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January 2023 - Legal Update - First Dealings Exemption

January 2023 - Legal Update - First Dealings Exemption

Suppose you have inherited a house worth one million dollars in fair market value. You might be concerned about what taxes are involved. This article will cover the possible estate tax outcomes, including a review of the situations where no estate tax is payable by you!
 
First, it is common for spouses to own a property by joint tenancy. If you owned the property with the deceased in this manner, then you likely own the property outright and must simply register a survivorship application with the Land Registry Office. Assuming there are no other taxable assets, there will be no estate tax payable by the estate.
 
For most properties where the beneficiary is not on title as a joint tenant, you will likely need to make an application for a certificate from the court in order to transfer the home to yourself or sell it to a third party. This document is formally known as the “Certificate of Appointment of Estate Trustee”, but commonly referred to as “Probate”, as this was the formal title decades ago. Obtaining this Certificate is required in most instances, whether or not the deceased had a will. There is a long waiting time to obtain this document, and it means Estate Administration Tax (“EAT”) is payable. EAT is set out under the Estate Administration Tax Act as “$15 for each $1,000 or part thereof by which the value of the estate exceeds $50,000.” If the million-dollar home is the only asset of the estate, the tax payable on it would be $14,250.00. This tax is payable out of pocket at the beginning of the application for probate, and if the value of the home declines between time of death and time of sale, the tax liability remains the same.
 
If the house is the only major asset to the estate, sometimes the estate can avoid the delay and cost of an estate certificate by relying on the First Dealings Exemption (the “Exemption”). The Exemption is available on three conditions. First, the property must be in Registry System or Land Titles Conversion Qualified (“LTCQ”). More on this point below. Second, if it's in LTCQ, there must not have been any previous “dealings”, meaning the estate transfer is the first such transfer of ownership involving the deceased. Last, the executor must be in possession of a valid will to bypass the need for an estate certificate. If all three conditions are satisfied, then an executor may immediately sell or transfer the home without paying any tax or waiting on probate. There are unfortunately many nuances to this Exemption. It is important to receive a legal review of title in order to determine if the Exemption applies.
 
To understand why the Exemption exists, it is important to note that between the 1980s and 2005, properties in Ontario were converted from the Land Registry System to the Land Titles System by the government. The government classified property that was automatically converted as Land Titles Conversion Qualified to show that the rights in land under the Registry Act still existed. Because probate is not required to sell land under the Registry Act, if the owner of the property was on title to the home at the time of conversion, and remained on title when they passed, their beneficiaries could avoid both taxation and delay in receiving their inheritance provided a valid will was prepared.
 
There are other challenges that complicate the Exemption. If any other assets of an estate require probate, it is presently debated in the legal community whether the house to which the First Dealings Exemption applies would still need to be included in the estate value calculation for EAT purposes. This means unfortunately that while the home could be sold without probate, the estate tax would still be payable on it. Luckily, a proper estate plan will minimize assets that might require an estate certificate. Sometimes, this might involve the drafting of a Dual Will, which is one strategy to ensure that business assets that don’t strictly need probate to avoid EAT, possibly removing the need for probate altogether. A review of your estate plan is always best to ensure taxation and complexity is minimized on your passing.
 
If you have inherited property or want to minimize the stress and liability of your beneficiaries upon their inheritance, be sure to reach out to Liddiard Law today for a free estate consultation.
 
Benjamin James Pinfold, BA JD CEA
    Liddiard Law Professional Corporation