Two things are certain in life - death and taxes. Ontario’s estate administration tax is no exception. In fact, it may become more onerous in the very near future, making it critical that one engage in careful planning to avoid or minimize this tax.
Estate administration tax (“EAT”) (formerly called “probate tax”) is generally paid on the value of a deceased person’s estate when the deceased’s estate representative applies for a certificate of appointment of estate trustee (a “Certificate”) (also referred to as “letters probate”). A Certificate is a document issued by the Ontario Superior Court of Justice that provides evidence of the executor’s authority to deal with the deceased’s assets.
In the application for a Certificate, the value of the deceased person’s assets must be listed, including personal property which may not be readily and easily valued. Although changes made in 1992 to the legislation administering the EAT tripled the rate of EAT levied on an estate (generally from .5% to 1.5% of the asset value disclosed), EAT revenues have nevertheless remained disappointing. Many speculate that this may be due to EAT evasion and a lack of audit and verification measures. Historically, there has been little compliance measures undertaken by the court staff of the Ministry of the Attorney General (who administer and collect the tax) or any other government body to ensure that the value of assets disclosed on an application are accurate. Ontario’s Better Tomorrow for Ontario Act (Budget Measures), 2011 (“Budget Measures”), which became law on May 12, 2011, amended the existing legislation to enhance the EAT compliance regime. Beginning January 1, 2013, the Ontario Minister of Revenue is provided with significant audit and verification functions, as well as assessment, objection and appeal mechanisms, similar to those contained in Canada's Income Tax Act. As a result, it is anticipated that there will be much more pressure to verify the value of the assets disclosed in the application for a Certificate. This will likely result in a higher EAT payable unless one has engaged in planning to minimize this tax.
The enhanced audit and verification functions will include (among other things) the right to assess and reassess an estate in respect of its EAT liability within four years of the tax being payable, a requirement that the estate representative provide all reasonable assistance and answer all questions in respect of an audit being conducted, provide any “prescribed” information as is requested (none has yet been prescribed), and a requirement that third parties give the Minister access to their premises and/or permit the Minister to examine their assets and records. The Minister may also assess or reassess an estate in respect of its EAT liability outside the four-year limitation period if any person made a misrepresentation attributable to neglect, carelessness or wilful default, or committed fraud in supplying (or omitting to disclose) information regarding an estate to the Minister. In addition, it will be an offence for any person to make, or assist in making, a false or misleading statement (or omission of relevant facts) in connection with the filing for a certificate. Such an offence is to be punishable by fine, imprisonment, or both – the minimum fine being $1,000 and maximum being twice the EAT payable.
Given the new audit measures, it will be critical for executors to be diligent in obtaining and documenting proper and accurate valuations of the deceased’s property for purposes of calculating the EAT. It is also increasingly important for testators to review their options to minimize or even avoid EAT upon death. Planning vehicles such as, alter ego trusts, multiple wills, joint partner trusts, joint tenancies and beneficiary designations are all viable methods of transferring assets outside of one’s estate, thereby minimizing the value of the estate on which the EAT is calculated. While there has been some concern that the anticipated regulations to the enabling legislation may eliminate the ability to avoid the EAT through the use of multiple wills, there is no indication that this tax avoidance technique will be targeted. In some cases, the implementation of an estate freeze in favour of future generation(s) is also recommended, to place the future appreciation of assets outside of the testator’s personal estate on which the EAT is calculated.