Tax on Your Principal Residence at Death: Why You Might Still Have Some Tax to Pay

In Ontario, many individuals are aware of the principal residence exemption (“PRE”), which exempts homeowners from capital gains tax on the sale of their principal residence. However, even if you qualify for the PRE and do not owe any capital gains tax on the sale of your home, your estate may still face unexpected taxes upon your death. This tax, known as Estate Administration Tax (“EAT”), or commonly referred to as probate tax, can be a significant burden for families or loved ones dealing with the complexities of administering your estate.

Understanding Estate Administration Tax

EAT is a provincial tax levied on the value of an estate at the time of death. It is simply calculated as a percentage of the estate’s total value, with the current rate being 1.5% on the value above $50,000. For example, if your estate, which includes your principal residence, is worth $1 million, the probate tax bill would amount to $14,250.

While the PRE may shield your home from capital gains tax, it does not protect your home or estate from the EAT. The EAT is uniquely based on the gross value of your estate, which includes all your assets, not just your home (although mortgages are generally deducted from the calculation).

How Estate Administration Tax Applies

When you pass away, the executor of your estate will be required to report the value of all your assets to the Ontario government when applying to the Court for a Certificate of Appointment of Estate Trustee (“CAET”). Accordingly, if the property you own falls into your estate (subject to any estate planning, discussed below), its value will need to be included in the calculation of your estate’s total value for EAT purposes.

Strategies to Reduce or Avoid Estate Administration Tax

As a result of how EAT is calculated, taking certain steps to address EAT concerns now can help minimize or eliminate any EAT that may apply on your estate. Generally, there is no requirement that estate trustees apply for a CAET, but rather, this is usually by necessity due to third parties requiring such certificate in order for the estate trustee to deal with the estate’s assets. For this reason, it is important to consult with your estate and tax advisors on EAT and how it applies to your assets.

Where practical, the following list includes some of the common strategies that can help mitigate EAT on your principal residence (and your assets more generally), some of which can be combined for maximum effect:

1. Dual or Multiple Wills: In Ontario, multiple wills (or dual wills) can be a useful tool for reducing EAT. If a CAET is required, having more than one carefully drafted Will can aid your executors in only including certain assets (i.e., the ones requiring probate) in the application for a CAET. Assets commonly requiring probate like personally held real estate or non-registered bank accounts, can be included in one Will, while assets like privately held shares or certain personal property (such as household contents, collectibles, or art) that do not typically require probate, can be handled in a second Will. If the assets in the second Will do not need to go through probate, they will not be subject to estate administration tax. In addition, some properties in Ontario (including a principal residence) may be exempt from EAT if certain circumstances are met, however, taking advantage of such exemption is often dependent on the deceased having made multiple wills.
2. Use of Trusts: Trusts are often used as an estate planning tool for various reasons, including for income tax and probate tax planning reasons. Trusts can either be established during your life (i.e., inter vivos), or through your Will (i.e., testamentary). Assets placed in inter vivos trusts generally do not form part of your estate for the purposes of EAT, and therefore, no EAT would apply on property held by such trusts. Including any trusts in your estate planning requires careful consideration and advice to ensure the desired result is achieved.
3. Joint Ownership: Another strategy to mitigate EAT involves holding property (including a principal residence) jointly with another person, such as a spouse or adult child. This can allow the surviving joint owner to automatically inherit the property, potentially avoiding probate altogether for that asset. However, this approach requires careful consideration and advice, as joint ownership (especially for any real estate) can have its own tax and legal consequences.
4. Corporate Ownership: When combined with multiple wills (discussed above), moving assets (or the legal title of assets) into a private corporation can further minimize the part of your estate on which EAT applies. Since the asset is held in a private corporation, transferring it out of your estate no longer requires a CAET. However, it is important to consider corporate law and tax implications of these transfers to ensure they are completed without triggering any tax. In the case of your principal residence or other real estate, land transfer tax implications on any transfers need to be carefully considered.

Review Your Estate Plan to Avoid Unexpected Costs

While the above strategies may help reduce the impact of EAT, estate planning is not a one-size-fits-all solution. Each individual’s situation is unique, and there are many nuances to consider, from asset protection to tax efficiency.

A thorough review of your estate plan can help you identify strategies to minimize taxes, protect your assets, reduce unnecessary costs and ensure your wishes are carried out effectively.

If you are unsure whether your current estate plan will be sufficient to avoid unnecessary tax burdens, or if you simply want to review your Will and estate plan to ensure it aligns with your goals, please contact Adam Solomon at [email protected] or any other member of our Wills & Estates practice group.

This update is intended as a summary only and should not be regarded or relied upon as advice to any specific client or regarding any specific situation.

If you would like further information regarding the issues discussed in this update or if you wish to discuss any aspect of this commentary, please feel free to contact us.