From Jan. 1, 2015 various changes relating to the Estate Administration Tax Act have become effective. While these changes seem administrative in nature, a deeper look reveals they can make estate administration and the probate process more onerous, costly and time-consuming. This makes it critical for Ontario residents to carefully plan their financial affairs to minimize or avoid estate administration tax. This article discusses the changes and their impact for executors/trustees.
The changes
1. Duty to give information
This change requires anyone applying for (i) the grant of probate, administration or testamentary guardianship or (ii) a certificate of appointment of estate trustee, from the Ontario court, to provide such information about the deceased person as may be required by the Minister of Finance. The information must be provided within the time and in the manner as may be prescribed by the Minister. The estate representative is also required to provide all reasonable assistance, and answer all questions, during a subsequent audit. Third parties are also required to provide the required information to the Minister.
2. Assessments and re-assessments
This change gives powers to the Minister of Revenue to assess or reassess the estate in respect of the tax payable. Generally, the Minster may assess or reassess the estate within four years after the day the tax became payable. There is no time limit if the person has failed to provide the information required or made a misrepresentation.
3. Audit and inspection
This change authorizes the Minister of Revenue to appoint inspectors to exercise the powers and perform the duties under the Estate Administration Tax Act.
4. Offences
This change makes failure to provide the information, or providing false or misleading information, an offence punishable by fine, imprisonment or both. The minimum fine is $1,000, and maximum is twice the tax payable. The term of imprisonment may be up to two years.
The impact
While these changes seem simple, the impact can be far reaching.
The “duty to give information” in and of itself doesn’t appear burdensome. However, when it’s read with the increased power of assessment/reassessment and penalties, it’s clear that much more effort and due diligence is required by the person applying for probate or certificate of appointment of estate trustee. The inventory of the estate assets and their values are to be provided to the Minister. It’s now more important than ever the applicant ensures all the assets are reported and proper valuations are done. Depending on the valuation issues and financial affairs of the deceased, it may require significant time before the application is made to the Ontario court for probate or certificate of appointment of estate trustee. In many cases, no distribution of the estate may be possible without probate or the certificate of appointment of the trustee, resulting in delay in administering the estate.
The enhanced audit and verification powers means the Minister may review the asset valuations. What if the valuation is higher – resulting in increased estate administration tax liability, but all the assets of the estate are already distributed? As mentioned, the Minister may assess or reassess within four years, so there is a possibility an auditor may come back on the estate trustee. Does this mean trustees should wait for at least four years before distributing all the assets of the estate? If so, this further adds to delay in estate administration. If not, the trustee may be assuming the uncertainty and risk.
The solution
A very simple solution is provided in the Estate Administration Tax Act itself – i.e., no tax is payable if the value of the estate does not exceed $1,000.
Obviously, this solution does not apply to most individuals, and highlights the need for estate planning.
Different planning opportunities such as an alter ego trust or joint tenancy for the ownership of property (particularly for spouses or common-law partners) etc. are available to transfer the assets outside of one’s estate, thereby minimizing the estate and resulting estate administration tax.
Each opportunity has its own complexities and may require annual maintenance costs, not to mention potential income tax consequences.