Penalties for Undervaluing an Estate for Probate Tax in Ontario

When you apply for probate, you must put a value on the estate, and the Estate Administration Tax is based on it. It can be tempting to round down when values are uncertain, or to leave an asset out because it is hard to price. That is risky.

This article explains how Ontario expects the estate to be valued, what can happen if the figure is wrong, and how to handle genuine uncertainty honestly. An honest estimate is not the same as a misleading one, and a lawyer or accountant can help you tell the difference in your case.

How the estate's value is set

Assets are valued at their fair market value at the time of death. Ontario real estate is valued at its appraised value on the date of death, less encumbrances such as mortgages or liens. Real property keeps that value even if it sells for more or less shortly after the death.

The value also includes bank accounts (including at foreign banks), investments, vehicles and vessels wherever located, property held in another person's name, business interests and other property wherever situated. Insurance counts if the proceeds are payable to the estate.

What does not count, and what cannot be deducted

Not every asset belongs in the figure. Some are lawfully left out, and leaving them out is not undervaluing.

• 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 are left out, but an RRSP, RRIF or TFSA whose beneficiary is the estate is included.
• Real estate outside Ontario, CPP death benefits, and RDSPs where the deceased was a subscriber but not a beneficiary.

On the other side, 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. Deducting these is a common source of an understated figure.

What can go wrong

An estate representative who fails to file the Estate Information 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 an estate's tax within four years after the day the tax was due. If a return was not filed on time or a misrepresentation was made, it may assess or reassess at any time. A reassessment can be disputed by filing a Notice of Objection within 180 days from the day the Notice of Assessment was issued.

To see why the numbers matter, note that the tax above $50,000 is $15 for every $1,000 (or part thereof) of value, with the value rounded up to the nearest thousand. A lower figure therefore means less tax on paper. If the figure is later corrected, additional tax found to be owing can be paid to the Superior Court of Justice or the Ministry of Finance.

When you honestly do not know the value

Uncertainty is normal, and the rules allow for it. Where an estimated value is used on the application, an amended return is due within 60 calendar days after the actual value is given to the court under the undertaking. 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, within four years of the certificate. Property discovered later also has its own 60-day amendment timeline.

Representatives must be able to back up asset values with supporting documents, such as statements or an appraiser's opinion of value. For complex assets, a professional appraiser with expertise in that area may help recommend a value. Any additional tax paid must come with an affidavit setting out the revised value of the estate at the time of death.

What to do next

• List every asset and decide, with documents, whether it belongs in the estate's value.
• Gather supporting documents for each value, such as statements or an appraiser's opinion of value, keeping in mind that real property is valued at its appraised value at the date of death.
• Consider a professional appraisal for business interests or other hard-to-price items.
• Do not deduct debts that the rules do not allow.
• Keep your supporting records for four years.
• If you spot an error later, correct it promptly rather than waiting.

If a figure is close to a line, such as the $50,000 threshold, or you are unsure whether an asset belongs in the estate, talk to a lawyer or accountant before you file.

Frequently asked questions