Insurance Policy Proceeds and Changes to the Estate Administration Tax Act
On February 27, 2015, I chaired a workshop titled, The Estate Administration Tax Act, 1998: New Reporting Requirements, which was provided as part of the LSUC’s Continuing Professional Development.
As part of this workshop, our speakers, among other things, canvassed the various issues and concerns raised in relation to the introduction of the new Regulation, which came into effect January 1, 2015.
One area of concern we discussed during the workshop was the treatment of mortgages on real property. Specifically, the situation in which a deceased dies with real property in Ontario that is subject to a mortgage and that mortgage is secured by way of life insurance with the proceeds of the life insurance policy made payable to the mortgagee.
At that time of the workshop there was some uncertainty as to what information would need to be included in the value of the estate for the purposes of estate administration tax and the Estate Information Return in such circumstances.
Following the workshop, discussions were held at the Ministry of Finance and the Ministry has since clarified its position on this issue.
The Ministry’s position is that under these circumstances, since the insurance policy is payable to a designated beneficiary, the proceeds do not flow through the estate. They do not form part of the value of the estate for the purposes of estate administration tax. They do not need to be reported on the Estate Information Return. Since the real property is in Ontario, it should be included as an asset of the estate. The mortgage, since it is registered against real property in Ontario, can be deducted from the value of the estate for the purposes of estate administration tax.
So, for example, let’s say Jim dies the registered owner of real property in Ontario valued at $500,000. Prior to his death, Jim registered a mortgage against this property in favour of CIBC. Jim secures the mortgage by way of life insurance with the premiums paid by Jim and the proceeds of the life insurance policy made payable to CIBC.
Upon Jim’s death, the amount owing in respect of the mortgage registered in favour of CIBC, as at Jim’s date of death, is deductible from the fair market value of the property and the life insurance proceeds, as payable to CIBC, would not be included as an estate asset.
Thank you for reading,