Do Debts and Funeral Costs Reduce Estate Tax in Ontario?

Trustees often assume that paying the funeral bill, credit cards and other debts lowers the estate tax. Under Ontario's rules, most of them do not.

This article explains what can and cannot be deducted, and which assets are never counted in the first place. A lawyer or accountant can confirm how this applies to a particular estate.

What does not reduce the value

Only encumbrances on real property can be deducted. Funeral expenses, lawyer's fees, loans and interest, vehicle debt, credit card debt, real estate commissions, unregistered loans and lines of credit do not reduce the estate's value.

The estate trustee is still responsible for paying taxes, bills and other debts as part of winding up the estate. Paying them is part of the job. It just does not lower the value used for the tax.

The tax is based on the value of what the deceased owned, not on what is left after the bills are paid. Assets are valued at their fair market value at the time of death. These generally count toward the value:

• Ontario real estate, at its appraised value on the date of death, less registered encumbrances such as mortgages or liens.
• Bank accounts (including at foreign banks), investments, vehicles and vessels wherever located, and business interests.
• Property held in another person's name and other property wherever situated.

What can be deducted

A mortgage, collateral mortgage or lien registered against real property that is part of the estate can be deducted from that property's value. Ontario real estate is valued at its appraised value on the date of death, less encumbrances such as mortgages or liens.

The appraised value at death is used even if the property sells for more or less shortly afterward. Estate representatives must be able to back up values with documents such as statements or an appraiser's opinion.

On the probate application, Form 74A asks for the total value of real property, the total value of personal property and the total estate value. To calculate the tax, the estate's value is rounded up to the nearest thousand dollars. The tax is paid as a deposit when the application is filed, and it becomes the Estate Administration Tax once the certificate is issued.

Assets that are left out entirely

Some assets are not deducted but are never counted in the first place:

• Assets the deceased no longer owned at death, such as insurance paid to a named beneficiary.
• Jointly owned assets that pass automatically to the surviving owner or owners.
• RPPs, RRSPs, RRIFs and TFSAs with a beneficiary designation or declaration.
• Real estate outside Ontario, CPP death benefits, and RDSPs where the deceased was a subscriber but not a beneficiary.

There are exceptions that bring assets back in. Insurance is counted if the proceeds are payable to the estate. RRSPs, RRIFs and TFSAs are counted if the estate is the beneficiary. A tenant in common's share does not pass automatically; it becomes part of the estate and counts if probate is sought.

Some certificates also change what is counted. If the court issues a certificate limited to the assets in a specific will, only the assets in that will count toward the value. For resealing, ancillary and foreign nominee certificates, only assets located in Ontario are used to calculate the tax.

A quick comparison

What to do next

Not deducting debts can feel unfair, but the rate is applied to the estate's value after the first $50,000. For applications on or after January 1, 2020, that rate is $15 for every $1,000 (or part of $1,000) over $50,000. The estate pays the tax, not the representative personally.

Mistakes can be corrected, but there are deadlines. If information in a filed return turns out to be incorrect or incomplete, an amended return must be filed within 60 days of becoming aware of it, and this duty applies within four years of the certificate being issued. If assets are discovered after the certificate is issued, an amended return listing them is due within 60 days after the statement of that property is delivered to the court. The records supporting the return must be kept for four years.

An estate representative who fails to file the return, or who makes false or misleading statements, may be fined at least $1,000 and up to twice the tax payable by the estate, imprisoned for up to two years, or both. The Ministry of Finance may assess or reassess the tax within four years after the day it was due. If a return was not filed on time or a misrepresentation was made, there is no four-year limit.

• List every asset and mark which pass by survivorship or beneficiary designation.
• Get statements and an appraisal for real estate, and confirm which mortgages or liens are registered.
• Keep funeral and debt receipts for the accounts, even though they do not reduce the tax value.
• File the Estate Information Return within 180 calendar days after the certificate is issued.
• Ask a lawyer to review anything unusual, such as shared ownership or business interests.

Frequently asked questions