New Rules for Estate Trustees

The administration of estates will become more onerous for Estate Trustees in Ontario commencing January 1, 2013. The Ontario Government amended the Estate Administration Tax Act (the Act) in 2011 to increase revenue from Estate Administration Tax (EAT) and discourage inaccurate and dishonest valuations of estate property. Estate Trustees will undoubtedly be subject to additional scrutiny than ever before and be subject to penalties for non-compliance.

Applicants for a Certificate of Appointment of Estate Trustee will need to produce to the Minister of Revenue prescribed information about the deceased for all Applications filed after January 1, 2013. This will be in addition to the information given to the Ontario Superior Court of Justice. Additional information will likely include a detailed inventory of estate assets and appropriate valuations and/or statements to support all values placed upon estate assets for the purposes of calculating the total value of an estate and thus the applicable EAT.

The Minister of Revenue will have unprecedented verification, audit and search powers under the Act. These powers will include the right to assess the value of an estate for EAT purposes any time within four years from the date of the filing for a Certificate of Appointment. Also, a failure to file the required information or any misrepresentation attributable to neglect, carelessness or willful default or any fraud in supplying any information regarding an estate will open the door for an assessment indefinitely after the four year period.

The possibility of a reassessment may well result in an Estate Trustee being personally liable for the additional EAT after the assets of an estate have been distributed. This is obviously quite concerning. We know too well the challenges faced by an Estate Trustee when trying to collect monies from beneficiaries, following the distribution of estate assets. We acted for an Estate Trustee in a case where a solicitor’s mistake resulted in an Estate Trustee distributing most all of the assets of an estate without regard for income taxes inherent in certain estate assets. The result was that the Estate Trustee did not have sufficient funds to pay income taxes out of the few remaining estate assets. The Canada Revenue Agency pursued the Estate Trustee personally for the estate’s income tax debt. In an effort to recover the funds, the Estate Trustee proceeded to obtain a Judgment against the beneficiaries. Nonetheless, the beneficiaries steadfastly refused to repay the mistakenly paid funds. On behalf of the Estate Trustee, we had to commence collection efforts, including efforts to sell the beneficiaries’ home to force a repayment. We also had to claim against the solicitor for negligence and we had to address the tax debt with the Canada Revenue Agency. This was no easy or inexpensive task. While we favourably resolved the issues for our client, the prospect of our client, an Estate Trustee, being liable for additional tax (which in that case was well over $100,000) after the estate had been distributed was an alarming, stressful and a very concerning reality for the Estate Trustee.

The Act also provides for appeal mechanisms that allow Estate Trustees to challenge the Minister’s valuations after an assessment has been conducted. However, someone will be required to fund the appeal, if the estate has already been distributed. Apart from the real possibility of an Estate Trustee being personally liable to pay the EAT, the appeal process will be costly, burdensome, and time-consuming.

Estate Trustees will also face additional record keeping obligations under the Act. Estate Trustees will be required to keep detailed records containing relevant and accurate information for the determination of EAT for all Applications after January 1, 2013. Also, the Minister may enter into any premises and examine the records of an Estate Trustee, for any purpose related to the administration of the Act or for enforcement purposes.

Additionally, Estate Trustees will be subject to penalties in order to ensure compliance with the Act. For example, where an Estate Trustee fails to make the required filing with the Minister or makes or assists in making a false or misleading statement in connection with the estate trustee’s filing, the Estate Trustee will be subject to a fine of at least $1000 or a maximum fine in the amount of two times the EAT already payable and/or imprisonment.

As a result of the Act, it will become essential for Estate Trustees or anyone who may find themselves in that capacity to understand these additional obligations. This will involve not only ensuring accurate statements are made regarding the value of estate assets, but that appropriate substantiating documentation is available for review. Proper accounting documentation should also be prepared and maintained, with supporting vouchers.

For those making Wills, you should take steps to properly plan your Estate. You may want to reasonably minimize estate tax and ensure your Estate Trustee(s) and loved ones are spared a complicated administration process. Possible planning techniques may include multiple wills, trusts, joint ownership, inter vivos gifts and beneficiary designations. However, caution is warranted. Consideration of the pitfalls of those mechanisms should also be reviewed, with a professional. At a minimum, we expect that multiple wills may become the norm to minimize the need for costly valuations, even for personal property.