Ontario EAT changes – Increased probate burden for executors and estates

Long anticipated changes to the collection of Ontario estate administration tax (EAT) came into force January 1, 2015.  In addition to estates of deceased Ontario residents, the changes affect estates elsewhere if the deceased owned property (generally real estate) in Ontario.

To some this may seem like old news, as the legislation was passed in 2011, projected to be operational by the beginning of 2013.  While some procedural aspects did meet that schedule, most of the substantive changes remained in limbo for a couple of years while estate lawyers and other interested parties provided feedback to the government.  

The stated purpose of the changes is to “enhance compliance”, which of course essentially means collecting tax.  In pursuing that goal, the government has imposed onerous duties on executors — and it remains to be seen what the net revenue effect will be, given the increase in probate avoidance planning this will no doubt prompt.

Background: Probate and the EAT

Though no longer official legal language in Ontario, ‘probate’ is used generically to refer to the court certification that an executor (officially an “estate trustee”) may act under a Will.  It is also often used in reference to the charge levied by the court, which was at one time known as the probate fee, and is now the EAT.

There is no change to the scope of property to which the EAT applies.  Beneficiary designations on insurance and registered plans continue to bypass the probateable estate, as does property held by the deceased in joint ownership with someone else.  However, EAT does apply to property held beneficially for the deceased, despite how legal title may have been held. 

There is also no change to the EAT calculation, which is levied at $5 per thousand of estate value up to $50,000, and $15 per thousand over $50,000.  No tax is payable for estates of $1,000 or less.  

The EAT is due when the probate application is filed.  Until the end of 2014, only three summary values had to be disclosed: personal property (wherever located), Ontario real estate, then a deduction for encumbrances on real estate.  If requested however, the executor would have to substantiate the numbers.

EAT changes, 2013-2015

As of 2013, EAT administration migrated from the Attorney General’s office to the Ministry of Revenue (now merged into the Ministry of Finance), managed under the Retail Sales Tax Act.  Then a new Estate Information Return (EIR) was published in late 2014, to be used for probate applications filed after January 1, 2015. 

As before, the court continues to have oversight/approval of probate applications, and the EAT is still due when the application is filed.  Once the court is satisfied that all requirements are met, it issues a certificate to the executor to that effect, which for simplicity we’ll call the Estate Certificate.  It is after this point that the brunt of the changes will be felt:  

Timing – The EIR is a new/second-step requirement, to be filed with the Ministry of Finance 90 days after the court issues the Estate Certificate.  An amended EIR must be filed within 30 days of possible later events including discovering incorrect/incomplete information, discovering new property, or completing an undertaking to the court to update the EAT due if the original payment was an estimate. The executor’s obligation to monitor changes basically runs for four years from the issuance of the Estate Certificate.  However, if any filing is late, the government may assess or reassess at any time.   

Asset details – The EIR requires disclosure of the fair market value of all assets as of the date of death.  This includes Ontario real estate (again, less encumbrances on title), bank accounts, investment accounts, vehicles and vessels, goods, business interests and intangible property.  (This last item has increasing relevance in our digital/online world.). The executor must keep records of how valuations were determined, and the official guide suggests the use of professional appraisers depending on the nature of the assets.  In addition to values, identifying information such as addresses and account numbers are required, as applicable.

Penalties – If the executor fails to file the EIR or an amendment as required, or makes false or misleading statements, there can be a fine from $1,000 to twice the EAT and a potential prison term of not more than two years.

Official resources

The scope and depth of the changes go beyond these highlights.  More detailed information can be found from official government sources:

Estate information return:
http://www.forms.ssb.gov.on.ca/mbs/ssb/forms/ssbforms.nsf/GetFileAttach/9955E~1/$File/9955E.pdf 

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

Increased government revenue?

As a matter of interest, the last time there was a significant change in this area was 1992 when the rate was roughly tripled from 0.5% to 1.5%. (The actual formula is outlined above.)  While revenue bumped in the first year, it quickly settled back, presumably as counter-planning efforts took hold.

For current reference, in 2014 the EAT generated gross revenue of $149 million – a large figure in isolation, but less than 0.2% of the province’s $89 billion tax revenue that year.  Whether that top line figure will grow in future would be speculative at this point, and it is also unclear what additional administrative cost will be needed to harvest the tax. 

What is certain is that the cost, complexity and exposure for estates and executors have risen.  For those at the planning stage, this may be the nudge needed to seriously consider probate avoidance strategies, ideally with advice from a qualified lawyer.

Writing a separate document to change or add to a Will

At issue

For many people, the execution of a Will is a solemn and rare occasion, with the document promptly packed away in some safe location to await its eventual application. 

Others may have a more dynamic view of Will execution, expecting and even planning periodic or frequent additions or amendments.  Those in a terminal medical condition may at times become especially active in reviewing their estate intentions.  

When actions are taken with the benefit of professional guidance, it is highly unlikely that the authenticity or interpretation of such documents will come into question.  However, when a person acts without involvement of a professional – and perhaps with no-one else involved at all – uncertainty can arise.  

While codicils are accepted in all provinces, writings that fall short of that are less dependable.  Ontario generally requires formal execution to give testamentary effect, while most of the other provinces explicitly empower courts to review and rule on documents that do not meet the formalities required for Wills.

Use of a codicil

Whereas a newly executed Will revokes all prior Wills (absent a clear statement to the contrary within it), a codicil adds to or amends the prior Will but otherwise leaves it in force.  The Codicil will make explicit reference to the original Will, and in terms of process the execution requirements are exactly the same as applies to Wills.

British Columbia Wills, Estates and Succession Act, s.58

With WESA coming into force in 2014, BC moved away from its former ‘strict compliance’ requirements for creating, altering, or revoking a will.  

Section 58 is what is commonly called a curative provision.  It allows a court the discretion to accept or ‘cure’ a document or writing as a valid testamentary statement despite that it does not meet formal execution requirements. 

Estate of Young, 2015 BCSC 182

Sharone Young was 69 years old, living alone in North Vancouver.  She had been in declining health for a number of years, dealing with cancer and the aftermath of a stroke.  She died in her home on July 10, 2014.

Ms. Young had a validly executed Will from 2009 in which she named Canada Trust as her executor.  After Ms. Young’s death, two documents were found on her dining room table: a signed document dated June 17, 2013 and an unsigned document dated October 15, 2013. Both documents addressed the gift or disposal of furniture and personal effects to certain people, with the October document being more general and adding some priority of choice among some of those people.

Evidence was also received that Ms. Young had lunch with her neighbour on June 17, 2013, and provided to her a copy of the document of that date.

The judge outlined the legal framework for analysis, which of course centered on the application of WESA s. 58.  With no case law yet in BC, she considered the similarly worded Manitoba provisions, though even there most of the case law pre-dated the most recent amendments.  Still, she summarized from those cases the two principle issues to address: 

  1. Is the document authentic?, and
  2. Does is reflect testamentary intention?

With respect to the June document, the judge viewed the signature as Ms. Young’s conscious signal of her knowledge and approval of its contents. That was supported by having shared an exact copy with the neighbour and conspicuously leaving the original on the dining room table where it would be easily found. All this led to the conclusion that it was both authentic and expressed her testamentary intentions.

The judge was not as persuaded with the October document.  As mentioned, it was unsigned, was never shared or mentioned to anyone so far as the evidence showed, and appears to have been no more than a letter expressing non-binding wishes.

Practice points

  1. Per my usual comment, the best route to certainty is for a person as testator to follow formal processes, generally with the assistance of a capable professional.
  2. At a minimum, an offered document will be questioned as to its authenticity and whether it shows testamentary intention.  
  3. To repeat, Ontario has a more formalistic regime, while most of the other provinces allow greater court discretion.  Still, there remains a range of approaches even at that discretionary end.  An executor should obtain legal advice specific to the deceased’s province to be certain whether a particular document may affect the estate. 

Spousal trusts and blended families – A different mix in 2016

It can be challenging managing finances between spouses in second marriages.  

Add two sets of children to the mix — and often some mutual children — and things can get very complicated.  And it doesn’t necessarily get any easier as those children become adults, or even if they are already adults when the new relationship develops.  It’s a delicate balance.

Beyond the day-to-day issues, attention will eventually turn to what happens when one of the spouses dies.  While there are common interests between them as spouses, their parental desire to provide for their respective children adds a layer of complexity to the estate planning exercise.

How spousal trusts work

The spousal trust has been used for decades as a tool to address these concerns.  Let’s assume the spouses are Jay and Pat.  

Jay’s Will may make some immediate bequests, then a trust is set forth with Pat as lifetime income beneficiary.  Pat may or may not be allowed to encroach on the capital to some extent, with Jay’s children being the ultimate capital beneficiaries on Pat’s death. 

As an alternative, Jay could settle a joint-partner trust created during lifetime.  In that case such an inter vivos trust would be a top bracket taxpayer, though income distributions would be taxed to Pat.

Either route would result in a spousal trust into which capital assets could be transferred at their cost base.  This defers tax recognition of gains to that point, and allows for continuing deferral on future gains.  Some gains could be triggered and taxed to Pat if there is an encroachment, but otherwise the gains will be deferred until Pat’s death.

Tax changes after 2015

A couple of wrenches were thrown into the machinery of this planning with changes to the rules for trust taxation passing into law in 2014.  Let’s assume Jay dies, with the trust provisions having been established in Jay’s Will.

First, Jay would have contemplated that Pat’s income could be optimized by coordinating with the testamentary trust’s graduated tax brackets.  But after 2015 (unless Pat is disabled at Jay’s death), such a testamentary trust will be subject top bracket taxation.  Thus there will be less spendable income than the plan intended, possibly insufficient to sustain Pat based on Jay’s expectations when the Will was executed.  

The second key change relates to the capital gains related tax on the deemed disposition of trust assets on Pat’s death.  Under prevailing rules the trust is responsible for that tax, following which it distributes the net remainder to Jay’s children as capital beneficiaries.

Under the new rules for deaths occurring after 2015, the capital gain is deemed to be Pat’s. Pat’s estate is responsible to pay the tax, though if it is insolvent then the trust has the contingent liability.  Subject to that proviso, Jay’s children will likely receive the trust capital, while Pat’s children bear the brunt of the taxes in the form of a depleted estate.  

Even if an agreement is struck to have the trust pay the taxes, this will likely be considered a contribution to Pat’s estate that immediately disqualifies it from use of graduated tax rates (which otherwise would be available for three years under the new rules).

Any reprieve ahead?

These issues were acknowledged by the Canada Revenue Agency at this year’s annual conference of the Society of Trusts and Estates Practitioners.  Not surprisingly, the loss of graduated brackets for testamentary spousal trusts did not seem to be a concern.  

On the other hand, the mismatch problem on death of the spouse-beneficiary appears to have been unintended.  It remains to be seen whether the government takes any action to address this.

Regardless, spouses in the planning stages may wish to reconsider, redraft or possibly completely unwind their plans — hopefully both spouses still have testamentary capacity.  It’s likely not so easy for trusts that have already come into existence, potentially requiring a court application to vary trust terms.

[NOTE: Late in 2015, the federal Department of Finance issued a comfort letter acknowledging the issues discussed in this article, opening a dialogue with tax professionals intended to address the concerns.