Ontario Government EATs the Dead

It's gruesome. As of January 2013 the Government of Ontario will voraciously EAT dead people, or more precisely, their estates. That's EAT as in Estate Administration Tax, the official name for probate fees in the province. The Government of Ontario has passed into law big changes in the Estate Administration Tax (EAT) and though the tax rate will remain the same, the new provisions for collection will make it a nightmare.

The innocuously titled Ontario to Change the Way it Collects Estate Administration Tax (Probate Fees) by Clare Sullivan, Aird & Berlis LLP in CCH's August 2011 newsletter describes the additional bureaucracy:

• "... the new provisions require the estate representative to keep records and books of account ... the value of the assets of the estate for probate or administration purposes will have to be supportable ... valuations will be necessary for all property passing under a probated will" >>> i.e. extra effort, time and cost to get formal assessments on everything
• "... The MNR will be able to assess or reassess for a period of four years after the day the tax is payable... The new procedures may also unduly delay the application for a certificate of appointment [my note - this is the document an executor needs to show everyone that he/she is legally entitled to be executor] ... there could be significant delays in obtaining the certificate of appointment and thus delays in administering the estate ... an estate representative may not wish to settle an estate until four years after the application for probate in order to limit his or her personal liability for any unpaid tax" >>> i.e. potential lengthy delays for someone to even getting started as executor. The Catch-22 lunacy of this is that without the certificate of appointment many/most financial institutions will likely refuse to provide any information, which of course can make it impossible to pay the tax and get the certificate. And then there will lengthier delays - goodness knows it takes long enough now - to wrapping up and distributing estates. And even after that, there might be messy reassessments and more to pay later.
  

Another lawyer, Barry Corbin, goes into more detail about increased liability exposure and complications of distributing estates as a result of the audit and compliance provisions of the new law - see Estate Administration Tax - The Nightmare Begins.

One thing is certain - the Ontario Ministry of Revenue will make sure to collect a lot more tax than now (why else would they have done the amendments?), merely from its rigorous and likely painfully painstaking application of the law. Moreover, with the structure in place, down the road one can expect increases in the already highest in Canada rates (see Canadian Tax Resource blog's table). Just wait till the government needs more money and finds that dead people are easier targets than live voters.

It's a done deal. The new law received Royal Assent May 12th. Of course, the government could forget to Proclaim the law, and it would never go into force. Maybe an election would see a new government that would see fit not to take that final step.

Deemed Disposition and Probate

Some years ago when I had to perform the tasks of executor for my wife's will, I was caught in a very unusual unusual situation. Since the the tax rules specify that all of a deceased taxpayer's assets are deemed to be sold as of the date of death, capital gains are liable to be paid on that deemed disposition. That's exactly what happened with Nortel at the time, which only begun its slide by the time of death at the end of September 2000.

By the time the will was probated in December 2000, the stock price had dropped by close to 40%. The capital gains tax payable almost exceeded the value of the stock holding. By the time the estate was ready to be distributed some months later, it did by a good margin. The only way to avoid a huge tax hit was to avail myself of a provision that allows a spouse, and only a spouse, who is to inherit some or all of an estate, to receive his/her share at the original cost of the deceased taxpayer and to avoid deemed disposition of those specific assets. At least the executor, unless the will states otherwise, is at liberty to decide who will receive which specific assets.

This incident revealed to me some interesting characteristics of having a will probated. Financial institutions seemingly will generally (except for things like funeral expenses) refuse to accept instructions of the executor (e.g. liquidating assets) until the will is probated unless the amounts are quite small. This appears to be a matter of the financial institution showing proper care to avoid getting sued later by disgruntled inheritors. Same goes for the executor. There does not seem to be any law that requires a will to have received probate from a court before it can be carried out.

However, even when a will has been probated, if another later will is found and can be shown to be valid then the original probated will does not stand and the executor would have to start all over again. What does all the money paid for probate actually give one then? It can cost a lot of money ($5 per thousand on the first $50k of assets and $15 per thousand on the excess in Ontario). Certainly it doesn't happen very quickly - a matter of months at best.
Does the court check for existence of other wills - no! how could it in practical terms? Does the court even check the accuracy of assets listed in the estate - again, no, unless some lawyers out there can correct me ... some dishonest people might be tempted to understate the total assets, n'est-ce pas? The bottom line is that the probate fee is not a fee for a service, it is a tax on wealth. Why not a flat fee of $150 or some such amount that reflects the actual work involved by the court?