Law Times

Page 10 February 10, 2014 • Law Times www.lawtimesnews.com Estate tax rules up in the air Lawyers concerned as province vows to implement changes FOCUS ust over a year ago, there was great concern over the impending introduction of the new estate adminis- tration regime that would place collection and enforcement of the estate administration tax un- der the umbrella of the Ministry of Finance. However, the imple- mentation date of Jan. 1, 2013, came and went and a year has passed without the new system coming into effect. Estate plan- ners and administrators have been hoping the government is reconsidering the changes. "Dumb and dangerous" is Barry Corbin's assessment of the new regime that would see the might of the federal tax office applied to executors and estate administrators. Corbin practises tax and estate planning at Corbin Estates Law PC. "Maybe they are having second thoughts about the whole regime. ey should abandon this before it makes a mess." Corbin recalls a meeting between ministry officials and the Ontario Bar Association's trust and estates section just prior to the proposed im- plementation date. "We gave them a constructive earful. Almost immediately, they announced they wouldn't be implementing it on Jan. 1. Since then, they've been working on the revised regula- tions." e OBA heard in early December that the revisions were complete. "We are in nowhere land," says Lori Duffy of WeirFoulds LLP. "e old system is all that we have. We don't even know if collections have moved over to the Ministry of Finance." Daniel Barichello, a partner in the estate and business succession group at Keyser Mason Ball LLP, is frank in his opinion that the status quo should continue. "e current application process is relatively straightforward and much easier to administer. e proposed system threw out a shock wave of concern. e bar has raised lots of questions and the government is very silent. In the meantime, we carry on as usual." Corbin is of the view that the changes won't de- liver the payoff the government is hoping for. He has been tracking estate administration tax rev- enues ever since former premier Bob Rae's gov- ernment tripled the rates in 1992. "I expected they would do badly, and this has been borne out. ey woke the sleeping giant of estate administration tax avoidance." He notes that in 1992, probate tax revenues LEONARD KUNKA | CRAIG BROWN | DARCY MERKUR YOUR ADVANTAGE, in and out of the courtroom. Since 1936 Thomson, Rogers has built a strong, trusting, and collegial relationship with hundreds of lawyers across the province. As a law firm specializing in civil litigation, we have a record of accomplishment second to none. With a group of 30 litigators and a support staff of over 100 people, we have the resources to achieve the best possible result for your client. Moreover, we are exceptionally fair when it comes to referral fees. 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Now he sees that the current government is unhappy with the revenue stream and is looking to increase it again. "ey must think the revenues are anemic because of a fraudulent or ca- sual approach to getting valua- tions. ey think executors are not being accurate, whether de- liberately or inadvertently. e truth is that people are using le- gitimate means to avoid the tax, like joint ownership with their spouse or kids or the use of al- ter ego trusts." Corbin predicts that under the new regime, the revenue stream will be no better and will probably be worse. ere's also an expectation that administration costs will be significantly higher. "Every application will generate a pre- scribed form to be given to the minister," says Corbin. "Approximately 22,000 appli- cations for certificates will make 22,000 new files a year and every year, the number of deaths goes up. It will cost them $4 or $5 million annually to pay all the tax auditors and support staff, not to mention all the instances when we disagree with a valuation. en there will be valuators and lawyers. It's the park- ing meter question: Do you collect enough revenue to cover the costs to run it?" e Ministry of Finance is moving forward with increased disclosure of information by estates, according to spokesman Scott Blodgett. "We will ensure there is balance between suf- ficient disclosure of financial information while not making it enormously complicated or burdensome." Barichello is skeptical. "e government wants to use its rev- enue arm to audit and enforce the tax. Just in the same way you file your HST, they want to apply that muscle to the [estate admin- istration tax]. ey are placing a very onerous procedure on the whole evaluation point." He calls it a "nitpicky" ap- proach. "Depending on the reg- ulations, it seems to require that all assets of an estate be evalu- ated, even down to the level of household contents. Typically, I've found that these things have a nominal value. Unless they have Picassos or Rembrandts, people generally don't appreciate how little personal stuff is worth." Of great concern to the bar is that estates can be subject to au- dit and reassessment up to four years from the date the tax be- comes payable. "e typical es- tate administration might wind up in a year," says Barichello. "You do the final tax return, apply for a clearance certificate, distribute the estate, and you're finished. e question is: What is the executor to do? Not distrib- ute for four years? What happens if aer three years they say you should have paid more? You're still responsible." Duffy's greatest concern is that executors and estate trustees won't know how to do the job nor will they know whether they've completed it. "Estate trustees need to have a clearance certifi- cate. At some point, they need to be able to walk away know- ing that they will not be pursued for taxes." She wonders who will want to be an estate trustee when there's an impending liability. "You don't have it for income tax. Why should you have it for this?" Corbin also believes execu- tors need closure well before four years. "It's a long time. Unlike the Income Tax Act, where there is an obligation to assess with all due dispatch, there's no obliga- tion to issue a certificate at all or even tell them if they are clear. What does no news mean?" It's also debatable whether there's personal liability on the head of the executor if any error occurs with the probate filing. "It's not like an HST audit where everything is in electronic book- keeping and you can see if you put something in the wrong col- umn," says Barichello. "In an es- tate, what's the sofa worth if you gave it away? Very little is known about how this will work." Corbin worries about what will happen if the executor has already distributed the estate by the time a dispute is resolved. "It's reasonable to say they should have looked aer the creditors first and the beneficiaries second. It's a general principle of com- mon law, and the government is a creditor. e statute says there is no personal liability because the tax is paid in a representative capacity, but the fines and penal- ties aren't paid in a representative capacity, and good luck trying to recover them from the benefi- ciaries. ey can say that it's not an expense reasonably incurred by the estate if it was caused by false filing or failure of proper diligence. e executor will have to eat it." e new scheme also comes with penalties. "You can be jailed or fined for twice the amount of the [tax]," says Corbin. "If a family member is to be the executor, why would you want to expose them to the risk of fines and incarceration? is kind of approach will give people all the more reason to get away from the whole probate exercise." LT The changes create uncertainty for estate trustees as to how to do the job, says Lori Duffy.

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