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Real Estate and Probate Planning: More Issues to Consider

Oh, did you think we were done with real estate and taxes for a while? Sorry to disappoint. Our last blog, “Selling Sunset: Real Estate Taxes Property Owners in Canada Must Know About,” discussed some new taxes and tax filings involving real estate in Ontario. Today we’d like to remind you about our old friend, Estate Administration Tax (“EAT”), also known as probate fees.

As you may be aware, in Ontario EAT is levied on the fair market value of your assets passing through your estate. The current rate of EAT is 1.5% on the value of those assets as at your date of death over $50,000, or $15,000 per $1,000,000 of assets.

As the value of your real estate goes up, so too does the EAT payable by your estate upon your death. While no one will lament the increase in the value of their real estate, many people are understandably interested in minimizing the amount of tax payable by their estate on their death and maximizing what their loved ones will inherit.

There are several methods for minimizing EAT upon death. Many focus on removing the value of assets from the estate, thereby reducing EAT. For example, a house held with a spouse as joint tenants with right of survivorship will generally pass to the surviving spouse upon the first spouse’s death without forming part of the deceased’s spouse’s estate. Therefore, the house will not be included in the estate value of the first spouse to die for EAT purposes. Gifting and lifetime trust planning are also EAT planning options.

Dual will planning is another estate planning technique. Given changes made to the Ontario probate process and application forms since 2016, individuals with even modest estates are increasingly considering having a 2-will structure for their estate planning. The addition of audit powers and the requirement to file an Estate Information Return (not to be confused with income tax returns) brought in by the Ontario Government in 2016 and the 2022 changes to the probate application process, which now requires that beneficiaries (even if only receiving a small bequest or legacy) receive a full copy of the application form, which includes the total value of the estate, as well as of the will, have contributed to the increasing popularity of this planning.

If you wish to ensure that your real estate falls under the second non-probate will, however, you will likely need to do more. Many people are under the impression that their property does now and will in the future fall under an exemption that allows it to be sold or transferred by their executor without a probate certificate (called a “Certificate of Appointment of Estate Trustee”) from the Court. It may be that their property does fall under such an exemption now, although a review of title is necessary to confirm this.

However, the most likely exemption called the “first dealings” exemption not only does not apply to all properties (it never applies to condominiums, for example), it can only be used once for any substantive change to title upon the death of an owner, making it increasingly unlikely over time that this exemption will apply.

This exemption is available for properties that have been transferred from the “old” Ontario property registration system (Registry) to the “new” one (Land Titles). Most properties previously in Registry were converted to Land Titles when the Ontario Government converted the land registry system from paper-based to digital. Upon conversion, a property owner (or their legal representative such as an executor) is entitled to one final substantive title registration under the old rules.

This is an important exemption for estate planning because the old rules did not require an executor to probate a deceased person’s Will in order to be able to deal with their real estate. The new rules do have this requirement, therefore if a property is subject to the “first dealings” exemption, an executor can deal with it without probate.

However, as mentioned, the exemption is only allowed once. Any number of substantive title dealings will “use it up”, thereby making the property subject to the requirement for probate before an executor can deal with the property. Bare trust planning (which involves the transfer of legal ownership of property to a nominee trustee who holds the property for the original, beneficial owner, who continues to exercise all control over the property) in conjunction with dual Will planning can overcome this obstacle, but it must be properly implemented, and the annual compliance which now includes a T3 Trust Income Tax and Information Return and Underused Housing Tax Return and associated costs must now be considered.

In a bare trustee arrangement, there is no transfer by you of beneficial ownership of the real estate; the corporation holds as a bare trustee, and although the registered owner, has no beneficial (economic) interest in the property. For tax purposes, there is no disposition of the property on its transfer to the corporation as bare trustee, and accordingly, no capital gains are triggered. Further, all income, gains and losses will belong to you as the beneficial owner, and therefore to your estate on death. The corporation as bare trustee has no independent control over the assets; all decisions and directions are made by you, as the beneficial owner, and carried out by the corporation upon your direction. A declaration of trust is entered into by you and the corporation as bare trustee to evidence the arrangement.

All estate planning techniques have pros and cons, and not every option will assist each individual with their goals. It is important that property owners consult with experienced estate planning lawyers to ensure that their planning is not dependent on false assumptions and that all considerations are carefully taken into account in order to make the best decision.

— 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.