Death, Probate Taxes, and Ontario Real Estate

Probate is a service provided by the Superior Court to assist in the administration of estates after a person with a will dies.  Court officials examine the documents and provide the applicants with a certificate stating that there was a technically valid will and that the applicants are entitled to be the executors pursuant to that will.

Probate is only a limited technical review of the will.  It does not validate the will in a more fundamental sense.  For example, it cannot prevent a lawsuit, such as by a person excluded from the will who challenges the mental competence of the testator, or a dependant of the deceased who has not received adequate support under the will.

The term probate is also used loosely for situations where a person died intestate (without a will).  In that case, the court grants a right of administration to the appropriate applicant, based on the laws of intestacy under the Succession Law Reform Act.

Probate is not always required where there is a will

One important thing to remember is that probate is not always necessary.  It depends on what was in the estate.  At common law, the will by itself gives the executors the direct legal right to deal with the property that belonged to the deceased person: “The executor obtains authority, not from the probate, but from the will.” (Granovsky Estate v. Ontario, para. 17).  There is no legal obligation to obtain probate.

Probate is not the source of the executor’s authority, but only serves as certified evidence of it.  Some custodians of money, such as banks, will usually not give access to that money without the evidence of probate.  However, this is a matter for their discretion, not a legal requirement.  Banks will often exercise their discretion to release some money without probate, such as to pay for funeral expenses.

In Ontario, the Business Corporations Act states that probate is not required for the transfer of corporate shares.  The transfer of title to real estate registered under Ontario’s Land Titles Act does require probate, but the older Registry Act specifically provided the option of simply registering the will at the land registry office without probate.   The transfer of personal property that is in the possession of the executors, such as jewelry, art, and household effects, does not require probate.

Estate Administration Tax

The exceptions to the requirement for probate create an opportunity for savings on the Estate Administration Tax (EAT) that is levied on the estates of deceased persons in Ontario (and similar taxes in other provinces, particularly British Columbia).  Ordinarily, this tax needs to be paid immediately when the executors file their application for probate.

The EAT is at a relatively modest rate of 1.5 percent of the value of the assets in the estate (and the first $50,000 of assets is exempt).  However, for a large estate, this can still represent a substantial amount of money.  Moreover, it is payable even if the asset that the beneficiary inherits is not being sold, but will be owned directly by the beneficiary, such as a house or a family business.  In such a situation, this tax could create a serious cash crunch for the beneficiaries.

The Estates Act permits the exclusion of some property from the calculation

The value of the estate on which EAT is to be calculated is governed by the Estates Act, R.S.O. 1990.  It starts out in Section 32(1) by requiring a calculation of the total value of of “all the property that belonged to the deceased at the time of his or her death.”  However, Section 32(3) of that statute allows for a significant reduction in the value that needs to be included: “Where the application or grant is limited to part only of the property of the deceased, it is sufficient to set forth in the statement of value only the property and value thereof intended to be affected by such application or grant.”

Among other things, section 32(3) means that property is not taxable by the EAT if it passes automatically to beneficiaries, such as Retirement Income Funds with a direct beneficiary designation or property that was held in joint tenancy.   In addition, through the use of multiple wills it can have a broader impact to exclude other types of assets that do not require probate.

A person can have numerous wills

A person is legally entitled to have one, two or several different wills.  Each separate will can dispose of different pieces of property in Canada.  Different wills can deal with property that was owned by the deceased in other provinces or countries.  The important thing in writing these wills is to ensure that they do not contradict or cancel each other out.  Such embarrassing mistakes have been known to happen.

Courts have held that multiple wills can also qualify for exempting significant parts of the estate from EAT.   This is done by having one will dispose of property such as bank accounts, which require probate.   A second will can dispose of property such as the shares of private corporations, where no probate will be required to transfer the ownership to the executors.   The second will is not submitted for probate, and pursuant to s. 32(3), it is not included in the calculation of the value for the tax.

Saving the tax on assets that don’t require probate

One of the landmark court cases of this type concerned Philip Granovsky, who had owned two box manufacturing companies.   He arranged matters so that his primary will, which was to be submitted for probate, had assets of about $3 million.  His secondary will, which disposed of the shares of his private corporations, was worth about $25 million.

The Ontario Ministry of Finance attempted to challenge the interpretation of the law, arguing that if one will is submitted for probate, the value of the whole estate is taxable.   This was rejected by the judge in Granovsky Estate v. Ontario, who carefully reviewed the history of such separate wills and their impact on estate tax going back into the 19th century, and interpreted the statute accordingly.

Of course, the Ontario legislature could have amended the Estates Act to take out this exemption.  It has not done so, as the intention of the Estate Administration Tax is not to be a broad estates tax (of which there is none in Canada), but to be a tax to pay for the cost of the court system in providing this service.  If no service is provided, no tax should be charged.

Unlike the United States, Canada has no general estates tax.  Instead, the value of capital gains on the deemed disposition that occurs at death is taxed through the income tax system.  The Ontario government receives substantial tax revenue from the estates of deceased persons through that source.

More recently, the issue was reviewed again by the courts in Milne Estate (Re), 2019 ONSC 579.  In that case, the will used very general language.   Instead of allocating specifically identified property to the secondary will (such as the specific corporations named in the Granovsky will), it stated that the executors should decide what property does not require probate, and allocate that to the secondary will: “any other assets for which my Trustees determine a grant of authority by a court of competent jurisdiction is not required for the transfer or realization thereof.”   There was an issue about whether this language was too vague to be enforceable, but on appeal the Ontario Divisional Court ruled that the will was valid.

High GTA house prices and secondary wills

Secondary wills have been used primarily by wealthy people with business assets, such as in the Granovsky example.  Corporate shares are the most important type of asset for which probate is not required.   There are numerous other categories of property, such as works of art, furniture, and jewelry that do not require probate, for which a secondary will can save the tax.

As noted above, real estate whose ownership was acquired pursuant to the Registry Act similarly does not require probate.  Since around 1999, most property in Ontario has been converted by the government from the old paper-based registry to the electronic system under the Land Titles Act.   Property that was converted in this way is classified as “Land Titles Conversion Qualified” until it is resold by the original owner, and is considered to still be under the Registry Act.   As a result, there is a “first dealing exemption” for such property.   When the original owner dies, it can be transferred to a new owner without probate.

Many of the people who will pass on in the next decade or two in Ontario are the oldest baby boomers (or the parents of the youngest baby boomers) who have owned the same property since well before 1999.  For most older people, their house is their largest piece of wealth.

This is particularly significant in Toronto, where a modest old house in a desirable neighborhood may sell for $2 or $3 million primarily because of its land value.

The executor can transfer title to the real estate based on the first dealing exemption, before applying for probate for the balance of the estate.  Therefore, one could argue that the application for probate in that situation is “limited to part only of the property of the deceased,” as the house is no longer part of the estate.

The saving of EAT should arguably be available on the real estate by using this strategy even if there is only one will.  Unfortunately, that is not the opinion of the Ontario Ministry of Finance.  This is not explicitly discussed on the Ministry’s website, but that is the opinion of Ministry officials when asked for a ruling.  However, this question has not been tested in court in Ontario.  There is a Manitoba decision, Pollock v. Manitoba, 2006 MBCA 78, where the taxpayer was unsuccessful, but that was decided under a Manitoba statute (since repealed) with substantially different wording than Ontario’s Estates Act.

In some situations, this interpretation could result in a confiscatory tax rate where the deceased was “house rich but cash poor.”  Suppose that the deceased had a house worth $2 million, and $25,000 in the bank.  In that situation, if the executor applied for probate, a total amount of EAT of $29,625 would be payable.  The effective tax rate on getting the money from the bank (for which probate is required) would be over 100 percent.

In such a situation, the executor would be better off just selling the house without probate by using the first dealing exemption, and abandoning the $25,000 in the bank.  It is doubtful that this was the intention of the Legislature.   However, if a person wants to avoid the tax without falling afoul of the Ministry’s interpretation, the option of a secondary will for the house remains available.

Estate planning options for home values

An alternative that is sometimes used by elderly parents is to put their house into joint tenancy with their child.  In such a situation, when the parent dies, the house will pass by right of survivorship without triggering any tax.   Unfortunately, this approach has its own pitfalls.  There have been cases where the parent’s house became subject to the debts of the child, or where there has been a disagreement between the parent and the child about when the house can be sold.

As part of estate planning, the possession of an older Registry Act property should be taken into account.  Since probate is not required for it, this property can be effectively disposed of through a secondary will, for a substantial tax saving.   Therefore, secondary wills should also be considered by people of more modest means who have become “house rich” due to escalating house prices.   The tax saving to the estate can be many times larger than the cost of drafting an additional will.

Peter Spiro is counsel to Rogerson Law Group for tax and estate litigation and planning. This article is for general information purposes and you should seek specific advice for your particular case.  A shorter version of this article was originally published in the Lawyer’s Daily – https://www.thelawyersdaily.ca/articles/28015/secondary-wills-for-real-estate-that-doesn-t-require-probate?category=analysis