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Tips for Estate Trustees: Selling Property, Avoiding Probate/EAT & First Dealings

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“If you buy in Registry, you get to die in Registry”, as Jeffrey Lem (Ontario’s Director of Titles) is prone to quoting as the general rule applicable here. He is referring to the Land Registry System in this rule. What does this mean for executors or Estate Trustees who have been left responsible for administering real estate as part of a deceased’s estate? If the Estate Trustee is selling real property, this rule relates to the first dealings exception which may be available to help Estate Trustees avoid probate tax, otherwise known as estate administration tax (“EAT”).

EAT is payable at the time an Estate Trustee applies for a Certificate of Appointment of Estate Trustee (also commonly called a “Probate Certificate”). The tax is calculated at 1.5% of the value of the assets of the “estate” above $50,000.  For example, if the only estate asset is a real estate property valued at $800,000, the EAT payable when applying for the Probate Certificate would be $11,250. However, not all Estate Trustees require a Probate Certificate to be able to administer the estate. If the need for the Probate Certificate could be avoided, this would save the estate $11,250 in the example. The “first dealings” exception is a way the need for the Probate Certificate is often avoided.

Whether a Probate Certificate is required, in any individual case, is dependent on two factors: (1) whether third parties, like banks and financial institutions with whom the Estate Trustee is dealing, insist on seeing the Probate Certificate as proof of the Estate Trustee’s authority over the estate; or (2) whether legislation requires the Probate Certificate in order for the Estate Trustee to administer certain assets, such as real estate.

This latter requirement, and how it can be avoided using the first dealings exception in the context of real estate transactions, is discussed in greater detail in this article. In most cases, before an Estate Trustee can transfer real estate in Ontario, a Probate Certificate is required. With good planning and using the first dealings exception, however, the Probate Certificate requirement and payment of EAT can often be avoided altogether by the estate.

What is the First Dealings Exception? How Does It Relate to the Land Registry and Land Titles Systems in Ontario?

Real properties in Ontario are either registered in the Land Registry System or the Land Titles System. In the 1980’s, a conversion process began to move all properties from the Land Registry System to the Land Titles System. Now, almost 40 years later, the vast majority of properties have been fully converted. While some properties were never converted and still remain in the Land Registry System (perhaps due to errors or breaks in the chain of title preventing conversion), all other properties were converted into the Land Titles System on a qualified basis (so they were classified as “Land Titles Conversion Qualified” or “LTCQ”).

Using the earlier example, if an Estate Trustee is trying to sell real property valued at $800,000, the estate would ordinarily become subject to $11,250 in EAT because a Probate Certificate would be needed to complete the sale transaction. Unless an exception applies, the Probate Certificate is needed in order to register the property instruments that convey title to the new owner. In most cases, obtaining a Probate Certificate will be required, as many properties classified as LTCQ have had first dealings already registered on title. However, if the property is still in the old Land Registry System, or if it has been converted to LTCQ but has not yet had such a first dealing, then there is no need to obtain a Probate Certificate to transfer this property and EAT can be avoided altogether. This is the essence of the “first dealings exception”.

What Statements Are Generally Required in Teraview to Register a Transmission Application Using the First Dealings Exception?

Teraview is the (now online) system that lawyers, law clerks, and other title searchers use to access data and register property instruments in the Government of Ontario’s land records database. The relevant instrument to be registered here is a Transmission Application, which is used to indicate the Estate Trustee is “entitled to be the owner by law, as Estate Trustee of the estate of the deceased owner”. It is required to be registered before a Transfer by Personal Representative can be registered (pursuant to the Estate Trustee’s authority), in order to convey the property from the estate to the new buyer or to a beneficiary and complete the sale transaction.

When employing the first dealing exception, the lawyer acting for the Estate Trustee must select statements 3634, 3635, and 3636 in the Transmission Application. In order to do so, the estate’s lawyer will have to make a number of statements:

  1. “this transaction is the first dealing after the property was converted from Registry to Land Titles by the Ministry”;
  2. the value of the estate;
  3. the Will was properly executed and witnessed (with evidence);
  4. the Will was not revoked by any subsequent marriage; and
  5. the deceased was over 18 years of age at the time of signing the Will.

Importantly, statement 3640 in the Transmission Application must also be selected, which requires the Estate Trustee to sign a Covenant to Indemnify the Land Titles Assurance Fund (the “Covenant”) in the event of any claim brought against that compensation fund (the “Fund”).

What is the Covenant to Indemnify the Land Titles Assurance Fund?

When the Estate Trustee signs the Covenant, they are agreeing to indemnify the Fund and save it harmless in situations where a valid claim is brought against the Fund. Estate Trustees should thus weigh the advantages and disadvantages of giving such a Covenant before signing it. Essentially, in signing it, the Estate Trustee is giving a personal indemnification to the Fund to make it whole, in the event that a claim arises because it is later determined that the person acting as the Estate Trustee did not actually have authority over the estate.

How might this happen? If the Will in which the person is named as Estate Trustee is later determined to be invalid, then the authority of the person acting as Estate Trustee under that Will would also be invalid. Or, if a later Will is discovered that was unknown to the originally named Estate Trustee, which appoints someone else as Estate Trustee, then the originally named Estate Trustee had no true authority to sell the property in the first place. If a claim is made against the Fund for losses incurred due to the failure to obtain a Probate Certificate, then the Fund will be indemnified by the person who signed the Covenant.

While signing the Covenant allows the estate to avoid paying any EAT altogether, the Estate Trustee may need to think twice about signing in the following situations: (a) the Estate Trustee is not certain that the Will is indeed the last Will; or (b) there is a disgruntled beneficiary likely to make a claim or challenge the validity of the Will. In such scenarios, the Estate Trustee may be better-advised to apply for the Probate Certificate rather than signing the Covenant. The decision will be case-specific, of course, and the pros and cons of it should be carefully considered at the time it is made. An Estate Trustee is not obliged to save the estate EAT by signing the Covenant in lieu of obtaining a Probate Certificate. Where the Estate Trustee is the sole beneficiary of the Estate, then signing the Covenant may make good sense.

If, after completing all requisite due diligence, the Estate Trustee chooses to sign the Covenant, then a Transmission Application can be registered without obtaining the Probate Certificate, and a Transfer by Personal Representative can be registered to convey title directly to the new owner without any EAT costs whatsoever.

How Does the (Lack Of) Definition of “First Dealing” Factor into the Above Analysis?

Unfortunately, the Director of Titles has stated “there is no public definition of what exactly constitute[s] a ‘first dealing’”, and Bulletin 2015-05 states “[r]egistrants should continue to confirm with land registration staff that the [T]ransmission [A]pplication is in fact the first dealing with the property since conversion before the registration of this document“. This complicates matters, and begs the question: what is likely to be classified as a “first dealing”?

In order to answer this question, one should firstly turn to experience. Members of our Wills, Estates & Trusts and Commercial Real Estate Practices at Pallett Valo LLP have developed a list of the types of instruments that are not considered to be “first dealings” based on our work on previous files. The list includes, but is not limited to:

  • Charges/Mortgages;
  • Discharges (of Charges and other Interests);
  • Applications (such as to delete a Writ of Execution);
  • Assignments (such as a Notice of Assignment of Rents – General);
  • Other Notices (such as a Notice of Lease);
  • Survivorship Applications (where title is held by the registered owners as joint tenants); and,
  • Certain Transfers/Deeds in select circumstances (such as registration of a Transfer/Deed to sever a joint tenancy into tenants-in-common, or registration of a Transfer/Deed to convey a property between spouses as a result of divorce and dissolution of marriage).

At times, one may face resistance from different representatives working at the Land Registry Office (“LRO”), and it is possible that one’s Transmission Application and Transfer by Personal Representative could be returned after registration citing one of the above documents as a “first dealing”. On balance, the LRO’s policy appears to be to make decisions on a case-by-case basis with respect to whether any property has or has not yet had a “first dealing”.

Practically, during such instances of instruments being returned and not being certified for registration, one will have to engage with the LRO representative assigned to the file and make considered arguments about why a client’s right to the first dealing tax-avoidance mechanism should be retained nevertheless. After all, the alternative is to instruct one’s estate client to pay all applicable EAT, obtain a Probate Certificate through the courts, and complete the probate process. This would naturally increase the cost to the estate, and delay the closing of the property sale transaction or transfer to beneficiaries. Generally speaking, prudent solicitors zealously protecting their client’s best interests should be prepared to make considered arguments any time an instrument appears on title that is not a Transfer/Deed. However, our experience indicates that even a Transfer/Deed can possibly be argued as not being a “first dealing” in certain circumstances.

It should be noted that the actual ability to save the EAT payable rests also in understanding the nature of all of the deceased’s assets, not only real estate. If the deceased has other assets which will require a Probate Certificate, and if no special planning was undertaken by the deceased to avoid the need for a Probate Certificate (like holding assets jointly with a right of survivorship so that a Will is not required to transfer ownership, or using a secondary Will to govern the real estate in the Land Registry System or that has been designated as LTCQ, for example), then the estate will likely still be subject to EAT on the value of all the assets, including the real property. This would be the case regardless of whether or not the property is in the older Land Registry System, or is classified as LTCQ and has had no “first dealings”.

Conclusion

After death, Estate Trustees should obtain advice from a lawyer competent in both real estate law and wills, estates & trusts law when embarking on the long and complex road of attending to the deceased’s final wishes with respect to real property. This will be necessary in order to determine whether the first dealings exception is available, and whether the Estate Trustee should take advantage of this opportunity to save EAT under the circumstances.

If wishing to take advantage of these possible EAT savings where properties are still in the Land Registry System or are classified as LTCQ and have had no “first dealings”, the owners of real property should consider valuable estate planning opportunities, like using a multiple Wills strategy or possibly holding real property as joint tenants with loved ones who have rights of survivorship. Such types of estate planning are complicated, however, and may not be recommended for every situation. There can be matrimonial law implications and capital gains tax implications that also need to be considered. Accordingly, getting professional advice from knowledgeable and competent lawyers is strongly recommended for clients before attempting to implement these discussed strategies and tax-avoidance mechanisms.

Just heard about Pallett Valo being chosen as One of Ontario's Top Three Regional Firms. Congratulations – well deserved.
Peter Campbell, BDO Canada LLP