The First Dealings Exemption: Avoiding Probate on Your Home.

In situations where an executor is asked to prove their authority to instruct financial institutions or other third parties on behalf of an estate that has control over the testator’s assets, that request triggers an application to court for a Certificate of Appointment. This process is often referred to as probating the Will. 

Probating a Will triggers an approximate 1.5% Estate Administration Tax on the date of death value of the deceased person’s assets that are controlled by their Will. In terms of actual dollars, Estate Administration Tax works out to nearly $15,000.00 for every $1,000,000.00 in value of the assets under the control of the Will. 

Not all assets of a deceased person fall within the control of the Will that is submitted to court. Many people know, for example, that assets can pass outside the control of the Will via joint tenancy or, in the case of assets like RRSPs, RRIFs, Life Insurance and TFSAs, via beneficiary designations. 

Examples of assets that often pass within the control of the Will, thereby triggering probate and Estate Administration Tax, are bank or investment accounts in a single person’s name and real estate that is not passing to a joint tenant co-owner by right of survivorship. 

However, what is not commonly known is that in certain circumstances real estate interests owned by one person can also be transferred without triggering probate and Estate Administration Tax. What this means is that, although Estate Administration Tax is avoided when one of two spouses listed on title to a home as joint tenants dies, in very certain circumstances the tax can also be avoided when the second spouse dies and the home is passed down to their children or other beneficiaries.

When Ontario first began to record title to real estate, it did so using a pen and paper system. To govern this system, it passed a piece of legislation known as the Registry Act. In and around the late 1980s the government unilaterally decided to digitize this pen and paper system and to do so it created a new digital system governed by a piece of legislation called the Land Titles Act. The owners of real estate that had their title converted to the new system were not given any choice in the matter. 

For the purpose of this article, the two acts differed in one major way. Under the Registry Act an executor did not need to probate the deceased’s Will to transfer their real property; however, that was changed for property that had been transferred to the Land Titles Act system, which meant that Estate Administration Tax was thereafter payable upon the value of a piece of real property that passed via a probated Will. 

As an acknowledgement for unilaterally increasing the Estate Administration Tax that an estate had to pay upon the death of a deceased real property owner, the Ontario Government created an exception whereby a home may continue to be transferred by an executor, after the death of the owner, without triggering probate and the associated Estate Administration Tax.

That exception is known as the First Dealings Exemption. 

The key criteria that the home must meet the leverage the exception are as follows:

1. The home must have been purchased or transferred to the current owner(s) when title to land in Ontario was recorded in the pen and paper Registry Act System. Generally, this means that the real estate must have been purchased before the mid 1990s but this is not always the case, some property remains in the pen and paper system to this day.
2. The Estate/Qualifier for the property must be Land Titles Conversion Qualified. If title to the home has been upgraded to Fee Simple Absolute or another Estate/Qualifier, the exemption will not apply. For example, the First Dealings Exemption does not normally apply to condominium units because Ontario upgraded the title to all condominium units upgraded beyond the Land Titles Conversion Qualified Estate/Qualifier. 
3. There must be no changes to ownership of the property since title to the property was automatically converted to the digital Land Titles Act system from the pen and paper Registry Act system. 
4. The Will that controls the distribution of the real estate must not be probated. Once this happens the rules surrounding Estate Administration Tax pull the value of the real property back into tax calculation, making the First Dealings exemption useless. 

The first three points can be determined via an examination of the real property’s parcel register, which can be purchased over the internet. The government currently charges less than $50.00 for this.

The fourth point can be planned for by an experienced estate planning lawyer using Primary and Secondary Wills, a technique often used by individuals who own shares in private corporations. 

Lastly, if you believe you purchased your home, or other real property, while it was still in the pen and paper Registry Act system and you are thinking about adding anyone else on title as a joint tenant owner, it is always a good idea to canvas the possibility of the First Dealings Exemption with your real estate lawyer. Once you’ve added someone onto title, your estate can no longer us this exemption. It will be lost.

The foregoing should not be considered to be legal advice and should not be relied upon as such. Please consult a lawyer to get advice and an opinion on your unique circumstances.