Does a Mortgage Reduce Probate Tax on a House in Ontario?

You are the estate trustee, the house has a mortgage, and you are about to file for probate. The big question is whether you pay tax on the full value of the house or only on what the family actually owns in it.

The answer depends on what kind of debt it is and where the asset is. This article explains which debts count, which do not, and how to support the numbers you report.

How the tax is calculated

Ontario charges Estate Administration Tax, often called probate tax, when a certificate of appointment is sought. For applications made on or after January 1, 2020, no tax is payable if the estate is worth $50,000 or less. Above that, the tax is $15 for each $1,000, or part of $1,000, by which the value exceeds $50,000.

The estate value is rounded up to the nearest thousand. The estate pays the tax, not the trustee personally.

The tax is paid as a deposit when the application is filed and becomes payable when the certificate is issued. Applications made before January 1, 2020 followed different rules, with an exemption of $1,000 or less and different rates. If your application is recent, the figures above are the ones that apply.

Secured debts on Ontario real estate

Ontario real estate is valued less its encumbrances, such as a mortgage, collateral mortgage or lien. So if the house is worth more than the mortgage against it, the value that counts is generally the difference.

This applies to real property in Ontario. Real estate outside Ontario is left out of the estate's value altogether for this tax.

In plain words, the tax looks at what the estate really holds in the house, not just the price the house might fetch. Whether a particular arrangement counts as an encumbrance on the property can turn on the paperwork behind it, so it is worth confirming with a lawyer or accountant if the debt is unusual.

Debts that do not reduce the tax

Unsecured debts such as credit card balances, loans, interest and lines of credit cannot be deducted to reduce the estate's value for this tax. They still matter, because the estate is distributed only after funeral and burial expenses and debts are paid. They just do not lower the tax base.

If the estate's assets are not enough to pay every debt, debts are paid proportionately, with no debt of one kind taking priority over another. That is a separate question from the tax, but it is a reminder that a debt can matter to the estate even when it does not change the tax.

Valuing assets and keeping proof

Assets, including private company shares and business interests, must be valued at fair market value at the date of death. The representative should be able to support each value with documents such as statements or an appraiser's opinion.

If you file using an estimate, you must undertake to file a sworn statement of the actual value and pay any additional tax within six months. An Estate Information Return is also required within 180 calendar days after the certificate is issued, even if no tax is payable.

Accuracy matters. Failing to file the required information, or making false or misleading statements, is an offence, with a fine of at least $1,000, imprisonment of up to two years, or both. It is not an offence if the person did not know, and could not reasonably have known, that a statement was false.

What to do next

• List every asset and note whether it is in Ontario or elsewhere.
• Get the payout or balance figure from each lender for any mortgage, collateral mortgage or lien on Ontario property.
• Separate secured debts from unsecured ones, since only secured debts on Ontario real estate reduce the value.
• Obtain appraisals or statements for each asset at the date of death.
• Keep copies of every document that supports a value you report.
• Ask a lawyer or accountant to confirm the figures before you file, so that the values you report are as accurate as possible.

Frequently asked questions