Estate Planning - Death and Taxes

Death and taxes are the only certainties in life as the saying goes. Compared to countries such as the United States, Canadians do not have to pay any form of estate tax on their passing. Instead, Canadians file a final federal personal tax return on their death with allowance for transfers such as spousal rollovers or joint ownership. However, the process of probate through the courts, which validates one’s will and authorizes the appointment of executors to act on behalf of the estate, is handled at the provincial level. Traditionally, a “fee” is applied to process the probate application based on the net value of the assets in the estate. In recent years, a number of provincial governments have sought to capture additional revenue from the value of individual’s estates, which has clearly crossed into the realm of an estate tax. As a result, planning for the ultimate distribution of assets and even the location of one’s estate has taken on renewed significance.

Summary of fees

The above chart clearly demonstrates the divide between those provinces that levy an administrative fee versus a tax. Still, even in Ontario and Nova Scotia the fees only represent 1-1.5% of the value of an estate.

Executors and administrators (now estate trustee) must now file an Estate Information Return, while administration of the tax has been moved from the Ministry of the Attorney General to the Ministry of Finance to enhance compliance and enforcement.

However, long awaited changes to Ontario’s probate policy under the Estate Administration Tax Act (EATA), which recently took effect, decisively shift the collection of probate charges into the taxation camp. Executors and administrators (now estate trustee) must now file an Estate Information Return, while administration of the tax has been moved from the Ministry of the Attorney General to the Ministry of Finance to enhance compliance and enforcement. An estate trustee must file a return within 90 days of receiving their certificate of appointment. Even though certain assets such as jointly owned accounts are excluded from the estate tax, significantly, all property of the deceased must be listed to monitor the nature of any transfers within the estate. Asset valuations are required as of the date of death, and all valuations must be substantiated, typically through the use of a professional valuator.

If an estate trustee discovers additional assets, they must be disclosed within six months on an amended return and the Ministry of Finance has up to four years from the issuance of the estate certificate to audit the estate and issue a reassessment. At this point, there is no provision for issuing a tax clearance certificate to the estate trustee, but penalties for failing to properly disclose assets start at $1,000 increasing up to twice the amount of estate tax payable and two years in prison.

Ultimately, the response will be increased legal and tax planning by individuals and professionals to preserve as much as possible of the intended gifts to beneficiaries.

The implementation of this EATA regime will have clear implications for the estate and trust industry in Ontario. The potential liability for estate trustees will make their appointment and acceptance even more problematic. Completing the listings, valuations and tax returns for an estate will increase costs, and although the tax rates aren’t changing at this point, as the province monitors the revenue generated by the tax, rates will change to meet fiscal targets. Ultimately, the response will be increased legal and tax planning by individuals and professionals to preserve as much as possible of the intended gifts to beneficiaries.

At Northland Wealth, our advisors are prepared to assist you with analyzing the impact of these changes on your personal finances, and to provide alternatives for your estate that fit in the context of managing your overall wealth.