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Dying is never a simple thing when it comes to the Canada Revenue Agency’s (CRA) application of the Income Tax Act to the deceased’s estate. One of the most significant issues is that the executor of the estate can become liable for income taxes payable by the estate. When an executor undertakes their role, they also are now potentially liable for any unpaid income taxes of the deceased‘s estate. So if the executor distributes funds to the beneficiaries before receiving a clearance certificate from CRA and CRA reassesses the estate for income tax in an amount beyond what remains in the estate, CRA will look to the executor for the payment of the outstanding income tax. Since the executor has the liability they should always ensure that they have enough cash in the estate to pay the income tax liability before accepting the appointment to executor or distributing funds to the beneficiaries. As complex as the Income Tax Act is, especially the area dealing with estates and trusts and with the threat of income tax, the executor and/or trustee in most instances will hire an advisor to help them through the myriad of rules and regulations and to minimize their risk.
So when someone approaches an individual to become an executor or a trustee there maybe some hesitation on the individual’s part to accept the appointment because of the previously mentioned income tax liability issues, but if that person could get paid for the job of executor, there may be less resistance and one is more likely to get the best person for the job.
Executor/trustee fees are considered taxable income to the recipient and must be reported to CRA. If that recipient is an individual that is not in the business of being an executor/trustee then the income is considered income from an office or employment. The estate/trust will have to issue a T-4 slip to the individual for an amount equal to the fees paid for the particular calendar year and remit the necessary withholdings to CRA. CRA will issue a Business Number to the estate for purposes of payroll reporting.
The fees would be taxable to the executor/trustee and in order to avoid double taxation the executor would want those fees deductible to the estate/trust. The Income Tax Act indicates that expenses incurred to produce income from business or property are deductible. In this respect executor fees paid by the estate/trust in relation to the earning of income could be considered deductible.
There have been court decisions which could have an impact on the deductibility of fees paid by estates/trusts. In some cases the fees paid to the executor were based on agreed amounts between the executor and the beneficiaries. A CRA auditor reassessed the deductibility of the fees using a schedule found in a provincial tariff of fees based on income and taxable capital gains of the estate. The exact amount of the tariff is not important, just the fact that the remuneration of the executor was based on an agreed amount and the executor did not provide a detailed account of the allocation of his time between income matters and administrative matters. It was found that since the executor could not provide details of the breakdown of his fees with respect to income earning or administrative activities, the estate was denied full deductibility of the executor fees and instead the tariff rates proposed by the CRA auditor were used even though the judiciary felt that it was not necessarily the correct method.
This jurisprudence has reiterated that it is very important for the executor to keep track of the time he spends with descriptions of the activity relating to that time in order to have a detailed record for review at a later date. If the fees paid to an executor relate to income earning activities and a detailed record exists then those fees could be deductible based on prior court cases. The legal decisions could be applied to fees paid to lawyers and accountants as well, so the estate should ensure their advisors are keeping track of their time relating to income earning activities.
This just reinforces the fact that good documentation does have its just rewards, only occasionally those rewards may not occur for some time.
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