This Blog was written by Suzanna Walter, Estate and Trust Consultant with Scotia Wealth Management
There have been many articles written about the dramatic increase in real estate values in Canada. This real estate boom has implications for executors’ administering estates.
Maureen Berry in her article Non-Resident Beneficiaries and Canadian Real Property: Canada’s Hot housing market can increase the work of estate executors reviewed one such implication for Executors who are distributing assets to a non resident beneficiary. The current boom in the Canadian housing market has resulted in more estates needing a section 116 clearance certificate because of the increased value of the estate’s real property in relation to the total residual value of the estate. The Executor with a non- resident beneficiary should be sure to review with their advisors whether a section 116 clearance certificate is required.
There are many tasks and responsibilities for the Executor of an estate which holds real estate. I want to highlight one of these tasks; namely the importance of valuing the real estate and being able to justify the values used in the administration of the estate. This task of the Executor is arguably even more difficult with values of real property increasing quickly and many sales being completed well over the listing price.
Executors should keep in mind that they may be challenged on their valuation of real properties by not only various taxing authorities (both provincial and federal) but also by residual beneficiaries. Executors will want to be able to have documentation on how the Executors determined the value. This documentation can include formal paid appraisals, as well as opinion of values from licensed realtors with recent sales of similar properties. The Executors must decide how to determine the value and how much documentation is prudent. It is fair to say that if the Executors obtain widely different values for a real property, it may be prudent to obtain more valuations, as well as considering whether to review with the residual beneficiaries, the way the Executors determined the value of properties prior to selling or distributing any properties.
In addition, it is not just one value which is important. The value must be determined at different times. If the Will is being probated in Ontario, the Executors will need to provide the date of death when they file the Estate Information Return and it is used in calculating the provincial estate administration tax ( more commonly know as “Probate Fees”) . The date of death value is also an important value for calculating the amount of any increase in value or capital gain from the date of death value until the sale of the property.
Valuations are also important when the Executor is preparing the property for sale or if the Executors are making distributions in kind to any beneficiary. If the property is to be sold, the Executors will need to consider whether any repairs or decorating should be done to improve the sale price or whether it is better to sell “as is” and not expend estate assets on the property. How should the property be marketed and sold? If the property is sold privately, or by auction if the Executor is against using MLS with a realtor, are the Executors confident they can justify that the property was sold for the fair market value?
Timing of the sale of the property can also be problematic for Executors and they can be questioned by the beneficiaries because they delayed in selling the property or because they sold too quickly.
After the Executors have sold the property, they may think they can relax a little. However, they should keep in mind that the increase in the value of the property between the date of death and the sale may result in a taxable capital gain.
In the past, this capital gain was not usually an issue, as property values did not fluctuate greatly between date of death value and the sale price. In addition, any increase in the sale price was likely to be relatively small and not result in a taxable capital gain due to the expenses associated with the sale, such as real estate commission and legal fees.
However, in this unusual time, values of property have dramatically increased in a short time. Many executors make the mistake in thinking that the gain between date of death value and when it is sold, is not subject to any tax on the capital gain because the property was a Principal Residence of the deceased. However, the Principal Residence Exemption (PRE) protected the deceased from any taxable capital gain on the increase in the value of the property during his or her lifetime and does not apply to the increase in value after death. In other words, the PRE dies with the deceased and except for limited circumstances, the PRE is not available for the Estate.
For more discussion on the PRE and the availability for a Trust, Tamar Silverbrook reviewed this in her May 21st , 2021 article A Review of the Principal Residence Exemption by a Trust