Can a Trust Help You Avoid Probate Fees in Ontario?

Many homeowners hear that a trust can help avoid probate fees. In Ontario, the fee is called Estate Administration Tax, and it is payable when an estate certificate is issued. The idea is appealing, but a trust is not a simple fix.

This article explains how the tax is calculated, which assets already fall outside it, and the catches that come with using a trust. Because the answer depends on how a trust is set up, take your plan to a lawyer and an accountant before acting.

How Estate Administration Tax works

The tax is $15 for each $1,000, or part of $1,000, by which the value of the estate exceeds $50,000. This rate applies to applications made on or after January 1, 2020.

It is payable immediately when the estate certificate is issued. The value of the estate is the deceased's property that must be disclosed under the Estates Act, less encumbrances on real property.

Small estates are an exception. If the estate is worth $50,000 or less and the application was made on or after January 1, 2020, no tax is payable, but an Estate Information Return must still be filed.

Assets that already pass outside the estate

Before considering a trust, check what is already excluded from the tax value. Assets that pass outside the estate are not counted.

• Assets with a named beneficiary, such as RRSPs, RRIFs and TFSAs.
• Jointly owned assets that automatically go to the surviving owner.
• Real estate outside Ontario.

Joint ownership and beneficiary designations carry their own risks and family consequences, so they are worth discussing with a lawyer before you change anything.

The main catch: who really owns the asset

Ontario includes in the estate value any property the deceased owned that was held in another person's name. Putting legal title in another name does not by itself remove a beneficially owned asset from the tax.

This means a trust only helps if the person has genuinely given up beneficial ownership. Holding a home in a child's name, or in a trust where you keep ownership in substance, may not avoid the tax. Whether an arrangement works depends on its terms and the facts.

There are also consequences if the estate representative gets this wrong. An Estate Information Return must be filed within 180 calendar days after the estate certificate is issued, and a false or late filing can lead to a fine of at least $1,000 and up to twice the tax payable, up to two years in prison, or both.

Other costs and risks of using a trust

• Income tax: generally, a trust is deemed to dispose of its capital property at fair market value every 21 years. Spousal, alter ego and joint partner trusts have a different first date.
• Filing: a Canadian-resident express trust that is not a listed trust must file a T3 return, and generally reports beneficial ownership on Schedule 15.
• Penalties: where no tax is owing, filing late costs $25 a day, with a minimum of $100 and a maximum of $2,500.
• Creditors: under the Bankruptcy and Insolvency Act, a court can void a transfer at undervalue to someone not dealing at arm's length if it was made within one year before the initial bankruptcy event, and within five years if the debtor was insolvent or intended to defraud, defeat or delay a creditor.

For transfers to arm's-length parties, the test is stricter: the transfer must be within one year before the initial bankruptcy event, the debtor must be insolvent or made insolvent by it, and must have intended to defraud, defeat or delay a creditor.

Informal arrangements and bare trusts

Sometimes a parent is put on title so a child can get a mortgage, or a family holds a joint account. A bare trust is an arrangement where the trustee can reasonably be considered to act as agent for all the beneficiaries and has no significant powers or responsibilities.

Bare trusts do not have to file a T3 return for tax years ending after December 31, 2024 and before December 31, 2026. For years ending on or after December 31, 2026, reportable bare trusts are subject to the trust reporting rules and may have to file. Some are not reportable, including a joint bank account held by family members where every beneficiary is also a legal owner. Related individuals holding title to a beneficiary's principal residence, and one spouse holding a shared principal residence for the other, are also excepted, but the spouse exception does not cover joint bank accounts.

Reporting rules for bare trusts are changing, so confirm the current position before relying on any exception.

What to do next

• List your assets and mark which already pass by beneficiary designation or survivorship.
• Estimate the tax using the $15 per $1,000 rate above $50,000 so you can weigh it against the cost of any trust.
• Be honest about whether you would truly give up ownership of anything you move.
• Ask an accountant about income tax, the 21-year rule and T3 filing.
• Have a lawyer review the plan, including creditor and family risks, before you transfer anything.

Frequently asked questions