Distributing Assets in Kind or Cash: Executor's Options in Ontario

Not every estate is mostly cash. Many contain a mix, such as investment shares, a family cottage and a bank account, and the beneficiaries may want different things. One might want the cottage, another would rather have money.

Giving someone the actual asset, instead of selling it first, is called distribution in kind. This article explains the general ideas, how values are set, the tax points to raise with an accountant, and the steps to take before transferring anything.

Cash or in kind: what the choice means

The estate trustee collects the assets, pays taxes, bills and other debts, and distributes the residue to those entitled to it. Under a will, distribution follows liquidation of assets and payment of funeral and burial expenses and any debts. In the simplest case, the trustee sells everything and divides the cash.

Distribution in kind is different: the executor transfers the asset itself, such as the shares or the cottage, to a beneficiary. Whether that is allowed depends on what the will says, whether the beneficiaries agree, and whether the estate still has enough to pay its debts. Many wills give the trustee some flexibility, but wording varies, so a lawyer should read it before you transfer anything.

Comparing the options

If shares are meant to be equal, assets of different value need balancing. Someone who takes the cottage may need to receive less of the other assets or pay the estate the difference.

How values are fixed

Values matter for three reasons: fairness among beneficiaries, probate tax, and income tax.

• Fairness: Everyone should accept the number used to compare the cottage with cash and shares. For real estate, many estates obtain an appraisal, and for shares your lawyer or accountant can tell you what record to use to document the value.
• Estate Administration Tax: The tax is charged on the value of the estate as of the date of death, and the return reports the total value of real and personal property owned at death. For applications made on or after January 1, 2020, there is no tax on estates worth $50,000 or less, and above that the rate is $15 for every $1,000 or part of estate value.
• Estate Information Return: It must list assets with values, and assets held with an adviser, dealer or financial institution may be reported as account-level totals. The initial return is due within 180 calendar days after the certificate is issued.
• Income tax: Capital property is deemed disposed of just before death at fair market value and reported on Schedule 3 of the final return.

If an estimated value was used on the return, an amended return is due within 60 calendar days after the actual value is given to the court. An appraisal done early can reduce that kind of correction.

Tax points to raise with an accountant

Transferring an asset in kind is not free of tax consequences. A later sale of the asset is taxed on the sale price less the fair market value reported on the final return. Transfers to a spouse or common-law partner, or to a spousal trust, generally occur at cost unless the fair market value choice is made on the final return. The deemed disposition of depreciable rental property can also create recapture of capital cost allowance or a terminal loss.

If the cottage or other property earns rent, income from January 1 to the date of death goes on the final return, while rent earned by the estate after death is reported on a T3 return. A graduated rate estate can last up to 36 months after death, and if the estate ends by final distribution the tax year ends on that date, with the return due 90 days later. Whether the cottage qualifies for any other tax relief depends on its use and ownership, so ask an accountant before choosing between selling and transferring.

Transfers of land and timing

A transfer of land to a beneficiary within six months of death must be accompanied by an executor's statement that there is no surviving spouse, a court order, or the spouse's consent. A sale is not barred, but the sale proceeds cannot be distributed in that period. That bulletin is old, so a lawyer should confirm the current practice.

Even when the six months have passed, the executor should not transfer in kind before confirming that the estate can still pay its debts and tax. The Ministry may assess or reassess Estate Administration Tax within four years, with no time limit if a filing was missed or a misrepresentation was made.

What to do next

• Read the will for any clause about selling assets or dividing them in kind.
• List every asset and its date-of-death value, and order appraisals for the cottage and any unusual holdings.
• Ask each beneficiary which asset they want, and record the answers.
• Ask an accountant how the final return and the T3 will treat each transfer.
• Keep enough cash back for debts, taxes and costs before transferring anything.
• Have a lawyer prepare the transfer documents and any signed agreement among the beneficiaries.
• Keep supporting records, since the Ministry expects them to be kept for four years.

Frequently asked questions