This month’s blog post was written by Nadia Bechai, Partner at Linmac LLP.
In Canada, surveys indicate that more than 80% of older adults prefer to age in place: there is a desire to remain at home within established communities, and pay for support as needed.[1] This can mean remaining in a home that was acquired some time ago, until death.
With the increasing value of real estate in Ontario, real property is often among a person’s most valuable assets at death, thereby potentially triggering significant probate taxes payable by their estate.
When a person dies, the executor must usually submit the deceased’s Will for probate. Probate is the process whereby the court confirms the validity of the Will and the executor’s authority to control the assets governed by the Will. The probate process attracts a fee, commonly called “probate tax”, but technically called estate administration tax (“EAT”). In Ontario, EAT is approximately 1.5% of the fair market value of the assets that transfer under the probated Will. If one asset governed by the Will requires probate, then the value of all assets under the Will must be declared for EAT.
There are strategies to avoid the application of EAT on real property. The most common ones include:
- Holding title to real property as joint tenants. This technique works well for couples but is generally not recommended for adding children (or others) to title. With a joint tenancy, EAT is not payable on the first-to-die’s death because the property is automatically owned by the survivor by right of survivorship; and
- Having property owned by a nominee corporation (e.g. a numbered company), such that on the individual’s death, the property continues to be owned by the corporation and does not fall under the deceased’s estate.
This blog post examines another option that may be available to eliminate EAT on the homes of these persons, in particular, who wish to age in place: it is called the First Dealings Exemption (the “Exemption”).
Background: Registry vs Land Titles
Historically, Ontario had two active systems of recording interests in land:
- the Registry System (“Registry”) established in 1796 by the Registry Act; and
- the Land Titles System (“Land Titles”) established in 1885 by the Land Titles Act.
Under Registry, interests in land were recorded by depositing documents at a local Registry Office, which were catalogued chronologically. Each county had a Registry Office which would manage the records for the properties within its county. Under Registry, ownership was determined by reviewing 40 years of chronology for a particular property.
Registration under Land Titles was initially only available in certain parts of the province. Under this system, each parcel of land was given a property identifier number (PIN), and ownership was confirmed by way of government-backed title certificates.
Initially, both systems were paper-based such that by the late 1980s, Registry Offices were inundated with paper-records. Therefore, in 1990, the government decided to: 1) transition title registration to an automated system, and 2) have it governed only by the Land Titles Act, thereby phasing out Registry.
The transition took time. First, Land Titles had to become widely available across the province and used for all new transfers of property. Second, all Registry records had to be converted to Land Titles records: this process started in the mid-1990s. This combined conversion and electronic registration process continued, on a county-by-county basis for several years. By the end of 2010, 99% of all titles in Ontario were governed by the Land Titles Act. Currently, only a few “non-converts” remain.
Why does this matter?
For our purposes, the two Acts differed in one major way: under the Registry Act, an executor did not need to obtain probate to transfer a deceased’s real property, whereas under the Land Titles Act, an executor must obtain probate to transfer title. Therefore, under Land Titles, EAT is applicable on the value of a person’s real property at death.
Recognizing the effect of its unilateral decision to automate title registration, the government decided to create an exception to the application of EAT – a kind of grandfathering of rights, captured in a popular saying (among lawyers, at least): “if you bought under registry, you die under registry.” The exception is called the First Dealings Exemption.
Qualifying for the Exemption
To qualify for the Exemption:
- The deceased owner must have acquired the property under Registry. Generally, this means that the deceased must have obtained title before the mid-1990s. However, as conversion to Land Titles took time, there are properties that did not convert until later. For example, I have come across a property in the GTA that was acquired in 1998 and did not convert to Land Titles until 2000;
- On the property’s PIN, it must show that when the property was converted to Land Titles, its title was qualified as “Land Titles Conversion Qualified” (“LTCQ”);
- Since conversion to Land Titles, the property was not “dealt with”, i.e. no changes of ownership occurred from conversion to the deceased’s death; and
- The deceased died with a Will.
Saving on EAT: First Dealings Exemption + Multiple Wills
If the deceased’s interest in the property qualifies for the Exemption, then to avoid the application of EAT on the value of the property at death, the interest in property must be transferred under a Will that does not require probate. Ideally, therefore, the deceased prepared multiple wills: a Primary Will to deal with all probatable assets, and a Secondary Will to deal with all non-probatable assets, which explicitly includes a property that qualifies for the Exemption.
Notable points about the Exemption
- The Exemption is personal to the owner; it does not run with the land. If a person acquired their interest under Registry and after conversion to Land Titles, they transferred their interest to someone else, the Exemption ends. The new owner does not acquire the Exemption because the new owner did not personally acquire their interest under Registry. This is true even for transfer to non-arm’s length parties, such as spouses or children.
- Only a transfer of ownership affects the Exemption: charges on property (e.g. mortgages), notices, leases, survivorship applications, etc. will not compromise the Exemption.
- The Exemption is rarely available to condominium units.
Conclusion
If an interest in property was acquired some time ago, it is worthwhile to run a title search to determine whether the Exemption is available and to plan accordingly with multiple Wills. This can save the estate a meaningful amount of EAT.
References
[1] “Aging in Place”, National Initiative for the Care of the Elderly. Retrieved January 19, 2025. https://www.nicenet.ca/articles/aging-in-place#:~:text=Most%20older%20adults%20prefer%20to%20age%20in%20place.,pay%20for%20support%20as%20needed.
DISCLAIMER
Terms of Use
By accessing the Wealth Matters – Our Insights page, you agree that you have read, understood and agree to be bound by the website terms of use, in addition to the terms stated below. If you do not agree with this website’s terms of use, please exit from this page, and do not access any other pages on this website.
Cidel Bank & Trust Inc. (including its subsidiaries and affiliates, “Cidel”) reserves the right, at its discretion, to change, modify, add, or remove portions of this page, and the information contained herein, without prior notice.
Information Is Not Legal or other Advice
Wealth Matters – Ours Insights publications are intended to convey general information about legal issues and developments as of the indicated date. It does not constitute legal, tax, accounting, or any other advice and must not be treated or relied upon as such.
Statements made in Wealth Matters – Our Insights publications, including the interpretation of case law, are of a general nature only and in no way represent a warranty of the position or accuracy of the law at the time, nor do they pre-determine any position Cidel may take with respect to a specific fact situation or particular client matter. Furthermore, Cidel does not endorse, guarantee the accuracy of, or accept any responsibility for any content written or contributed by third parties who are featured as guest bloggers on Wealth Matters – Our Insights, nor does Cidel endorse, guarantee the accuracy of, or accept any responsibility for the content of third-party websites or materials that may be linked, quoted or otherwise referenced in these publications. For greater certainty, Cidel does not warrant or guarantee that the information contained on this page is accurate, complete, updated regularly and obtained from reliable sources.