How to Avoid Probate in Ontario

How to Avoid Probate in Ontario

What Is Probate?

In Canada, every Province and Territory has its own unique set of rules and regulations regarding probate. The following information is intended for residents of Ontario only.

When someone dies, everything that they own — real estate, bank accounts, investments, and any other assets — is called their estate. In Ontario, an Estate Trustee (often called the Executor) is the only person with the legal authority to manage or distribute an estate.

Probate is the legal process through which the Estate Trustee disburses the assets of this estate and the Ministry of Finance confirms that all outstanding taxes and debts have been paid. It is important to note that both federal and provincial taxes take precedence and that all debts are required to be settled before any beneficiaries of the estate receive funds or assets.

For any estate with assets more than $50,000, there is an additional tax called the Estate Administration Tax (EAT).

Regardless of the size of the estate, the Estate Trustee is legally obligated to file an Estate Information Return (form 9955E) with the Ministry of Finance, and remit the owed Estate Administration Tax, within 90 days of their appointment as Estate Trustee.

Probate is a matter of “public record” and is completely accessible to the general public, upon request. If you do not wish to have your financial records available to the public upon your death, you will need to take the necessary steps to avoid probate before you pass away and are still healthy enough to do it.

How long does Probate take in Ontario?

Currently the average probated estate takes approximately one year to settle. The length of time has been growing over the years, primarily due to backlogs in the court system. Any complications at all can dramatically extend the time required. Poorly planned estates, even if not complicated, can take several years to settle.

Is Probate required in Ontario?

Although it is possible to arrange an estate to completely avoid probate, the majority of estates in Ontario will require this process. The requirement to probate an estate can be waived, avoided, or at least greatly reduced, with the utilization of specialized pre-death planning specifically designed to accomplish this.

How to minimize or avoid Probate fees and Estate Administration Tax (EAT)

It is possible to completely avoid probate on most estates, but currently very few estates have done the necessary pre-planning to accomplish this. Typically, this is a moderately complicated process that would require using the services of an experienced Financial Planner who specializes in Estate Planning.

Essentially the process involves determining which assets are subject to probate and, where it is reasonable to do so, transfer these assets into an asset class that is not subject to probate. This process may be fairly simple, but it could take several years, or possibly considerably more, to complete. Depending on the size and complexity of the estate, there may or may not be a fee associated with this planning process.

Accountants and lawyers are usually utilized in the probate stage itself, and not the pre-planning stage. They do not generally have the skill set or tools at their disposal to arrange to bypass or avoid the need for probate and, for most people, would be considered part of the probate fees to the estate.

Estate Administration Tax (EAT)

This is generically referred to as a “Probate Fee” and is one of many fees associated with probating an estate. As all government tax systems are inclined to do, this does change from time to time.

As of January 1, 2020, the Estate Administration Tax is still eliminated for taxable estates with assets of $50,000 or less and reduced by $250 for larger taxable estates. The current tax rate is 1.5%. At that rate, including the $250 reduction, for an estate value of $1,000,000 the Estate Administration Tax payable is $14,250.

This does not include income tax owing or fees charged by accountants, lawyers, courts, or the Estate Trustee.

Additional fees

The Estate Trustee has a legal right to be compensated for their work, even if the will does not stipulate a payment. In Ontario, the fee formula is approximately 5% of the value of the estate. While the Estate Trustee certainly has the right to decline compensation, it can be a lengthy and complicated process, and you may feel that compensation is appropriate. The Estate Trustee is also personally liable for any mistakes in the distribution of the estate, regardless of how long it takes to discover the mistake. These mistakes can include fees, penalties, fines, interest, and, in extreme circumstances, jail time. Estate Trustee insurance (also called Executor Liability Insurance) is available to protect the Estate Trustee and may be worth considering in some cases.

Lawyers and accountants are far less likely to decline being compensated for their portion of the work, and their combined bills can easily approach, or exceed, 5% of the estate value.

There are usually court costs associated with probating an estate.

Are there Probate fees in Ontario on a principal residence?

For a rollover from a deceased person to their legal spouse, with a clear and valid Last Will & Testament, probate, and the fees involved with it, are usually not required. To transfer real estate from a deceased person to anyone else will almost certainly require probate.

Listing a joint owner on real estate as “Joint Tenancy with a Right of Survivorship” can possibly expedite the process but has the likelihood of creating other tax consequences that may well exceed any potential savings of bypassing probate.

What assets are not subject to Probate in Ontario?

Most assets are subject to probate in Ontario and the associated Estate Administration Tax unless they are passing from a deceased person to their legal spouse.

Life insurance policies and specific types of investments that have a designated beneficiary (not the “Estate”) would ordinarily be exempt from probate.

Registered investments (RRSPs, TFSAs, RRIFs, LIFs, etc.) have the option to designate a beneficiary and, provided that this is done correctly, would bypass probate and be transferred to the beneficiary in a matter of weeks.

Most non-registered investments (GICs, mutual funds, stocks, bonds, options, etc.) and bank accounts do not have the ability to designate a beneficiary and are therefore subject to probate and Estate Administration Tax. However, some investment companies have access to a specific class of non-registered investments that do have this ability and would be exempt from probate and Estate Administration Tax. Banks do not generally offer this type of non-registered investment.

Bank accounts are subject to probate and Estate Administration Tax unless jointly owned by a surviving spouse.

Joint ownership of bank accounts

When bank accounts — or other non-registered “liquid” investments — are jointly owned by two spouses, upon the death of one spouse they will ordinarily transfer to the surviving spouse without going into probate or incurring any Estate Administration Tax obligations.

This exemption from probate and Estate Administration Tax only applies between legal spouses.

Bank accounts and most non-registered investments that are jointly held by two people that are not legal spouses are always subject to Estate Administration Tax and are usually subject to probate. There is no legal way to avoid the Estate Administration Tax if the jointly held bank account is not moving from one spouse to another, in these cases.

True ownership of bank accounts

In the event of an audit, the Ministry of Finance uses a number of methods to determine true ownership of funds, including determining who originally contributed the funds, who is paying income tax on the gains, and who is actually using or benefiting from the funds.

It is not generally recommended, in the legal community, to list someone other than your spouse as a joint owner of a bank account or an investment account, especially when there are better options available. There are a number of inherent dangers in joint ownership, including the fact that the “joint owner” has full, legal, unrestricted access to the funds, and the account would be at risk to the joint owner’s creditors or a potential divorce settlement.

If it is desirable for an adult child, or other trusted person, to have access to a bank account or investment account, whether it is for pure convenience or due to mental incapacity, it is strongly recommended that this be done through use of a Power of Attorney document for financial matters and property. This will add clarity to the situation while decreasing the estate’s exposure to litigation or likelihood of an audit.

If you can keep the bank account balance under $50,000 and use non-registered investments that are inherently exempt from probate, then you can avoid Estate Administration Tax obligations.

Bank accounts or investment accounts jointly owned by people who are not legal spouses are often referred to by lawyers as “litigation goldmines” because they create situations that are highly contestable by other family members and are unlikely to hold up in court — or an audit by the Ministry of Finance. The lawyers will ultimately be the only winners in such a scenario.

The Ontario Ministry of Finance has full investigative powers and can perform a full audit of anyone they choose to ensure that all of their rules have been followed and the correct amount of taxes have been remitted. The onus to prove that the facts are indeed what was stated is on the Estate Trustee, who will be held personally liable in the event of a mistake or misstatement.

The Canada Revenue Agency (CRA) has also recently taken an interest in such matters with their Related Party Audit Program (RPAP). Through the RPAP, the CRA conducts extensive auditing of an entire group, as opposed to just one individual. In the case of an estate settlement, every person mentioned in the Will, or otherwise listed as a beneficiary, would be audited. These audits are conducted by teams of forensic auditors, not just a single auditor, and is a very intrusive and expensive process for all concerned.

A well-designed Estate Plan, in conjunction with an RTO plan, will reduce your tax obligations throughout the rest of your life — and beyond — keeping more available for you to utilize during your lifetime and reducing the estate’s losses to taxes and fees upon your death.

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For a no-cost preliminary consultation to determine what would be involved with reducing or eliminating your estate’s exposure to probate, the Estate Administration Tax, and other probate fees, contact me. I specialize in Estate Planning and Retirement Planning and offer financial planning services across Ontario. My office is in Kingston, Ontario, and I am happy to speak with anyone on the phone, or meet in person with anyone in the surrounding area.

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