On Dec. 22, Ontario’s minister of finance filed a regulation pursuant to authority given to him by the government in May 2011 when it amended the Estate Administration Tax Act. The regulation will require every person who applies for a certificate of appointment of estate trustee to file an information return with the minister with details of the deceased person’s assets whose values helped determine the amount of estate administration tax owing.
The tax amounts to $5 per $1,000 on the first $50,000 of estate value and $15 per $1,000 of estate value in excess of $50,000. There is no cap. As part of the court application process, an estate representative must swear the truth of two amounts: first, the aggregate value of the deceased’s real property (net of registered encumbrances); and second, the aggregate value of all of the deceased’s other property. Currently, there is no process allowing for a government review of the declared values to confirm that the correct amount has been paid. However, once the regulation took effect on Jan. 1, the minister of finance was in an effective position to exercise his authority to audit and verify those values and, in the event of a disagreement, assess the estate for additional tax based on the higher values he considers to be correct.
The new regime will thus operate in a manner similar to our self-assessing income tax system.
In theory, there is nothing objectionable about adding an audit and verification authority to a self-assessing system. But since audit and verification necessarily entail added government expense, we must ask why, after decades without such authority, the province chose to establish one. The only logical reason is its belief that there is substantial tax leakage attributable to estate asset values that are far too low due to the estate trustee’s dishonesty or a careless attitude in the valuation exercise.
This entire affair began with a decision by the former NDP government, strapped for cash, to triple the rates in 1992. Tracking the estate administration tax revenues for the 20-year period preceding the rate hike reveals that the average year-over-year increase was slightly less than 10 per cent. Had Ontarians ignored the rate hike, year-over-year increases in estate administration tax revenues would presumably have continued, resulting in $685 million for Ontario’s 2014 fiscal period. The actual revenues were $142 million. What accounts for this apparent shortfall? Surely, it cannot be that estate representatives have been consistently undervaluing or perhaps even excluding estate assets by more than 75 per cent of actual value?
It is far more likely that the oft-mentioned trillion-dollar transfer of wealth from parents to their children has begun to take place not by means of a will but by means of jointly held property. Where individuals A and B hold an asset as joint-with-right-of-survivorship, the death of A will see B acquire 100-per-cent ownership without the deceased’s former fractional interest passing through the estate and thereby reducing the estate administration tax payable. Such ownership of property between marital partners has been commonplace for generations. However, because it is possible to change property from sole to joint ownership at relatively little legal cost, there is every reason to believe that since 1992, single parents, faced with the tripling of rates, have begun using the same device to pass significant wealth to their children. (Making such property ownership changes without the benefit of competent legal advice can be dangerous because the transfers can create other costly legal problems and they can facilitate financial abuse of an aging and vulnerable parent. In addition, because the parent effects the changes without documenting actual intention, they can
create family feuds over the ownership of those properties after death.)
In a single year, there are approximately 20,000 court applications for a certificate of appointment of estate trustee. The Ministry of Finance has acknowledged that it does not have the resources to review every information return filed. Only the ministry knows how many of those returns it will select for audit and what the selection criteria will be. But there are several reasons why the additional tax collected with this new machinery in place will be minimal:
First, joint ownership will continue apace. Indeed, it may accelerate in order to minimize or avoid the obligation to complete and file the new information return and, perhaps, the risk of fines and imprisonment an estate representative faces for failing to do so, filing it beyond the prescribed deadline or making a misrepresentation.
As well, people with significant wealth have for many years been employing perfectly valid devices other than joint ownership to minimize estate exposure to the tax. They will continue to do so.
In addition, the ministry has said the estate trustee will not be personally liable for additional tax if it issues a notice of assessment after the estate assets have been distributed to the beneficiaries or next-of-kin entitled. Can we expect the ministry to pursue beneficiaries living outside Canada for additional tax? Even if it made sense to do so, the government would face a long-entrenched principle of private international law: the courts of one jurisdiction will not enforce another jurisdiction’s revenue laws.
In sum, a new regime is now in place that will cost millions of taxpayer dollars to administer; put many thousands of people every year to the trouble of filing information returns that no one will ever look at; and collect negligible additional revenues. Is this not the definition of bureaucracy?
Barry Corbin is a lawyer at Corbin Estates Law PC.
The tax amounts to $5 per $1,000 on the first $50,000 of estate value and $15 per $1,000 of estate value in excess of $50,000. There is no cap. As part of the court application process, an estate representative must swear the truth of two amounts: first, the aggregate value of the deceased’s real property (net of registered encumbrances); and second, the aggregate value of all of the deceased’s other property. Currently, there is no process allowing for a government review of the declared values to confirm that the correct amount has been paid. However, once the regulation took effect on Jan. 1, the minister of finance was in an effective position to exercise his authority to audit and verify those values and, in the event of a disagreement, assess the estate for additional tax based on the higher values he considers to be correct.
The new regime will thus operate in a manner similar to our self-assessing income tax system.
In theory, there is nothing objectionable about adding an audit and verification authority to a self-assessing system. But since audit and verification necessarily entail added government expense, we must ask why, after decades without such authority, the province chose to establish one. The only logical reason is its belief that there is substantial tax leakage attributable to estate asset values that are far too low due to the estate trustee’s dishonesty or a careless attitude in the valuation exercise.
This entire affair began with a decision by the former NDP government, strapped for cash, to triple the rates in 1992. Tracking the estate administration tax revenues for the 20-year period preceding the rate hike reveals that the average year-over-year increase was slightly less than 10 per cent. Had Ontarians ignored the rate hike, year-over-year increases in estate administration tax revenues would presumably have continued, resulting in $685 million for Ontario’s 2014 fiscal period. The actual revenues were $142 million. What accounts for this apparent shortfall? Surely, it cannot be that estate representatives have been consistently undervaluing or perhaps even excluding estate assets by more than 75 per cent of actual value?
It is far more likely that the oft-mentioned trillion-dollar transfer of wealth from parents to their children has begun to take place not by means of a will but by means of jointly held property. Where individuals A and B hold an asset as joint-with-right-of-survivorship, the death of A will see B acquire 100-per-cent ownership without the deceased’s former fractional interest passing through the estate and thereby reducing the estate administration tax payable. Such ownership of property between marital partners has been commonplace for generations. However, because it is possible to change property from sole to joint ownership at relatively little legal cost, there is every reason to believe that since 1992, single parents, faced with the tripling of rates, have begun using the same device to pass significant wealth to their children. (Making such property ownership changes without the benefit of competent legal advice can be dangerous because the transfers can create other costly legal problems and they can facilitate financial abuse of an aging and vulnerable parent. In addition, because the parent effects the changes without documenting actual intention, they can
create family feuds over the ownership of those properties after death.)
In a single year, there are approximately 20,000 court applications for a certificate of appointment of estate trustee. The Ministry of Finance has acknowledged that it does not have the resources to review every information return filed. Only the ministry knows how many of those returns it will select for audit and what the selection criteria will be. But there are several reasons why the additional tax collected with this new machinery in place will be minimal:
First, joint ownership will continue apace. Indeed, it may accelerate in order to minimize or avoid the obligation to complete and file the new information return and, perhaps, the risk of fines and imprisonment an estate representative faces for failing to do so, filing it beyond the prescribed deadline or making a misrepresentation.
As well, people with significant wealth have for many years been employing perfectly valid devices other than joint ownership to minimize estate exposure to the tax. They will continue to do so.
In addition, the ministry has said the estate trustee will not be personally liable for additional tax if it issues a notice of assessment after the estate assets have been distributed to the beneficiaries or next-of-kin entitled. Can we expect the ministry to pursue beneficiaries living outside Canada for additional tax? Even if it made sense to do so, the government would face a long-entrenched principle of private international law: the courts of one jurisdiction will not enforce another jurisdiction’s revenue laws.
In sum, a new regime is now in place that will cost millions of taxpayer dollars to administer; put many thousands of people every year to the trouble of filing information returns that no one will ever look at; and collect negligible additional revenues. Is this not the definition of bureaucracy?
Barry Corbin is a lawyer at Corbin Estates Law PC.
