Ontario’s estate audit rules keep executors honest

This article appears in the February 2022 issue of Advisor’s Edge magazine. Subscribe to the print edition, read the digital edition or read the articles online.

The Ontario government has broad auditing powers and can impose onerous penalties on executors if an estate’s value has been under-reported for probate tax purposes, even if those powers are seldom used.

Audits “can be very costly and delay the administration of an estate,” even if no additional probate tax is ultimately assessed, said Keith Masterman, vice-president of tax, retirement and estate planning with CI Investments Inc. in Toronto.

Ontario introduced the estate information return (EIR) in 2015 over concerns that some executors, known as estate trustees in the province, could be underestimating the value of estates in order to pay less probate tax. Ontario charges a 1.5% probate tax, properly known as estate administration tax, on the value of an estate above $50,000.

Before 2015, executors could provide the government with an amount they had calculated as the estate’s value when applying for probate without proof.

In contrast, the EIR requires an executor to provide the fair market value of each category of estate asset as of the deceased’s date of death, as well as other information. For example, for bank or investment accounts, the executor must provide account numbers, branch information and the name and contact details of financial advisors. For real estate, the executor must provide the property’s assessment roll number, the property identifier number and the address.

“[The EIR] really puts the estate trustee to the test in terms of justifying the numbers that they submitted on the original application for probate,” said Kavina Nagrani, an estate lawyer and partner with Nika Law LLP in Toronto.

While some other provinces also levy substantial probate tax, none has introduced a compliance program similar to Ontario’s.

Executors must file EIRs with the Ontario Ministry of Finance within 180 days of receiving the probate certificate. The province has up to four years after the probate certificate is issued to assess or reassess the estate’s value. If an audit determines that the estate’s value was underestimated, the estate is liable for the additional tax. However, if the executor fails to file the EIR, files it late or makes false or misleading statements on the EIR, they can be fined $1,000 and up to twice the probate tax payable by the estate, be imprisoned for up to two years, or both. The government can assess or reassess late-filed EIRs at any time.

Despite these powers, audits remain relatively uncommon. Nagrani said she’s dealt with only a few since the EIR process was introduced six years ago.

However, the introduction of the EIR process and the mere threat of audit, with its associated penalties, has caused executors to take their asset reporting obligations more seriously. “Estate trustees who are dealing with lawyers know about EIRs and are filing them,” Nagrani said.

A common challenge for executors is how to value personal property. Most executors know that items such as jewellery should be appraised and included in the EIR. But Sarah Shipley, a wills and estates lawyer with Jenkins, Newman & Shipley Law Professional Corporation in Whitby, Ont., said the executor should obtain a professional appraisal for all the contents in the deceased’s home. Executors sometimes balk at doing so, arguing that the items have little or no value.

“Without getting a formal appraisal of the contents, you have to be prepared to justify how you came up with that value should it be audited,” Shipley said. “So, I usually say to those clients: ‘Go through the house and take pictures of all of the contents before disposing of it’.”

When in doubt, the executor should obtain a professional appraisal of estate property, even in cases where the cost of the appraisal exceeds the value of the property.

“If executors are getting something formal from third-party professionals, then they should be pretty protected in the event that they are selected for an audit,” Shipley said.

Nagrani said she advises clients to report any personal property with a resale value of $1,000 or more. While not in estate legislation itself, Nagrani said that’s the threshold the CRA uses on capital property.

Executors should also be aware that the Minister of Finance has the authority to share information contained in the EIR with other branches of the provincial government, or with the federal government. The valuation of estate assets could affect the calculation of capital gains tax on the deemed disposition of assets in an estate, for example.

“In most cases, it’s not the probate tax that’s the big financial hit, it’s the capital gains taxes or the income taxes of the deceased,” Nagrani said.