Tag: Probate

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.

Estate as the designated beneficiary – An estate-planning lawyer’s perspective

“Make sure to designate a beneficiary on RRSPs, RRIFs and TFSAs so the money doesn’t fall into the estate.”

It’s such familiar guidance in investment and financial planning that it would be foolish to suggest otherwise. Or would it?

I recently had an exchange with a financial advisor whose client’s lawyer recommended the estate as the named beneficiary. It was a young family with a single child and nothing else remarkable.

Unusual though that recommendation may appear, I myself offered the same advice to some of my clients in my past estate-planning law practice. Then as now, beneficiary designations help bypass probate tax and estate creditors, but may be cast in a different light when considering the following countervailing points. [See Callout Box on Quebec below]

Tax onus on registered retirement savings plans (RRSPs)/registered retirement income funds (RRIFs)

A person named directly as beneficiary is entitled to the gross value of an RRSP/RRIF, with the tax liability falling to the estate. Though the named beneficiary has a joint liability under the Income Tax Act (Canada) for the proportionate amount of the estate’s tax, the Canada Revenue Agency would likely only bother pursuing such a course if the estate is insolvent. There is no provision for the estate itself to claim contribution from the RRSP/RRIF beneficiary.

This would not be an issue where the beneficiary/ies of the RRSP/RRIF and the estate are identical, but could be a serious concern in a situation such as a second marriage, whether on first or second death of spouses.

Flexible spousal rollovers

It may be desirable to have RRSP/RRIF proceeds come into an estate in order to take advantage of a deceased’s graduated tax brackets, rather than have an immediate rollover to a spouse. This could be particularly effective if the death occurs early in the year (i.e., there is little other income). Otherwise, the RRSP/RRIF simply adds on to the surviving spouse’s own registered funds, with potentially higher future tax cost to fully deplete (whether in life or at death).

Generally, the estate and surviving spouse can still elect to roll the excess (not included in the estate) to the spouse.

Amending and revoking

The Will gathers all beneficiary designations together in one place, centralizing control through that one instrument. Otherwise, the person would have to deal with the administrative rules, paperwork and potential delays in dealing with each financial institution. It remains that person’s prerogative to amend/revoke the Will, with the requirements of testamentary capacity being the same for a Will as for beneficiary designations.

On divorce (though not necessarily on separation), spouse entitlements in a Will are generally revoked (although this may vary by province) without having to execute a new Will. On the other hand, designations with financial institutions are not automatically revoked, even in the face of apparent explicit terms in an executed separation agreement. In fact, there is plenty of case law where this has been fought. (Even so, one should be tactful if raising this point with spouse-clients who are otherwise presently in wedded bliss.)

Inheritance contingencies

Trust terms in a Will can be tailored for later issue/grandchildren, whether as additions to the distribution or as stand-ins for one or more predeceasing directly named beneficiaries. For beneficiary designations, the default is generally that if AB, CD and EF are RRSP/RRIF beneficiaries and AB predeceases, CD and EF share equally under survivorship. That may not be the satisfactory expected result if AB has children whom the deceased would have wished to include.

If a target beneficiary has creditor and or matrimonial concerns (presently or as caution against future developments), trust terms may be attached to insulate against that exposure.

For spendthrift concerns (e.g., gambling, drinking, profligate), trust terms could be laid out, maybe to establish a short- or long-term allowance rather than a lump sum.

Transfers to minor beneficiaries or disabled beneficiaries will likely not be adequate as direct beneficiary entitlements, and may be detrimental in terms of impairing provincial support amounts (for the disabled), limiting investment options (requiring an annuity to age 18 for minors), losing control of distributed monies, and likely requiring consultation/approval of government authorities.

Estate liquidity

Absent cash in the estate (e.g., it consists solely of a house and other non-monetary assets), it may require someone to post the funds for the probate tax (to be eventually reimbursed) in order for the executor to take control of the estate assets and begin realizing on them.

Inter vivos or testamentary trust?

As a final thought, an estate is a testamentary trust that is taxed using graduated brackets. Assuming a principal beneficiary (e.g., a surviving spouse) is at a higher bracket than the estate, the cost of probate may be effectively negated by lower taxes on income generated from estate investments. In the past, this could potentially be carried on for many years, but after 2015 will generally only be available for the first 36 months of the estate.

Another alternative may be to have designations directed to a trust that is separate from the estate, with the result that probate and creditor concerns may be circumvented. The lost use of the estate’s graduated brackets should be factored into this latter approach, perhaps by directing some of the RRSP/RRIF proceeds to the estate or by providing the trustee with power to disclaim entitlement to some extent, in order to allow such RRSP/RRIF funds to fall into the estate.

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Callout Box – Quebec residents

Based on a Supreme Court of Canada ruling in 2004, financial institutions generally will not accept beneficiary designations by Quebec resident annuitants, forcing such registered plan proceeds to fall into the deceased’s estate.  While a Will is a key planning tool for all Canadians, the mandatory involvement of the estate for registered plans in Quebec reinforces this need, and underlines the considerations expressed in this article.

EstateWISE – What is probate?

In the field of estate planning, there seems to be no word or phrase that strikes greater fear in a person’s heart than the spectre of “probate”.  While it is certainly a known word, its true nature and implications remain a mystery for most people.  Let’s remove some of that mystery:

What is probate?

  • The process of proving to a court office that a Will is entitled to be relied upon
  • The document issued from the court confirming the court’s finding
  • The tax the government/court charges for the service

When is it needed?

  • Third party demand – Likely a bank or other financial institution
  • Real estate under a land titles system (under which title must be certified by the Master of Titles)
  • Where public guardian is protecting the interests of minor beneficiaries
  • Pending or actual litigation involving the estate
  • Executor’s peace of mind

What does it cost?

  • The top rates range from about 0.5% to about 1.5% depending on the province
  • Alberta as a probate ‘haven’ — Maxing out at $400
  • Quebec notarial Wills do not require probate 

Who takes care of it?

  • It is the executor’s responsibility
  • Law office role is to assist with legal matters obviously
  • Often the executor will engage (and compensate) lawyer to carry out the application, but the executor remains legally responsible to oversee the lawyer’s activities

How long does it take?

  • Bringing the application to the court 
  • Time it takes the executor to gather assets and identify beneficiaries
  • Processing time for the court to respond
  • Depends on the backlog in the court office 
  • Few weeks to a few months