As someone who counsels executors and administrators I’ve always been comfortable advising that when applying to probate the will or obtain a certificate of appointment of estate trustee without a will they are required to swear an affidavit attesting to the values of the assets caught on their application and that the values used ought to be based on sound back-up assessments.  Those values then form the basis upon which estate administration (probate) taxes are required to be paid to the Minister of Finance.  Recently, however, some uncertainty has been thrown into the mix.

Bill 173 amends the provisions pertaining to how the estate administration tax is collected. It received Royal Assent on May 12, 2011.  The new rules are set to come into effect on or after January 1, 2013. When they do, the Minister of Revenue will be able to assess the tax owing.

The new rules will require the executor or administrator to keep records and books of account in a form that will, in essence, allow for an audit of the tax payable. The Minister of Revenue will also have the power to assess or reassess the taxes owing for a period of four years after the day the tax is payable.  Failure to comply or misrepresentation will be punishable by a fine and/or imprisonment.

So what was formerly a process where formal valuations may not have been needed, has become one which will require that the values used for the application must be justifiable. While this may not have much impact for many assets, for some, like personal property, there may be an onus to value such items in case the representative is ever audited.

Recently we were involved in applying for a clearance certificate from Canada Revenue Agency (“CRA”) in respect of federal income taxes. As part of that process we received a letter asking for the back-up information relied upon by the executor for the values used when applying to probate the Will.  This suggests to me that it will now be more important than was previously the case for the values used on the Terminal T1 tax return to match that used on the probate application.  This will undoubtedly delay the filing of applications for probate until the representative has sufficient certainty concerning the values of the assets of the estate.

However, unlike the clearance certificate process available to, in effect, close off the representative’s exposure to CRA for income taxes owing by the deceased, the amendments to the collection of estate administration taxes do not include such a process.  Rather, the Minister of Revenue will have four years to reassess the tax from when it was due.  The elephant in the room is – what’s the representative to do pending the closure of that period.  Distributing all the assets of the estate means s/he has nothing left should a reassessment come forward such that they are exposed to personal liability.  Whereas holding back assets for four years will undoubtedly lead to friction with the beneficiaries.  

When asked about this issue during consultations with members of the profession, the response was to say that the ongoing liability is that of the estate such that there is no ongoing risk to the personal representative.  Those of us who advise personal representatives only wish this were true, unfortunately it is not.  Personal representatives will have ongoing personal liability.  While they may be entitled to be indemnified from the beneficiaries, the ability to collect on that indemnity is only as good as the relationship with and credit worthiness of the beneficiaries – one or both of which are often missing in many estates.

So where does this leave us advisors – being in the unenviable position of having to give advice about what to do when setting an estate to the effect that – “it depends”.  So much for new legislation trying to add certainty to the process.

Corina Weigl