Bob Aaron email@example.com
An unconditional deed delivered as a gift could step around estate tax
A decision of the Ontario Superior Court last month suggests a novel way of avoiding the need to pay province's 1.5 per cent estate administration tax on real estate when the property owner dies.
Before her death in January 2011, Ann Sproul was the registered owner of a 54 per cent interest in a property on Hillsdale Ave. E., in Toronto. Her son, James, owned the other 46 per cent share of the house.
In November 2002, Ann signed a deed transferring her interest in the house to James. She gave it to her lawyer, but when he tried to register it, there was a minor title problem. Her lawyer called James and asked him to look into it but James did nothing and the deed was not registered during Ann's lifetime.
In her will, Ann left her entire estate to her children Marilyn and James equally. It was only after her mother died that Marilyn discovered that her mother had signed over her share of the house to James.
Eventually, the brother and sister wound up in court. Marilyn's position was that the deed was invalid and the estate owned her mother's 54 per cent share of the house. If the court ruled in her favour, she would end up with half of her mother's interest in the property.
Marilyn argued that the deed was invalid because it was never registered. James took the position that the property belonged to him outright.
The case came before Justice Laurence Pattillo in Ontario Superior Court last month. He ruled that the failure to register the deed, for whatever reason, did not affect its validity. When Ann unconditionally delivered the deed to her lawyer, it was a valid gift and was not part of her estate. The house belonged to James and he did not have to share it with his sister.
Justice Pattillo contrasted his decision with a 1960 Court of Appeal ruling. In that case, John Timothy Wilson signed a number of deeds to various recipients and gave them to his lawyer with instructions to deliver the deeds to the beneficiaries after his death.
The appeal court held that a signed deed is not a gift if it is conditional on death.
In the Sproul case, Justice Pattillo ruled that the unconditional delivery of the deed by Ann to her lawyer amounted to a gift to James, and the deed was valid.
It now appears that a legitimate way of avoiding the payment of Ontario's 1.5 per cent estate tax on a property is to sign a deed and deliver it to the recipient or a lawyer for registration after death. Handled properly with sophisticated legal advice, unconditional advance delivery of a signed deed can be an effective estate planning tool to reduce the estate administration tax otherwise payable.
In order to qualify as a transfer, which will be binding after death, certain requirements need to be met:
- It should be made clear in writing that delivery of the deed is unconditional, irrevocable and that it can be registered before or after death.
- The signed authorization to register the deed should be addressed to a particular real estate lawyer, or "any Ontario real estate lawyer."
- The document should clearly state that it is a gift.
If the property involved is not a principal residence, it will attract federal capital gains tax either when the deed is delivered or when it is registered, and tax advice should be sought in these circumstances.
Ed Olkovich, a certified specialist in wills and estates (mrwills.com), cautioned that delivery of a signed deed to a lawyer could create other problems and result in potential litigation. He added attempts to avoid probate without proper legal advice creates greater risks.
Olkovich always tells his clients: "paying probate tax is a small price to pay to keep control."