 30 days of the estate trustee becoming aware of an additional asset or a change in the date of death value of an asset.

The EIR provides detailed information regarding the assets of the estate and can be reviewed by the Ministry and audited. We are aware of audits having been conducted, including in some high value estates or multiple will situations. Because of the audit potential, estate trustees must have valuations and other documentation to be able to substantiate the asset values reported. Failure to report accurate or complete asset values or to be able to substantiate the values reported can result in penalties to the estate trustee, including not only fines but also possible jail time (although presumably the higher penalties would be reserved for flagrant violations of the rules and not honest mistakes).

The EAT regime can be onerous to comply with and the amount of EAT payable for high value estates can be significant. For example, EAT on a $20M estate would be approximately $300,000, not including compliance costs. Assets which are difficult to value, such as artwork or active businesses, add complexity and expense to an estate as special valuations are required.

Information reporting erodes individuals’ privacy after death, making the value of the deceased person’s assets a matter of public record and exposing detailed asset information to the scrutiny of the Government.

These burdensome requirements and undesired consequences can, however, be minimized or even eliminated with advance planning such as trust planning to remove assets from an estate which can eliminate the need for a probate certificate and ensure privacy, multiple will planning to greatly reduce both EAT and the assets which will require valuation for an EIR, and other helpful planning.

— O’Sullivan Estate Lawyers

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.