An estate planner’s clients typically express a desire to minimize taxes payable on death, including Estate Administration Tax (“probate fees”), which are payable on the value of the assets governed by a Will which is probated. For many clients, their home is their asset of most significant value. With the average price of homes in Ontario as of March 2018 at $576,950, which would give rise to probate fees of $8,170.00, and the average home price in the GTA as of April 2018 at $804,584, which would give rise to probate fees of $11,590.00, the desire to minimize probate fees is understandable.*
A quick refresher on how personally-held real property in Ontario may be dealt with after death:
- Real property owned as joint tenants passes automatically to the surviving owner(s), and does not require a Certificate of Appointment of Estate Trustee (“probate”) to be dealt with;
- Real property remaining in Registry System does not require probate to be dealt with;
- Real property which was transferred to the Land Titles System, is marked “Conversion Qualified”, and for which there have been no subsequent “dealings” (a dealing, for example, includes a subsequent transfer, including a transfer to a spouse) does not require probate to be dealt with (the “first-dealings exemption”);
- Real property where legal title is held by a corporate nominee does not require probate to be dealt with; and
- All other real property held personally will require probate to be dealt with.
I wanted to highlight two key issues that estate practitioners should turn their minds to when it comes to real property and probate fees:
- Where property otherwise does not require probate to be dealt with because it is in the Registry System, it is subject to the first-dealings exemption, or legal title is held by a corporate nominee, if the testator only has one Will, and if there are other assets in the estate which require probate to be dealt with, probate fees will still be payable on the value of the real property. As a result, where one of these exemptions may apply, estate practitioners should consider the use of dual Wills (i.e. one Will which governs the assets subject to probate, and one Will which governs those assets which are not subject to probate, including the real property) to ensure probate fees are not payable on the real property.
- Often, if real property is held in one spouse’s name (Spouse 1), the intention is for the second spouse (Spouse 2) to receive the real property on Spouse 1’s death. It may make sense, then, to put the real property into joint tenancy, to avoid paying probate fees on Spouse 1’s death, and again on Spouse 2’s death. However, before transferring the property, it is worth checking title to the real property to see if it qualifies for the first-dealings exemption, as a transfer to a spouse voids the first-dealings exemption.
Consider the following example: Two spouses have been married for years. In the 1980s, they bought a home. At the time, Spouse 2 had a business, so they put the home in Spouse 1’s name for creditor protection. Now that the Spouses are older, Spouse 2 no longer owns the business. The Spouses are thinking about estate planning, and, as part of a larger plan, how to best minimize probate fees. Unaware that the property qualifies for the first-dealings exemption, Spouse 1 decides to put the home in joint tenancy with Spouse 2 – largely to minimize probate fees, but also to reflect what the parties feel is the “real” ownership of the property. Assume for the purposes of this example that both Spouses have dual Wills which would effectively govern a real property which does not require probate to be dealt with.
After the transfer, if Spouse 1 dies first, Spouse 2 will receive the property by right of survivorship, and no probate fees will be payable. Probate fees will then be payable on the death of Spouse 2. Had Spouse 1 known about the first-dealings exemption, and had not transferred the property into joint tenancy with Spouse 2, the result would be the same: probate fees would not be payable on the real property on the death of Spouse 1, by virtue of the first-dealings exemption, but would be payable on the death of Spouse 2.
However, there is no guarantee of which Spouse will pass away first. If, after the transfer of the real property into joint tenancy, Spouse 2 dies first, there will be no probate fees payable on the real property on Spouse 2’s death, as it will pass to Spouse 1 by right of survivorship. However, once Spouse 1 dies, there will be probate fees payable on the real property, as it no longer qualifies for the first-dealings exemption. In this scenario, had the real property not been transferred, there would be no probate fees payable on the real property on either death: as Spouse 2 did not own the property, no probate fees would have been payable on Spouse 2’s death, and on the subsequent death of Spouse 1, the property would have been eligible for the first-dealings exemption.
I’ve recently encountered this very situation in a few of my files. A well-meaning advisor recommended this very sort of transfer, and the gamble did not pay off: probate fees were payable on the death of Spouse 1, where they otherwise would not have been. Of course, there may be other reasons to put Spouse 2 on title (for example, it may be a condition of a marriage contract, or to “lock-in” a spouse’s right to receive the home) but it’s important to consider the possibility of the first-dealings exemption before making this change for probate-minimization purposes.
* An important note: a mortgage registered on title to a property that is subject to probate may be deducted from the value of assets used to calculate the probate fees.