Starting January 1, 2015, estate trustees are required to file the new Estate Information Return with the Ministry of Finance before an estate can be settled. These amendments to the Estate Administration Tax Act, 19981 (the “Act”), add a new layer of audit, inspection and assessments, and impose more responsibility on estate trustees. This is the most significant legislative change for estate trustees and practitioners since the return was established.
Within 90 days after an Estate Certificate (the “Certificate”) is issued, the estate trustee must file an Estate Information Return (“EIR”) with the Ontario Ministry of Finance. The EIR provides detailed information on the assets included in the estate and their value, along with the amount of Estate Administration Tax (“EAT”) owing — which is due when the Certificate is issued. But there are a couple of significant challenges with this process.
THE VALUE OF THE ESTATE INCLUDES:
- Real estate in Ontario
- Bank accounts
- Vehicles and vessels
- All property of the deceased that was held in another person’s name
- All other property, including:
- Business interests
- Household contents, such as: art, jewellery, cash and antiques
- Insurance (if proceeds pass through the estate)
This process can significantly increase the cost to settle an estate. Additional paperwork and filing requirements will require more chargeable hours from professionals, and could delay the distribution of assets. With the imposed 4 year assessment period, the estate trustee may not feel comfortable distributing assets — fearing they may be required to pay additional probate if the estate is reassessed.
Besides filing more paperwork, estate trustees and practitioners should be aware of the assessment and potential penalties involved. Under the Act, the Ministry has 4 years from the time the return is filed to assess, or reassess, the EAT owing. If the trustee discovers additional property after the return is filed, it’s their responsibility to register a true statement of the total value, verified by oath or affirmation, of the newly discovered property within 6 months.2 However, if the trustee becomes aware of missing or incorrect information after 4 years from when the EAT was payable, they’re not required to refile the return. The assessment period only remains open after 4 years if:
- the estate trustee doesn’t comply with the Act and/or doesn’t provide correct information about the deceased, or provide information in the prescribed time and manner;
- any person makes a misrepresentation attributable to neglect, carelessness or wilful default, or has committed any fraud when supplying information, or has omitted to disclose any information about the estate.3 (The language in this provision is broad enough to cover the actions of persons other than the estate trustee.)
In these cases, the estate trustee can file an objection to the assessment within 180 days after the Notice of Assessment is mailed. If the Minister does not reconsider, and the objection is declined, then the trustee can make an appeal to the Superior Court of Justice (Ontario).
There are serious consequences if a trustee fails to file an EIR, or files a false or misleading return. If anyone provides information that makes, or assists in making a false or misleading statement, they can also be found guilty of an offence under the Act. Based on the current interpretation, this applies to valuators, appraisers and lawyers advising clients.
The penalty may be a fine of at least $1,000 or up to twice the EAT owing (if that amount is greater than $1,000), imprisonment for no more than two years, or both.
Currently, many trust practitioners feel they may be liable to pay additional tax out of their own pocket if the estate is assessed for additional EAT after a trustee distributes the estate assets. Unlike filing a federal income tax return, the estate trustee cannot apply for a clearance certificate to confirm there are no more taxes owing. If the estate trustee makes a request in writing, the Minister may write a comfort letter to confirm that the estate trustee is not personally liable for any additional EAT — after a clearance certificate is received from the Canada Revenue Agency. At this point, or after the 4 year period, if the return was filed and the EAT was paid on time, with accurate valuations and no additional assets were discovered, then the estate trustee can distribute the assets with a reasonable level of comfort.
WHAT DOES THIS MEAN FOR PRACTITIONERS?
There is increased professional liability for estate trustees in Ontario. Practitioners should revisit their current standard procedures and review these updates to understand the potential liabilities. The new Regulation 310/144 outlines the requirements for filing the information return, and penalties for those who aren’t compliant.
While drastic changes may not be required, existing client tools such as a retainer letter, reporting letter, release and indemnity of beneficiaries, and client’s wills should be reviewed and revised to:
- specify the scope of the retainer, including completion and filing of the EIR and any amendments.
- adjust fee structures to accommodate additional legal work relating to the EIR.
- amend the reporting letter to include additional filing requirements; this includes reporting additional discovered property, reporting deficiency and filing an amended return for any owed EAT.
- obtain a comfort letter from the Minister.
- retain valuations and asset information for the assessment period.
- obtain indemnities from the beneficiaries with respect to legal fees and expenses for assessments and audits, and defense of a filing position. This is in addition to any indemnities with respect to all taxes, penalties, interest and fines payable by the deceased’s estate.
- revisit wills and consider additional wording on the client’s intention with respect to any joint accounts or investments with an adult child.
Trustees don’t need to file the return if they’ve received:
- a Certificate of Appointment of Succeeding Estate Trustee with a Will,
- a Certificate of Appointment of Succeeding Estate Trustee with a Will Limited to the Assets Referred to in the Will,
- a Certificate of Appointment of Succeeding Estate Trustee without a Will, or
- a Certificate of Appointment of Estate Trustee During Litigation.
SOLUTIONS FOR CLIENTS AND THEIR BENEFICIARIES
One could reasonably expect increased interest and focused efforts to minimize EAT, but the focus will likely be on reducing legal and valuation costs associated with the process, and minimizing the estate trustee’s potential liability (in addition to the frequent estate litigation risks). Let’s take a look at a few strategies.
Designating a beneficiary other than the estate on a life insurance policy, segregated fund contract, RRSP, RRIF, LIRA, LIF or TFSA is a low cost and effective way to avoid EAT. But clients should be aware of the potential unintended consequences, and special attention should be paid to designating minors or disabled persons as beneficiaries. For minors and disabled persons, consider the beneficiary’s capacity, and take into consideration the use of a Qualified Disability Trust or a Lifetime Benefit Trust for dependents.
Clients should also consider whether they would like to give all of the assets in an account to the named beneficiaries, or share the estate with other beneficiaries. Having conversations with clients about their intentions helps clarify these questions; these intentions should also be identified within their will.
The value from clients’ jointly owned accounts would not be included in the return. But this could cause controversy when an asset is owned by a parent and an adult child. The question of “true ownership” comes into play, and the accounts could be scrutinized by other beneficiaries and perhaps the Minister. For example, is the adult child holding the asset in trust or is the true intention for the adult child to own the asset after the parent passes away?
The current legal precedent set by the Supreme Court of Canada in the decision of Pecore v. Pecore, 2007 SCC 17 and recently affirmed in the Ontario Appeal Court Foley v. McIntyre,  ONCA 382 would presume that the surviving child holds the account on resulting trust for the deceased parent’s estate. If the intention was for the adult child to own the asset, then persuasive evidence of the parent’s intention would need to be documented.
Clients and estate planners need to clarify these intentions and keep documentation to support gifts and avoid EAT, and to legally pass ownership to the surviving child. This can be done by including information within the will and outlining the client’s intention about any joint accounts or investments with an adult child.
The precedent set by Granovsky Estate v. Ontario,  O.J. No. 508 made the practice of multiple wills common in Ontario. This will continue to be a popular way to avoid EAT, and to avoid disclosure of assets covered by non-probatable wills. Multiple wills are typically used when clients own private company shares, and are also useful for clients who owns vehicles, household goods and personal effects or loans that aren’t secured by a mortgage. This practice is particularly useful when these items have significant value, or if valuation is difficult, costly or simply onerous. Items included on a non-probatable will are not required to be included on the EIR, hence minimizing the risk of omissions, errors and valuation inaccuracies. This technique isn’t without pitfalls. For example, certain assets such as antiques or artwork may require a Certificate in order to complete a sale. Items classified as listed personal property are also required to be valued for income tax purposes.
Clients and estate planners may consider inter-vivos planning, like gifting or setting up alter-ego trusts, spousal trusts or joint partner trusts to avoid EAT and filing the EIR. For convenience, we’ll use the term alter-ego trust. Alter-ego trusts, also known as self-benefit trusts, are commonly used to hold assets in trust for the individual for their life. This is particularly helpful when a client may be incapable in the future.
The individual who created the trust is the only person who can get trust income or capital while they are living. After death, others can receive trust assets and/or income. Assets transferred to a trust before death aren’t included on the EIR. This technique is only available to Canadian residents who are at least 65 years of age. However, the costs associated with the trust structure should be reviewed against the costs of settling the estate.
New Federal Income Tax Act changes – effective January 1, 2016
In light of the changes to the Income Tax Act (Canada) section 104 (13.3), clients and estate planners should consider the income tax implications associated with alter-ego, spousal and joint partner trusts. On death, the trust would be considered to have a deemed year end and any income, including capital gains on the disposition, must be paid that same year. While the tax liabilities are a part of the estate, the assets are held in trusts. In the meantime, clients may want to include provisions in their wills to address who and how the income tax is paid.
The introduction of the Estate Information Return brings a heightened level of governance in the estate settlement process and imposes duties with risks to the estate trustee and their advisors. This increased governance and safeguard also brings increased costs to the estate and beneficiaries.
Clients and estate planners should revisit existing plans and re-evaluate the costs of current arrangements against the options available. As with most matters, there’s no one-size-fits-all solution. Complete information on how to file the Estate Information Return is available on the Ministry of Finance website, and clients should consult a tax or legal expect regarding their own situation.
1 S.O. 1998, c.34
2 Subsection 2(7) of the Act, and subsection 32(2) of the Estates Act, R.S.O. 1990, c.E.21.
3 Subsection 4.5(2) of the Act, STEP Canada 17th National Conference, Bernadette Dietrich, McCarthy Tetrault