What is Estate Administration Tax, Part One

January 19, 2022March 7, 2022kimgale

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:

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));
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.

Big changes for small estates

April 23, 2021July 7, 2021kimgale

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

Big changes for small estates

On April 1, 2021, the estates law changes from the Smarter and Stronger Justice Act came into effect in Ontario. The result of the bill raised the limit for a small estate to $150,000 and introduced Rule 74.1 in the Rules of Civil Procedure pertaining to the administration of small estates.

This is similar to the increased limit in the Children’s Law Reform Act in instances where there is no Will or there is a Will but no trust provisions, the estate trustee can only pay $35,000 to the minors parent. Anything above that must be paid into court. The parent or guardian can then apply to be guardians of property their child. The amount was $10,000 previously.

As wills, trusts and estates practitioners it is important to note these changes to the legislation – in particular, estate administrators should be aware of the rules relating to small estates and how it affects the estates administration practice.

Small estates bond requirements

Pursuant to s. 35 of the Estates Act, there is a general requirement that requires every person to whom a grant of administration, including administration with the will annexed, shall give a bond to the judge of the court by which the grant is made. Generally, the administration bond that needs to be obtained is required to be double the amount of the assets of the estate. Pursuant to s. 36(3), an administration bond shall not be required in respect of a small estate, now up to $150,000 (unless a beneficiary is a minor or incapable).

Rule 74.1 small estates forms and procedures: What is the difference?

The major difference of Rule 74.1 is the probate process for small estates

mainly the less stringent requirements to be appointed an estate trustee of a small Rule 74.1.02(2), states that Rule 74 continues to apply with respect to the small estates except for Rules 74.04 to 74.11 and 74.14 .

The following demonstrates the requirements under Rule 74.04 in comparison to the requirements under Rule 74.1 (italic emphasis added):

Rule 74.04 Requirements for Probate Application

the original of the will and of every codicil; (a.l) proof of death;
Form 74. 6 an affidavit attesting that notice of the application, and Form 7 has been served in accordance with subrules (2) to (7);
if the will or a codicil is not in holograph form,
Form 8 an affidavit of execution of the will and of every codicil or, Form 74.10 an affidavit as to the condition of the will or codicil at the time of execution, or
such other evidence of due execution as the court may require;
Form 74.9 if the will or a codicil is in holograph form, an affidavit attesting that the handwriting and signature in the will or codicil are those of the deceased;
a renunciation (Form 11) from every living person who is named in the will or codicil as estate trustee who has not joined in the application and is entitled to do so;
if the applicant is not named as an estate trustee in the will or codicil, a consent to the applicant’s appointment (Form 74.12 or, if the application is for a certificate limited to the assets referred to in the will, Form 12.1) by persons who are entitled to share in the distribution of the estate and who together have a majority interest in the value of the assets of the estate at the date of death;

(g.1 ) Form 74.13.2 in the case of an application for a certificate of appointment of estate trustee with a will limited to the assets referred to in the will, a draft order granting the certificate of appointment;

the security required by the Estates Act; and
such additional or other material as the court

Small Estates Rule 74.1.03 Requirements for Probate Application

Form 74, 1B, a request to file an application for a small estate certificate or an amended small estate certificate form;
proof of death;
Form 74. l C, a draft small estate certificate;
if there is a will, the original of the will and of any codicils, together with the following evidence of due execution of the will and each codicil, similar to the requirements in Rule 74;
any security required by the Estates Act, which should be nil; and
such additional or other material as the court

Small estates have a less formal notice equivalent under Rule 74.1.03(3) that requires the applicant to send a copy of the application for a small estate certificate, any attachments and copies of the wills or codicils to the beneficiaries. It acts very similar to a Notice of Application for estates over $150,000.

As the highlighted passages above indicate, there are more requirements for probate under Rule 74.04 . There are up to six less forms required under Rule 74.1 and generally, there is no security required pursuant to s. 36 of the Estates Act, in comparison to a traditional Certificate of Appointment of Estate Trustee. Forms require time and time is money.

Comparison of forms

The small estate forms themselves are newer and easier for an administrator of a small estate to complete.

On an analysis of the Small Estate Certificate Form (Form 74. lA) in comparison to the Certificate of Appointment of Estate Trustee Form (Form 74.4) as downloaded from the Ontario Court forms website, at first glance, there are colour indicators in Form 74. lA that easily guide an administrator on where to fill in the forms as compared to the monochromatic Form 74.4. The spacing and larger text in Form 74. lA is placed in a way where it is more intuitive and user friendly than Form 74.4.

In terms of guiding language, the small estate form is clearer than its “traditional” counterpart, and as a snippet, the Personal Property section of Form 74. lA has a more in-depth definition of Personal Property as compared to Form 74.4 .

One interesting note from Form 74. lA, is that this form asks for the beneficiaries to be listed, whereas in 74.4, the beneficiaries are to be provided in another court form.

Who benefits?

According to Attorney General Doug Downey, raising the small estate limit was a part of the changes made “to ease the burden on grieving loved ones and ensure fairness for everyone regardless of the size of an estate, the government is making the process to claim a small estate faster, easier and less costly for Ontarians.”

Overall, the new changes make it easier for administrators of any estate under $150,000.

As some administrators may utilize legal counsel for the administration of their estate, having a process where there are potentially six less legal documents to complete, and a process that requires less correspondence with other parties will drastically help small estates by reducing time and legal fees paid from the small estates.

For the administrators who wish to administer a small estate by themselves, the new process is more simplified. Overall, it is faster, easier, and less costly in comparison to the process for estates over $150,000.

Do changes ensure fairness for everyone regardless of size of an estate?

For there to be winners, there must be losers borne from these changes . In terms of fairness for everyone, regardless of the size of the estate, it is puzzling how the line was arbitrarily drawn at $150,000.

What happens to the still relatively modest estates valued between $150,000 to $200,000? Should there be a system in place that is less onerous and less expensive than obtaining an administrative bond to compel an administrator to fulfil their duties?

The changes are a good start, but there are still questions that need to be answered.

Pour Over Clauses: Why You Should Care

June 3, 2019June 3, 2019kimgale

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

By Kimberly Gale and Aradhna Mahajan

A clause that is valid in some U.S. jurisdictions is being disputed in Canada as seen in the recent decision

Quinn Estate 2018 BCSC 365

This case discusses pour-over clauses in a will. A pour-over clause makes a gift under a will to an existing trust. The terms of that trust is not defined in the will. While in several the U.S. states the pour-over clauses have been held to be valid, case law in Canada suggests otherwise.

In this case, former NHL coach Pat Quinn passed away. Quinn was a Canadian and American citizen and his wife, Sandra Quinn, held a U.S green card and was a Canadian citizen. Pat and Sandra lived in British Columbia and the value of his estate was either nil or $750,000. His will was prepared by a U.S. attorney, executed in British Columbia, and stated that the residue of his estate would pour-over into the Quinn Family Trust. The Quinn Family Trust was settled prior to his execution of the will and could be amended and was revocable.

Issues with Pour-Over Clauses

The case Kellogg Estate 2013 BCSC 2292, summarizes issues with the pour-over clauses. In this case, the will was to “pour over” into a trust which was amended after the will was executed. The amendment removed one of the primary beneficiaries of the trust. Justice Victoria Gray held that a gift cannot “pour over” on terms which did not exist at the time the will was executed (para. 70) and that a pour-over clause to a revocable, amendable, inter vivos trust is to be invalid.

In Quinn Estate, Justice Gordon Funt held that assets could not “pour- over” into a trust that could be revoked or amended because this violates the testamentary compliance rules provided in B.C.’s Wills, Estate and Succession Act (WESA). The definition of a will is testamentary disposition (s. 1 of the WESA) and the possible use of a revocable or amenable trust creates “uncertainty the Legislature sought to avoid” (Para 49).

The court pondered whether s. 58 of WESA, which allows the court to cure deficiencies in a will, can save the pour-over clause.

Can the clause be saved?

According to Justice Funt, the answer was no. The pour-over clause was invalid and could not be cured by s.58. The residue of the estate was to be distributed on intestacy.

The policy reason behind s. 58 was to enable the court to step in where there is “formal invalidity” in circumstances where a person has taken steps to a “deliberate or fixed and final intention” to dispose of his or her property. This legislation does not exist to enable the court to permit structures that circumvent the formalities all together. In this case, the pour-over clause attached to an amendable trust which was designed to be flexible and “left matters in flux” (para. 62). This arrangement made the very structure of the will inconsistent with the formal requirements of a will and could not be cured by application of s. 58.

Practitioners should be aware that pour-over trust clauses may not be valid in Canada and should not be employed without further consideration of the legal issues involved. That is not to say that estate planners must avoid pour-over clauses altogether. For example, if the Quinn Family Trust was irrevocable, there would have been more likelihood that the pour-over clause would be valid.

A will must be final and certain.

If a pour-over clause is able to defeat a testator’s wishes by having a trust whose terms can be later amended, it will be deemed invalid.

Aradhna Mahajan is a recent master of law graduate from University of Toronto.

Re Milne Clarified: A Will is Not a Trust | Yesterday’s Appeal Decision

January 25, 2019January 25, 2019kimgale

Yesterday’s decision, Milne Estate (Re), 2019 ONSC 79, which was an appeal from the Superior Court to the Divisional Court, provided much needed clarity on the question as to whether a will is a trust, whether a will must satisfy the three certainties test, and the investigative role of the court during a probate application. Also, Allocation Clauses (or basket clauses), which were under fire for potentially invalidating a will, were deemed to be acceptable. This blog will look at Justice Dunphy’s decision in Re Milne in the Superior Court, then Justice Penny’s decision in Re Panda and finally, Justice Marrocco’s decision in Re Milne in the Divisional Court.

Why two wills?

Preparing more than one will is a general practice adopted by many will drafting solicitors.

In order to appreciate this dilemma, it is important to understand the meaning of probate, estate administration tax and the benefit of using an Allocation Clause (also known as a basket clause).

Probate is basically a formal approval process where the Court validates a will and confirms the appointment of an the estate trustee. If the probate application is successful, the court issues a Certificate of Appointment of Estate Trustee, which gives the executor legal authority to deal with the estate.

Estate Administration Tax (also known as a probate fee) is a tax imposed on the estate of the deceased person. The rates are:

$5 per $1,000 of estate assets up to $50,000, and.

$15 per $1,000 of estate assets over $50,000.

What is an Allocation Clause?

Probate is not mandatory and not all assets need to be submitted for probate. That is where the Allocation Clause comes in handy and allows the estate trustee discretionary power to determine which estate assets should be probated and which one should not.

An Allocation Clause uses language that is all encompassing. It states that the primary will includes “all assets that require a probated will.” The secondary will includes “all of the assets that do not require probate will.” Assets in the “Primary Will” will be submitted for probate and assets in the “Secondary Will” will not be submitted. The Allocation Clause allows the estate trustee to determine which assets fall under the Primary and Secondary Will.

Even though it is a common practice to include Allocation Clauses, it was uncertain whether using this clause in a will was a “safe” practice or not – until now.

Re Milne in the Superior Court

On September 11, 2018, Justice Dunphy ruled in Milne Estate (Re), 2018 ONSC 4174 that the Primary wills that used the Allocation Clause were invalid.

His honours reasoning was simple: A will is a trust. Therefore, there the “three certainties” applied. These are certainty of intention, subject-matter, and objects. He also stated that is was proper for the court to examine these elements at the stage of probate because the probate function of the court has an inquisitorial function.

Justice Dunphy considered the Secondary Wills to be valid but held that the Primary Wills were invalid “as they failed to describe with certainty any property that is subject to them” (para 28).

This ruling created a sense of insecurity (or panic) in the mind of testators and litigants in respect of the validity of their wills.

Re Panda

On November 13, 2018, Justice Penny’s endorsement respectfully disagreed with Justice Dunphy’s decision in Re Milne Estate and granted probate for a Primary Will that used an Allocation Clause.

The same issue arose before Justice Penny in Re Panda, 2018 ONSC 6734. A motion for directions was brought before Justice Penny where probate was sought for a Primary Will where the Secondary Will had an Allocation Clause which was substantially similar to the one in Re Milne. When the application for Certificate of Appointment of Estate Trustee of the Primary Will came before Justice Dunphy, he refused to grant probate.

Justice Penny held that firstly, the inquisitorial role of the court is limited to whether the document is in fact a will, whether it meets the formal requirements of the Succession Law Reform Act (SLRA) and whether its testamentary in nature. Beyond that, such as broader interpretation questions, should not be addressed on probate applications.

Secondly, Justice Penny ruled that a will is not a trust, therefore, the three certainties test cannot be applied to wills. A will is a different testament then a trust. It is unique in itself. Though it has some features of trust and some of contract, it is neither a trust nor a contract. As Justice Penny stated, “a will is its own, unique creature of law.”

Lastly, in determining whether a testator can confer the ability of his representatives to seek probate of assets as per their discretion, Justice Penny was of the view that this is an issue of construction of a given instruction in the will. This issue was not before him in the Application, however, he stated that a resolution should occur in a case where the issue was raised “in the context of a mature dispute.”

Re Milne Appeal to the Divisional Court

In yesterday’s released decision dated January 24, 2019, Justice Marrocco of the Divisional Court ruled, with Justice Swinton and Justice Sachs consenting, that the appeal was allowed and set aside the order of Justice Dunphy. The Primary Will was deemed valid and there were no costs ordered (as none were sought).

Allocation Clauses: Common Technique

The court acknowledged that Primary and Secondary Wills are a commonly used technique as confirmed by Justice Greer in Granovsky Estate v Ontario (1998) 156 D.L.R (4^th) 557. Additionally, Allocation Clauses are a common estate planning technique and the fact that they remain discretionary does not mean that the power is arbitrary. An estate trustee must act as a fiduciary.

Re Panda

Justice Marrocco agreed with Justice Penny’s reasons and conclusions in Re Panda. Kindly see above that decision.

A will is not a trust

Justice Marrocco stated that Justice Dunphy cited no authority for his decision that a will is a trust. He agreed with Justice Penny and stated that “a will may contain a trust, but this is not a requirement for a valid will” (para 35).

However, the plot thickens, as Justice Marrocco referenced section 2(1) of the Estates Administration Act which “vests all real and personal property of a person who has died in the deceased’s personal property” (para 39). Justice Marrocco points out that even if section 2(1) creates a trust, the trust is created by statute and not by the will and would not be subject to the “three certainties” test.

If the three certainties apply the subject-matter of the primary will is certain

Justice Marrocco covers all his bases by saying that even if he is wrong, and a will is a trust, and the three certainties are required, the Primary Wills subject-matter is still certain.

The definition concerning subject-matter of a trust is that it must have property that is clearly defined. Justice Marrocco states that the property in the Primary Wills is clearly identified due to the “objective basis to ascertain it; namely whether a grant of authority by a court…is required…for transfer…of the property. As a result, the Executors can allocate all of the deceased person’s property between the Primary and Secondary Wills on an objective basis” (para 49).

Simply put, the executors are instructed to ascertain if probate is required to transfer an asset, and categorize the asset based on the “objective criterion” (para 50). If the executors make a mistake allocating a property, this error does not disrupt the subject-matter of the trust.

As a result, Justice Marrocco ruled the subject-matter of the Primary Will is certain.

The scope of Probate Review

Justice Marrocco cited Justice Penny’s view: “Broader questions of interpretation and the validity of powers of appointment or other discretionary decision-making conferred on estate trustees are matters of construction and not necessary to the grant of probate.” His honour was inclined to agree with Justice Penny’s reasoning and stated that “Justice Dunphy exceeded his jurisdiction, such a conclusion is not necessary to decide this appeal” (para 53).

Some Clarity?

Finally, estate planners and litigators have some clarity with the use of Allocation Clauses! Allocation Clauses do not invalidate a will. A will is not trust – but even if it a trust – you don’t have to worry about the three certainties.

Our concern is whether this “will is not a trust, but even it is” conundrum may allow further holes to be poked during probate or will challenge applications. This is yet to be seen, but you can sleep well tonight knowing that Allocation Clauses are in the courts good books.

It is worth noting that this appeal was an effort of many parties and we would like to congratulate the Toronto Lawyers Association, Archie Rabinowitz, David Lobl, Brian Cohen, Ian Hull, Timothy Youdan and Stuart Clark!