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Focus: Estate tax rules up in the air

Lawyers concerned as province vows to implement changes
|Written By Judy van Rhijn

Just over a year ago, there was great concern over the impending introduction of the new estate administration regime that would place collection and enforcement of the estate administration tax under the umbrella of the Ministry of Finance. However, the implementation date of Jan. 1, 2013, came and went and a year has passed without the new system coming into effect. Estate planners and administrators have been hoping the government is reconsidering the changes.

The changes create uncertainty for estate trustees as to how to do the job, says Lori Duffy.

“Dumb and dangerous” is Barry Corbin’s assessment of the new regime that would see the might of the federal tax office applied to executors and estate administrators. Corbin practises tax and estate planning at Corbin Estates Law PC. “Maybe they are having second thoughts about the whole regime. They should abandon this before it makes a mess.”

Corbin recalls a meeting between ministry officials and the Ontario Bar Association’s trust and estates section just prior to the proposed implementation date. “We gave them a constructive earful. Almost immediately, they announced they wouldn’t be implementing it on Jan. 1. Since then, they’ve been working on the revised regulations.” The OBA heard in early December that the revisions were complete.

“We are in nowhere land,” says Lori Duffy of WeirFoulds LLP. “The old system is all that we have. We don’t even know if collections have moved over to the Ministry of Finance.”

Daniel Barichello, a partner in the estate and business succession group at Keyser Mason Ball LLP, is frank in his opinion that the status quo should continue.

“The current application process is relatively straightforward and much easier to administer. The proposed system threw out a shock wave of concern. The bar has raised lots of questions and the government is very silent. In the meantime, we carry on as usual.”

Corbin is of the view that the changes won’t deliver the payoff the government is hoping for. He has been tracking estate administration tax revenues ever since former premier Bob Rae’s government tripled the rates in 1992. “I expected they would do badly, and this has been borne out. They woke the sleeping giant of estate administration tax avoidance.”

He notes that in 1992, probate tax revenues were $30 million with a historical increase of slightly under 10 per cent a year. “There was an immediate spike in 1993 with revenues growing to more than $51 million, but about five years ago they reached a crossover point where total revenues began to fall short of where they would have been without the rate hike.”

In the 2013 financial year, the revenues were around $128 million. “If the NDP hadn’t done anything, the actual revenues would have been over $208 million dollars by now. The government really shot itself in the foot.”

Now he sees that the current government is unhappy with the revenue stream and is looking to increase it again. “They must think the revenues are anemic because of a fraudulent or casual approach to getting valuations. They think executors are not being accurate, whether deliberately or inadvertently. The truth is that people are using legitimate means to avoid the tax, like joint ownership with their spouse or kids or the use of alter ego trusts.” Corbin predicts that under the new regime, the revenue stream will be no better and will probably be worse.

There’s also an expectation that administration costs will be significantly higher. “Every application will generate a prescribed form to be given to the minister,” says Corbin.

“Approximately 22,000 applications for certificates will make 22,000 new files a year and every year, the number of deaths goes up. It will cost them $4 or $5 million annually to pay all the tax auditors and support staff, not to mention all the instances when we disagree with a valuation. Then there will be valuators and lawyers. It’s the parking meter question: Do you collect enough revenue to cover the costs to run it?”

The Ministry of Finance is moving forward with increased disclosure of information by estates, according to spokesman Scott Blodgett. “We will ensure there is balance between sufficient disclosure of financial information while not making it enormously complicated or burdensome.”

Barichello is skeptical. “The government wants to use its revenue arm to audit and enforce the tax. Just in the same way you file your HST, they want to apply that muscle to the [estate administration tax]. They are placing a very onerous procedure on the whole evaluation point.”

He calls it a “nitpicky” approach. “Depending on the regulations, it seems to require that all assets of an estate be evaluated, even down to the level of household contents. Typically, I’ve found that these things have a nominal value. Unless they have Picassos or Rembrandts, people generally don’t appreciate how little personal stuff is worth.”

Of great concern to the bar is that estates can be subject to audit and reassessment up to four years from the date the tax becomes payable. “The typical estate administration might wind up in a year,” says Barichello.

“You do the final tax return, apply for a clearance certificate, distribute the estate, and you’re finished. The question is: What is the executor to do? Not distribute for four years? What happens if after three years they say you should have paid more? You’re still responsible.”

Duffy’s greatest concern is that executors and estate trustees won’t know how to do the job nor will they know whether they’ve completed it. “Estate trustees need to have a clearance certificate. At some point, they need to be able to walk away knowing that they will not be pursued for taxes.” She wonders who will want to be an estate trustee when there’s an impending liability. “You don’t have it for income tax. Why should you have it for this?”

Corbin also believes executors need closure well before four years. “It’s a long time. Unlike the Income Tax Act, where there is an obligation to assess with all due dispatch, there’s no obligation to issue a certificate at all or even tell them if they are clear. What does no news mean?”

It’s also debatable whether there’s personal liability on the head of the executor if any error occurs with the probate filing. “It’s not like an HST audit where everything is in electronic bookkeeping and you can see if you put something in the wrong column,” says Barichello. “In an estate, what’s the sofa worth if you gave it away? Very little is known about how this will work.”

Corbin worries about what will happen if the executor has already distributed the estate by the time a dispute is resolved. “It’s reasonable to say they should have looked after the creditors first and the beneficiaries second. It’s a general principle of common law, and the government is a creditor. The statute says there is no personal liability because the tax is paid in a representative capacity, but the fines and penalties aren’t paid in a representative capacity, and good luck trying to recover them from the beneficiaries. They can say that it’s not an expense reasonably incurred by the estate if it was caused by false filing or failure of proper diligence. The executor will have to eat it.”

The new scheme also comes with penalties. “You can be jailed or fined for twice the amount of the [tax],” says Corbin.

“If a family member is to be the executor, why would you want to expose them to the risk of fines and incarceration? This kind of approach will give people all the more reason to get away from the whole probate exercise.”

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