Understanding the First Dealings Exemption when an Estate is selling Real Estate

First Dealings Exemption

In Ontario, navigating the legal intricacies surrounding the sale of property by an estate can be complex. One area that often arises in discussions and can cause confusion is the “First Dealings Exemption.” This exemption can significantly impact the sale process and the distribution of assets for an estate. In this blog post, we will delve into what the First Dealings Exemption entails, its significance, and how it applies to estate transactions in Ontario.

What is the First Dealings Exemption?

The First Dealings Exemption offers an exemption from the requirement that an estate trustee obtain probate, also known as a Certificate of Appointment of Estate Trustee, when selling real estate. This can significantly reduce the timeline involved for an estate trying to sell real estate held by the deceased. Unfortunately there is no way to control whether the exemption applies; it relates to land that was acquired by the deceased under the Registry system. Ontario started the conversion of lands from the Registry System to the Land Titles system in the 1990’s. What that means is that if you purchased land before 1990, there is a good chance that you may qualify for the First Dealings Exemption. In that case, there are some steps you can take to do some probate tax planning.

What is Probate?

To understand the concept, we need to delve a little bit into the concept of probate.

Probate is a legal process that validates and executes a deceased person’s will, ensuring that their assets are distributed according to their wishes. During probate, a court examines the will’s validity, appoints an executor, and oversees the transfer of assets to beneficiaries. A large part of the probate process is identifying and appraising the deceased’s assets, paying debts and taxes, and distributing remaining property to heirs. This process can be time-consuming and costly, in particular as it often involves the payment of probate tax, court fees and legal expenses.

Significance of the First Dealing Exemption

If real estate owned in Ontario by a deceased was acquired by the deceased in the Land Titles System, there is no way for the estate trustee to sell the real estate without going through the probate process. In other words, in those instances the estate trustee needs to wait for the court to grant probate before selling. However, if real estate owned in Ontario by a deceased was acquired by the deceased in the Registry System, the estate trustee can bypass waiting for probate to be granted to deal with the real estate. This is known as the first dealings exemption. It is the first dealing of the property since its conversion from Registry to Land Titles. Being able to take advantage of the first dealings exemption can cut down on a lot of time, and therefore anxiety when it comes to disposing of assets. What the first dealings exemption does not do on its own, is save the payment of probate tax on the value of the real estate.

Why is Probate Tax Still Payable?

Contrary to what some people believe, just because you can convey the property without needing probate, does not mean that the probate tax is not payable. Probate tax, also known as the Estate Administration Tax, is payable on the entire value of the deceased’s estate, regardless of whether the first dealings exemption applies. The same rule applies to other assets owned by a deceased at the time of death. Probate tax is calculated on the entire value of the deceased’s assets, not just based on which assets need probate before they can be transferred.

Is there a loop-hole?

A “loophole” generally means some type of technicality or ambiguity that allows someone to exploit a law to their advantage, often in a way that was not intended by the lawmakers. While there is not a “loophole” regarding the payment of probate tax, there are some tax planning opportunities that exist, if you are in the enviable position of being able to take advantage of the first dealings exemption. The best way to avoid the payment of probate tax on assets that can be conveyed without probate is the creation of multiple wills. While multiple wills can make the estate planning process a bit more complicated, they have the advantage of potentially saving thousands of dollars in probate tax. Essentially, by creating multiple wills, you separate the assets that can only be conveyed with a probate certificate, from the assets that can be conveyed without a probate certificate. While this is most commonly used in situations where a person owns shares in a privately held corporation, it is very useful where the first dealings exemption applies.

Conclusion

The First Dealing Exemption plays a vital role in the intersection of estate and real estate transactions in Ontario. Understanding its requirements and implications is essential for estate administrators, beneficiaries, and legal professionals involved in estate planning and administration, and the conveyance of real estate.