Mortgage on a Deceased Person's Home: Executor Options in Ontario

A parent or relative has died, the house still has a mortgage, and you are the executor. You may be wondering whether the payments must keep going, whether the lender can demand the balance, and whether the home should be sold or kept.

The answers depend heavily on the mortgage agreement, the lender and what the will says. This article explains the parts of the picture that are fairly standard in Ontario so you know what to ask, and where a lawyer or accountant should confirm the details.

What the executor is responsible for

Ontario's guidance describes the executor's role as winding up the deceased's affairs: paying taxes, bills and debts, collecting assets and distributing the rest. A mortgage is a debt of the person who died, so it falls within that job. Note that a person named as executor is not required to act.

Early duties include telling banks and financial institutions of the death and filing the deceased's tax return. A mortgage lender is a financial institution, so contacting it early is a sensible step. Whether payments must continue, whether the lender will wait, and what happens if payments stop all depend on the mortgage terms and on the lender. Ask the lender in writing what it requires, and have a lawyer review the mortgage documents if anything is unclear.

Costs of professional help, such as legal work, tax filing and property maintenance, are paid from the estate as expenses. That includes keeping the home insured and maintained while decisions are made.

How the mortgage affects probate and the estate value

Ontario treats probate as normally necessary when the deceased owned real property. If the house was in the deceased's name alone, expect that a certificate will be needed before you can sell or transfer it. Whether a jointly owned home passes outside the estate depends on how it was held, and jointly owned assets that pass to the survivor are not counted in the estate value for tax.

For Estate Administration Tax, Ontario real estate counts at fair market value at the date of death, less mortgages and liens. There is no tax on the first $50,000 of estate value, and above that the rate is $15 per $1,000 or part of $1,000 for certificates applied for on or after January 1, 2020. The estate pays the tax, not you personally.

Because the value is rounded up to the nearest thousand before the tax is calculated, a small difference in the home's value can change the figure slightly. A lawyer can help you document the date-of-death value.

Selling versus keeping the home

Two broad paths exist. The estate can sell the home and use the proceeds to pay off the mortgage, with the rest going to the beneficiaries. Or a beneficiary may want to keep the home, which raises questions about the lender's consent, refinancing and who carries the payments. Lender practice varies, so this is a conversation to have with the lender and a lawyer before anyone commits.

Tax is part of the choice. Immediately before death, the deceased is treated as having sold each capital property at fair market value. If the home passes to a Canadian-resident spouse or common-law partner or to a qualifying spousal trust, it is generally treated as disposed of at its adjusted cost base instead, and it must vest indefeasibly within 36 months of death. The representative can elect out of that treatment.

Even if the whole gain is exempt, the legal representative must still designate the home as a principal residence on the final return using Form T1255 and Schedule 3, and that designation covers only years up to the date of death. If the estate sells later, the gain is reported on line 1 of the estate's T3 return and is generally the sale price minus the fair market value reported on the final return, plus disposition costs. How the exemption applies to the estate's own period of ownership is a point to confirm with an accountant.

Deadlines and personal risk for the executor

• The final return is due April 30 of the next year if death was between January 1 and October 31, or six months after death if death was between November 1 and December 31.
• If the deceased or their spouse was self-employed, the final return is due June 15 of the next year for a death from January 1 to December 15.
• Late filing with a balance owing carries a 5% penalty plus 1% per full month, up to 12 months, and compound daily interest.
• An Estate Information Return is due within 180 calendar days after the certificate is issued.

Before you distribute what remains, consider a clearance certificate. Distributing estate assets before getting one makes the representative personally liable for unpaid tax, up to the value of assets distributed. You apply after returns are filed, assessed and paid, using Form TX19, and CRA may take up to 120 days. Plan the timing of the sale proceeds with that in mind.

What to do next

• Locate the mortgage statement, the will and the title or ownership documents.
• Contact the lender, tell it about the death and ask in writing what it requires.
• Keep the home insured, secured and maintained, and keep receipts.
• Ask a lawyer whether a certificate is needed and how the home is held.
• Ask an accountant about the final return, the T1255 designation and the estate's T3.
• Hold off on distributing until you understand the clearance certificate process.

Frequently asked questions