Little-known strategy could maximize estate value

First dealings exemption could minimize probate fees

Probate is the often-dreaded process where an estate trustee receives a Certificate of Appointment of Estate Trustee, which confirms their authority to administer the estate. While not mandatory, if there is a will, third-party institutions such as banks or the land registry office, when dealing with real property, typically require that probate be obtained in order to deal with the assets of the estate.

In Ontario, part of the probate process includes payment of Estate Administration Tax (EAT) (commonly referred to as probate fees), which is levied on the fair market value of the assets of the estate. In Ontario, the current rate of EAT is 1.5% on the value of assets as at date of death over $50,000, or $15,000 per $1,000,000 of assets.

For the average Ontario resident, real estate often forms a significant amount of the value of an estate, and the more your real estate is worth, the more EAT will be payable by your estate. By minimizing the amount of EAT payable on your death, you consequently maximize your beneficiaries’ inheritance.

First dealings exemption

The first dealings exemption, if applicable, is one way that you may be able to minimize the amount of EAT payable by your estate.

What is the first dealings exemption? The first dealings exemption applies to certain properties that were registered under the Registry Act and subsequently converted to the Land Titles system (i.e., Land Titles Conversion Qualified (LTCQ)). Upon conversion, a property owner (or their legal representative, such as an executor) is entitled to one final substantive title registration under the old Registry Act rules, which do not require probate to deal with real property.

Benefit of the first dealings exemption. The first dealings exemption allows your estate to avoid the legal costs and taxes involved with the probate process, if your estate plan is structured accordingly.

Estate-planning considerations

Importantly, even if a property qualifies for the first dealings exemption, if the deceased left only one will and probate is necessary to manage other estate assets, then all assets of the estate inclusive of the first dealings exempt property must be declared for the purposes of probate, and EAT must be paid on all of those assets.

As part of your estate planning, legal title for real property should be reviewed to (1) verify how title is held and (2) to determine if the first dealings exemption is applicable to any property. By identifying the status of real property, early consideration can then be made of whether a secondary will is needed to carve out real property that is eligible for the first dealings exemption. EAT is not paid on the value of assets governed by the secondary will as the secondary will specifically deals with assets that do not require a probated will to administer, and it is therefore not probated.

Key points about first dealings exemption

The first dealings exemption, if applicable, can maximize the value of an estate by avoiding EAT on real estate to which it applies. Although only available to select properties, the advantage of the exemption, as well as other benefits, makes review of title to your real property a worthwhile and important step in your estate planning.

Nicholas André is an Associate Lawyer at O’Sullivan Estate Lawyers. His practice focuses on estate planning, estate administration, and advising executors, trustees, beneficiaries, and attorneys for property and for personal care, as well as matters directly related to these areas of the law. This article originally appeared in the O’Sullivan Estate Lawyers blog. Used with permission.

Notes and Disclaimer

This article is the opinion of the writer and is meant to be general in nature, limited to the law of Ontario, Canada. It is not intended to provide specific personalized advice on any individual situation, including, without limitation, investment, financial, legal, accounting or tax advice. Before taking any action involving your individual situation, you should seek legal advice to ensure it is appropriate to your particular circumstances.

Image: iStock.com/Valerii Evlakhov