When Probate Is Not Required To Sell Real Estate: The First Dealings Exemption

PROBATE AND ESTATE ADMINISTRATION TAX

In Ontario, when a person passes away, their assets fall into their estate and are either dealt with in the manner prescribed by their will, or pursuant to the provisions as set out in the Succession Law Reform Act. Often, in both circumstances, the person taking control of the assets of the deceased, the estate trustee, will need to work with third parties such as financial institutions to properly deal with the assets according to the deceased's wishes. To that end, estate trustees will often need to provide proof that they are properly authorized to act as the representative of the estate.

In Ontario, formal authorization allowing someone to act on behalf of an estate is granted by the court, which reviews applications by those applying to be the estate trustee after the death of the deceased, whether or not the deceased left behind a valid will. As part of this court process, commonly referred to as probate, the estate must pay what is known as the Estate Administration Tax (the "EAT"), a tax levied against the market value of all assets that fall within the estate at a rate of 1.5%. In 2020, the EAT was changed to exempt the first $50,000 of assets in the estate. In other words, for every million dollars in an estate, an EAT of $15,000.00 (other than the first million, for which EAT will be $14,250.00) will need to be paid for the estate to be probated.

Many estates require probate due to the nature and size of the assets that the deceased left behind, and real estate properties owned by the deceased may be some of the most significant among the assets that require probate. However, certain circumstances apply to real estate such that they fall outside of the deceased's estate and do not need to be probated, consequently avoiding the triggering of EAT. Practically speaking, an applicable piece of property can save on thousands of dollars of EAT through this kind of exception. One of these scenarios is what is known as the "First Dealings Exemption".

FIRST DEALINGS EXEMPTION

The First Dealings Exemption is the result of Ontario's shift from physical documentation of property ownership to a digital system and from the Land Registry system into the Land Titles system. Up until the 1980s, ownership of real estate was recorded in a paper system, and in the 1990s, the province made a move to convert all records of ownership from paper to digital, and from Land Registry to Land Titles.

For the purposes of this article, one of the key differences in this shift is that real estate now required probate to be transferred. Under the previous Land Registry system this was not necessary, but now, if the estate trustee wanted to sell a house, they would need to obtain probate and EAT would apply to what was often the largest asset in many people's estates.

The requirement for probate is not applicable when dealing with a deceased's property if it is the first time that the property in question is being dealt with after its ownership record was converted from Land Registry to Land Titles. The foregoing is referred to as the First Dealings Exemption, and for estate planning purposes, any such real estate need not form part of the probate process and be subject to the levy of EAT.

CRITERIA FOR EXEMPTION

For the First Dealings Exemption to apply, the property must meet the following criteria:

1. The property must have been acquired by the current owner during the Land Registry era. For the majority of real estate in Ontario, this means the property must have been purchased prior to the mid-1990s;
2. When the property was converted into the Land Titles system, the title must have been qualified as "Land Titles Conversion Qualified" in the system.
3. The property has not been "dealt with" since its conversion into the Land Titles system. While a transfer of ownership would constitute a "first dealing", other transactions subsequent to conversion such as mortgage charges and discharges, notices registered on title, and survivorship applications may not be considered first dealings. In other words, if there was no transfer of ownership since the property was converted into the Land Titles system, you may be able to rely on this exemption. Where spouses owned the property jointly, if one spouse passes away, the surviving spouse will still likely have the First Dealings Exemption available to them.
4. The deceased owned the property at the time of their death and they died with a will. Further, the will that deals with the property is not probated.

A successful application of the exemption allows the property to be dealt with pursuant to the rules in the Registry Act where probate is not required to deal with real property. Most properties in the province's records were converted into the Land Titles system in the 1990s, but there are still properties out there which the province has not yet converted, and certainly many homes which have not changed ownership since the 1990s.

Originally published 13 May 2024

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.