Changes were made to the Ontario Estate Administration Tax Act, 19981 (the "Act") in 2011 to try and increase compliance by integrating the administration of the Estate Administration Tax ("EAT") with audit and assessment functions at the Ministry of Finance.
Although the changes were announced in the 2011 Ontario Budget2 and the audit and verification amendments came into effect at that time, the filing requirements have yet to come into effect, as at the date of this article. These changes are far reaching, and it is important that both estate representatives ("Representatives") and people making wills have a good understanding of how they may be impacted.
What is the Estate Administration Tax (EAT)?
The EAT, which used to be called "probate tax or fees," is generally paid on the total value of a deceased's estate, where the value of the estate is greater than $1000.00. The formula for calculating EAT is set out in the Act, and is based on the total value of the deceased's reported assets, wherever situated.
A certificate of appointment of estate trustee ("Certificate"), which used to be referred to as "letters probate," is issued to an applicant by the Ontario Superior Court of Justice. It provides proof that the Representative, formerly the "executor," has authority to administer the deceased's estate. A Certificate is generally required for a Representative to gain access to the deceased's bank accounts and insurance policies, as well as to transfer real property in Ontario. The EAT is currently assessed and administered by the Ontario Attorney General's office as part of the Certificate application process, and is paid from the estate's funds when the Representative files their application for a Certificate with the court. The Representative is required to swear or affirm an affidavit providing basic information about the deceased, and confirming the reported value of the estate's assets. Documentation in support of the valuation is currently not required to support the accuracy of the valuation, a shortcoming that Ontario's government may have reasoned leads to under reporting and lower amounts of EAT collected by the province than should otherwise be the case.
In order to remedy this issue, Certificate applicants will be required to submit detailed information about the deceased's estate to the Ministry of Finance for assessment. The specific information that an applicant will be required to file will be prescribed in regulations under the Act when they are released. The regulations could have come into effect as early as January 1, 2013, but did not. According to the Ministry website2, Certificate applicants will not be required to submit estate information to the Ministry until the regulations come into effect, and notice will be provided when they eventually do.
New Compliance Powers: Audit and Reassessment
The new changes to the Act give the Minister of Finance broad audit and assessment powers, reflecting those found in the federal Income Tax Act. Enhanced audit powers include the ability to require a Representative, or other third party, to provide any information or reasonable assistance required in relation to the deceased and the declared valuation of their assets. The Minister may also question the validity of asset transfers made through mechanisms that fall outside of the EAT regime, such as to a beneficiary through an insurance policy or to a surviving spouse. In addition, the Minister has authority to reassess an estate for EAT within four years of the date that the tax became payable. They may also reassess at any time outside of the limitation period where no information about an estate’s assets has been filed, or where there are allegations that a Representative has misrepresented the value of assets through neglect, carelessness, willful default or fraud.
It will now be an offence when a Representative fails to file with the Minister, or knowingly makes a false or misleading statement, or an omission of relevant facts when applying for a Certificate on or after January 1, 2013. These offences have been added to the Act to encourage compliance, and are punishable by a fine ranging from $1000.00 to twice the value of the EAT payable and/or up to two years imprisonment.
New Enforcement Powers: Fines and Even Jail
It is clear that the new Ministerial powers under the Act will significantly increase the responsibilities and risk for Representatives. This risk is extended years beyond what it might have previously, and the consequences for non-compliance with the requirements under the Act could be severe. In addition to the possibility of paying a fine, or even imprisonment, Representatives may also incur significant legal and administrative costs in their defence. Since there is no mechanism for Clearance Certificates under the Act, similar to those granted by the Canadian Revenue Agency in relation to income tax, and the Act does not clarify who is responsible for the payment of additional tax on reassessment, the beneficiaries of an estate may be required to make additional payments under the EAT, as well as being subject to administrative costs in disputing a reassessment.
To learn more about the amendments to the Estate Administration Tax Act, as well as tax planning methods you might be able to use to minimize EAT payable on your estate, please contact a member of our Wills and Estates team.
1Estate Administration Tax Act, 1998, R.S.0. 1998, c.34.
2Ontario, Ministry of Finance, 2011 Ontario Budget: Chapter III: Tax and Pension Systems for Ontario's Future.
3Ontario, Ministry of Finance, Estate Administration Tax