Using a Secondary Will to Exclude a ‘First Dealings’ Property from Probate Tax

By Manda Ivezic

Before an estate can dispose of property, the Ontario Land Registry Office ("LRO") generally requires executors to obtain a Certificate of Appointment by 'probating' the estate. One exception to the probate requirement is the 'First Dealings' exemption, explained in greater detail below.

To illustrate with an example, the need for probate commonly occurs upon the death of the last of two spouses, who had held title to their home as 'joint tenants'. This is usually when the children inherit from the estate. On the death of the first spouse to pass away, ownership passes to the surviving joint tenant by right of survivorship. Probate is not needed for this to happen, since this manner of ownership means that the home does not become part of the first deceased spouse's estate. Upon the death of the last spouse, the executor would need to obtain a Certificate of Appointment before the estate could sell or otherwise transfer the land - unless the First Dealings exemption applies.

Determining whether your property is eligible for the First Dealings exemption

Firstly, what is the First Dealings exemption? It applies to real property acquired by the deceased under the Registry system. To give a concise explanation, Ontario initially administered lands under the Registry Act, but later adopted the Land Titles system. Eventually, the province decided to administratively convert Registry property records to the new system. This project was carried out by region, so the year of conversion will vary. In some parts of the province, properties were converted in the early 2000's; in others, not until a few years later. The typical clients with an eligible property are seniors who have resided at a home they purchased several years ago.

Where the criteria are met, the LRO allows an exemption so that the estate of the deceased owner can convey the land with the benefit of the Registry Act rules, under which probate and the Certificate of Appointment are not needed. This contrasts with the Land Titles system, in which probate is the norm. As Jeffrey Lem, Ontario's Director of Titles, has put it: ‘if you buy in Registry, you get to die in Registry’.

The transfer from the estate must be the first ‘dealing’ with the property since it was converted to the Land Titles system. The exemption is only available for testate estates - meaning the deceased must have died with a valid will. Where a deceased has no will, probate must be obtained in order to dispose of the estate’s real property.

A lawyer can determine whether a particular property qualifies for the exemption by obtaining the parcel register abstract. For the post-death transfer of the property to be eligible as a 'first dealing', the parcel abstract must show “Land Titles Conversion Qualified” ("LTCQ") as the title qualifier, not “Land Titles Absolute” or “Land Titles Absolute Plus”. Some parcels of land were first established within the Land Titles system and therefore cannot be conversions. For example, the vast majority of condominium units in Ontario are ineligible, because they were built on “Land Titles Absolute” lands.

The parcel abstract also shows the date of conversion, the date of the last transfer, and other registrations on title. The date of conversion is compared to the date of the last transfer, and consideration is given to whether any subsequent registration after the time of conversion may be a 'dealing' which disqualifies the exemption.

The LRO may consider some kinds of subsequent registrations to be 'dealings' that disqualify the estate from the exemption. However, the registration of a survivorship application by a surviving joint tenant to delete a deceased joint tenant's name from title is not a 'dealing'. Mortgages, discharges of mortgages, notices, leases, restrictive covenants, applications to delete writs or other instruments, and easements are also not considered disqualifying ‘dealings’. A self-to-self transfer registered to change the manner in which title is held among co-owners (eg. from ‘joint tenancy’ to ‘tenancy-in-common’, or vice versa) does not  jeopardize the exemption. And even some Transfers can be argued to not be dealings (eg. a transfer deleting a spouse from title pursuant to a separation). In unusual cases, on submission of a transfer from an estate relying on the First Dealings exemption, the lawyer may need to put forth their opinion to the LRO, and the LRO makes the final determination.

Estate Administration Tax and the Secondary Will

Having laid out this background information, I can now address how a Secondary Will comes into play with respect to a First Dealings property. In some situations, it is necessary for executors to apply for a Certificate of Appointment. The Certificate functions as an assurance of the executor’s authority and proper appointment, to third parties such as the Land Registry Office or a bank. Upon filing the Application for the Certificate, Estate Administration Tax (or “probate tax”) is due. Estate Administration Tax is calculated on the value of all assets which fall into your probatable estate, at approximately 1.5% (though as at the time of writing, the first $50,000 is tax free). One and a half percent of the equity in a house can be a significant amount of money, and perhaps even the majority of an estate’s value. Therefore, you might seek to exclude certain assets from being subject to this tax. This can be done with use of a Secondary Will.

To be clear, the First Dealings exemption only means that the executor is able to register a transfer of real estate without needing to apply for (and wait for) a Certificate of Appointment first. But the exemption does not, in itself, mean that probate tax won't be payable on the value of the house. If a Certificate of Appointment needs to be obtained for another reason – a common scenario is that the deceased’s bank requires it before allowing the executors access to significant account balances – then probate tax is calculated on the date-of-death value of the house and other estate assets.

However, a Secondary Will can be made which would apply to specified assets, for which probate is unnecessary – such as a first-dealings house. A Primary Will would apply to all other assets of the deceased. When the time comes to apply for probate, only the Primary Will (applying to limited assets) is submitted, and Estate Administration Tax is calculated on only the value of the assets governed by the Primary Will. Therefore, the value of the first-dealings house is excluded when calculating the amount of probate tax that must be paid. There is no need to submit the Secondary Will for probate – by separating the assets not needing a Certificate of Appointment (or “probate”) to be dealt with in the Secondary Will, those assets are excluded from the probatable estate.

So by creating a Secondary Will, you can save the amount of probate tax that would have been calculated on the date-of-death value of the  ‘first dealings’ property. Generally, the amount of probate tax saved is significant, enough to make the cost of having a Secondary Will prepared worth it.

Discussion with a lawyer is indispensable with respect to making use of the 'First Dealings' exemption. Our lawyers can advise and assist with preparing secondary wills, transferring properties from estates, and preparing probate applications.