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Category: Costs

What is Estate Administration Tax, Part One

 

Tax planning in our daily lives can be frustrating, annoying and complicated. Tax planning for estates can feel even more onerous, complex and unimportant in our busy lives. With the emergence of COVID-19 however, estate planning has become more on the forefront of our minds. Understanding the tax implications of estate planning is pivotal to ensure that our loved one’s belongings are carefully considered and planned for.

In part one of this series, we will be providing the fundamentals of the estate administration tax.

Who applies?

The applicant is the executor or administrator of the deceased’s estate. The estate tax is a tax paid by the estate to “probate” a will, or in other words, to receive an order from the Superior Court of Justice granting an individual an estate certificate. This court order certifies and confirms that:

  • the deceased’s will is valid, and;
  • the applicant (either named in a will, or appointed without a will) has the legal authority to act as a representative.

Who pays?

The estate tax is not paid from the estate representatives, but rather, from the accounts of the estate. The estate tax need not to be paid for the following certificates: Succeeding Estate Trustee with a Will, Succeeding Estate Trustee with a Will Limited to the Assets Referred to in the Will, Succeeding Estate Trustee Without a Will and Estate Trustee During Litigation.

How is it calculated?

 As of Jan. 1, 2020, the estate tax is calculated as follows:

  • The first $50,000 of the estate or less is exempt from estate tax;
  • Value exceeding $50,000: $15 per $1,000 (or any part thereof) for the estate value exceeding
  • $50,000.
  • Valuation of assets should be determined on the fair market value of the assets at the time of death. Estate representatives must be able to prove the value of assets through supporting documents (i.e., a statement of appraisal, financial statements, etc.). This can get quite complicated and may require the professional services of an appraiser.

How is it paid?

The estate tax is paid in the form of a deposit and is calculated based on the value of the assets of the estate on the date of death. The value of the estate is all the property that belonged to the deceased person at the time of his or her death as explained below. Practitioners can also refer to s. 1(1) of the Estate Administration Act (Act).

So, which assets make up the value of the estate?

The following assets are included in the calculation of the estate tax:

  • Real estate in Ontario, less the actual value of any encumbrance on real property (for example, mortgages and/or liens). The value used in this calculation is the appraised value at the date of death;
  • Bank accounts (including foreign accounts);
  • Investments (such as stocks, bonds, mutual funds, TFSAs, RRSPs); All property of the deceased held in another person’s name; Vehicles and vessels (for example cars, boats, ATVs, trailers, etc.);

All other property including goods, intangible property, business interests; and, Insurance if proceeds are left to the estate.

It excludes:

  • Assets passing on survivorship;
  • Real estate situated outside Ontario;
  • Insurance proceeds or registered funds passing to a named beneficiary or assigned for value; and
  • Debts owing by deceased, including credit card debts, car loans, etc.

Exceptions to paying the estate tax

While the estate tax must be paid when the court issues an estate certificate, there are two exceptions to this rule:

  1. The applicant must file an affidavit as to the estimated value, and the tax is based on the Additionally, the applicant must give an undertaking to file a sworn statement as to the value of the estate and to pay the tax within six months of that undertaking (Rule 74.13(2));
  2. If the court is satisfied, based upon the applicant’s affidavit and upon other material that the court requires:
      • That the estate certificate is urgently required;
      • That financial hardship would result from not issuing the estate certificate before the deposit is made; and
      • That sufficient security for the payment of the estate administration tax has been furnished to the court.

While holding various types of assets can prove to be tricky in calculating the estate tax (even for estate lawyers) this helpful guide can serve as a starting point for estate representatives to consider which assets need to be ascertained, whether they need to pay the estate tax or not, and if they need to engage the services of an experienced estates lawyer. In part two of this series, we will move on to how to maximize tax savings.

Costs in Estate Litigation: Who Pays, When and Why?

This article was originally published by The Lawyer’s Daily (www.thelawyersdaily.ca), part of LexisNexis Canada Inc.

An Overview of Costs in Estate Litigation: Who Pays, When, and Why?  

The issue of which parties are to bear the costs of litigation in estate matters presents some interesting nuances. On the one hand, estate matters are merely civil proceedings and, in such proceedings, costs generally “follow the event”, meaning that courts order them to be paid by the unsuccessful party to the successful party. On the other hand, such matters can present unique questions: What if the testator—because of mistake, neglect, etc.—failed to make his/her intentions clear enough, effectively constraining the parties in an estate matter to, well, bring the matter to court? What if there are concerns about the execution of the will, or the testator’s capacity at the time of execution? One would think that, in such cases, a common-sense approach to costs would acknowledge that, “winning” and “losing” aside, there are times when all parties may have ultimately benefited by having brought the matter to court to resolve issues, and thereafter administering the estate appropriately. Ideally, perhaps it would also acknowledge that the testator was—be it partially or otherwise—at fault himself/herself for not having laid out her intentions with sufficient clarity. 

These are precisely the types of considerations that today’s “modern approach” to costs in estate litigation seeks to balance and reconcile, and a brief summary regarding how it does this follows, below. While the general rules regarding the awarding of costs in civil proceedings applies to estate matters, a special approach has been developed in estate litigation that may allow for costs to be borne, not by the parties, but by the estate, in select circumstances.  

The “Modern Approach” to Costs in Estate Litigation 

As mentioned above, generally, the unsuccessful party bears the costs of the civil proceeding. However, in estate litigation, there can be an exception to this general rule if there is a policy justification to deviate from it. When a policy justification is found, then courts may instead order that the costs of some or all of the parties/proceedings be paid out of the estate. In McDougall Estate v Gooderham, the Ontario Court of Appeal outlined that a departure from the normal principles for determining responsibility for costs is justified in two circumstances: (1) where reasonable grounds exist to question the execution of the will or the testator’ capacity to make the will; or (2) where the difficulties or ambiguities in the will being considered by the court were partly or wholly caused by the testator (e.g. by some sort of failure to lay out her intentions clearly so as to have better avoided the need for future litigation). The Court stated at para 85 of McDougall Estate: 

Gone are the days when the costs of all parties are so routinely ordered payable out of the estate that people perceive there is nothing to be lost in pursuing estate litigation. 

Essentially, this approach seeks to strike a balance between: (1) the important role that courts must play in ensuring that valid wills are admitted to probate and complexities/ambiguities relating to it are resolved; and (2) the need to effectively control the propensity for parties to bring unwarranted or unreasonable proceedings under a misplaced expectation that the estate will pay for such proceedings.  

Courts applying this approach will have an appreciation for the facts. Overly simplistic assessments regarding whether or not the will was challenged, or whether or not the capacity of the testator was put in issue, are not enough to render a conclusion as to whether the estate should bear the costs. A deeper analysis is always required. 

Recently, in Trezzi v Trezzi, the Ontario Court of Appeal discussed the proper application of this approach to costs in estate litigation. It reaffirmed that courts in estates matters are to follow the costs rules that apply in civil proceedings, unless one of two “public policy considerations” are applicable: “(1) the need to give effect to valid wills that reflect the intention of competent testators; and (2) the need to ensure that estates are properly administered.” This statement is precisely in line with McDougald Estate. 

Partial Indemnity or More? 

As in other civil proceedings, courts resolving estates matters have routinely reaffirmed that costs above a partial indemnity scale should only be awarded: (a) when one party has made an offer to settle which the other party has not accepted and the former party obtains a judgment as favourable or more favourable than the offer (i.e. Rule 495 offers); or (b) when the court makes a clear finding of reprehensible conduct on the part of the party against whom the cost award is being made.

Other Costs Potentially Borne by the Estate 

Generally, executors incurring costs in the course of estate litigation are entitled to full indemnification for such costs out of the estate. The underlying principle here is that executors are entitled to indemnification for all reasonably incurred costs involved in their administration of the estate. It has often been noted that not allowing for this could otherwise turn people away from accepting appointments as executors, or could make executors reluctant to bring proceedings to advance the due administration of an estate.

Executors may have to bear their own costs if they unreasonably resist a reasonable challenge to the will, and courts may order them to bear their own costs for unnecessary or unwarranted proceedings, as well as for reprehensible conduct during such proceedings. Just like other parties in estate litigation, executors should not be initiating ill-advised litigation under the assumption that the estate will bear their costs.  

Concluding Remarks 

There are many cases where litigation may be necessary to properly distribute an estate. The modern approach to costs in estate litigation is a principled one that provides an effective means of identifying when this may or may not be the case, and awards costs accordingly.