Calculating Compensation – Hull on Estate and Succession Planning #124
Listen to Calculating Compensation
This week, Ian and Suzana discuss the number of emails they received last week about cross-reference analysis and compensation. Ian references 5 cases that are important to this subject:
1. Logan vs Laing – Ontario Court of Appeal
2. Toronto Railway Trust
3. Re. Knoch (1982)
4. George William Trust
5. Re. Jeffrey
They explain and continue talking about calculating compensation and how to audit the claim for compensation.
Calculating Compensation – Hull on Estate and Succession Planning Podcast #124
Posted on August 5, 2008 by Hull & Hull LLP
Suzana Popovic-Montag: Hi, and welcome to Hull on Estate and Succession Planning. You’re listening to Episode #124 of our podcast on Tuesday, August 5th, 2008.
Welcome to Hull on Estate and Succession Planning, a series of podcasts hosted by Ian Hull and Suzana Popovic-Montag, that will provide information and insights into estate planning in Canada. From the offices of Hull Estate Mediation in Toronto, Ontario, Canada, here are Ian and Suzana.
Suzana Popovic-Montag: Hi there Ian, how are you?
Ian Hull: I’m great Suzana, how are you doing today?
Suzana Popovic-Montag: I’m great thank you.
Ian Hull: Super. Well listen, please, feel free to give us an e-mail at firstname.lastname@example.org.
Suzana Popovic-Montag: Or feel free to give us a call at our direct line, 206-457-1985.
Ian Hull: Alright Suzana, well I think I managed certainly to confuse some people on our last podcast because I had three e-mails come in talking about what the heck I was getting at in this cross-referencing and maybe I got a little case law heavy in the last podcast. But we’re going to make sure that the show notes will reflect the cases that we’re talking about. But there really are only four cases, and it’s the Re. Laing decision. There’s a case called Toronto Railway Trust that we’re going to talk about. There’s a case called Re. Knoch and there’s a case called George William Trust. Those four cases, the references are in the show notes. But the important thing I think was, and we’re not going to rehash on pre-taking because that part, all three e-mails seemed to be quite clear that that wasn’t the problem. But there was some confusion about what we’re getting at with this whole Re. Laing analysis. And I don’t necessarily recommend to have to read the case but it is a phenomenal decision because what it did was, it gave us what we now identify as the cross-check. The balancing act between the five factors in the Toronto Railway Trust case versus the, you know, we call it a tariff, you know, whatever you want to call it. It’s the same as what real estate agents charge. You get the commission. It’s probably the nicest way of putting it. There is a commission that you get when you are an executor, that’s a general rule and that’s generally 5%. We talked about the plus or minuses and all of that.
So what Re. Laing said to us was first of all, take the commission seriously and don’t come to the Courts looking for us to adjust the commission unless you have got a good reason, it seems to me. And what they did was they relied on…sorry I did say four cases; there is a fifth case because the cornerstone part of the whole decision was Re. Jeffrey and that was a decision of Mr. Justice Killeen. Again, coming from the great town of London, Ontario, just like the George William Trust, we have some wonderful judges down there. And Justice Killeen was the guy that came out with this whole cross-check, cross-reference analysis, and brought certainty to the process of how we calculate compensation at a level that, quite frankly, for 50 years, has been unmatched because when I first started practicing law, the biggest area of contention with this type of passing of accounts issue was passing on compensation, and fighting over compensation. Because of Re. Laing in part, most of the time you’re not into those battles anymore because of the clear message that Re. Laing, Re. Jeffrey says and that is here is your formula and by the way, don’t mess with the commission unless you’ve got a good reason. That seems to be generally the approach that the Courts are taking. Now obviously that’s a general statement. Every case is different and the Re. Laing decision allows us to look at that difference because it talks about these five factors: the time, the skill, the care, the type of assets that are under administration, how much you are administering. All of those real life practical factors get dovetailed into and looked at against this commission. And is the commission excessive looking at those factors?
An easy example is, and it was a case that we see a lot of the time and that is, someone dies, they’ve got $20,000 in GIC, they’ve got $200,000 in a RIF and they’ve got a checking account of $16.00. They die, you go to administer that estate, you look at the size of the estate. You look at how hard it was. Well, the GIC and the RIF are, you know, pretty easy administration in terms of that. But on the face of it, you might say the commission is too high. But what we see from time to time is, here’s a great thing you throw into the hopper on that example. When you just really think that you should reduce the commission because it looks like a straightforward case, you throw in the analysis of what if this person did file tax returns for 10 years? Just because, you know, they got old and they just wanted to buck the system. Well, you throw that little factor in, all of a sudden the commission looks a little modest because you’re going to have to retain counsel, retain the tax advisors and so on to solve that problem. On the face of what looks like a straightforward administration, maybe you should reduce the commission, like you might do in a house sale situation where someone will come around to the agent and they’ll say look, I’ll do it for 1% less than my next-door competitor. But you’ve got to look at, the Courts have said, you’ve just got to look at the situation case by case.
Suzana Popovic-Montag: And it really is a matter of big picturing, Ian, it seems to me because as you say, it could, on the face of it, look like a simple thing but once you dig deeper into the administration, there is all of these complexities that might not be evident on the face of a set of accounts. So it helps with, as we’ve talked about in the past, keeping detailed records so that when you have to justify the work that has been done, you can point to the proof of the fact that it’s been done and to what extent.
Ian Hull: Okay, so now let’s just talk about, now that we’ve figured out the formula on how to calculate compensation, let’s just make sort of a mini checklist on what we also would look at again to audit properly the claim for compensation. And that is what this is all about. We’re auditing the claim and we’re determining whether or not the claim for compensation or the commission sought is justified in the circumstances. So we’ve talked about the big picture, the formula, the cross-check formula.
Now let’s just go through a couple of other items that you might want to add to your checklist that are easy hits or easy issues to consider when auditing the compensation.
Suzana Popovic-Montag: And the quickest one that comes to mind, of course, is what we’ve talked about in the past, is just like very large receipts or disbursements that are paid during the course of an administration. For example, that big RIF account of $200,000; other large bank accounts or insurance policy proceeds. Those kinds of things that are ear-marked and big sums could be ones to which you might argue a lesser percentage or commission should be applied.
Ian Hull: And another example would be are there actual deductions, are there proper deductions for issues that, items that just shouldn’t be compensated on. For example, one might be when you pay yourself a gift. So the executor gets a gift under the Will. That you’re not allowed to put into the mix to calculate compensation.
Suzana Popovic-Montag: Another common deduction that we see, a proper deduction is when there is a transfer between bank accounts. Trustees will occasionally take from one bank account, put into another, the estate bank account for instance, and then pay things from there. So those kinds of transfers are not normally compensable.
Ian Hull: Another area is, you know, you want to look at net losses on investments. It’s another area to consider which are not typically compensable.
Suzana Popovic-Montag: And another flashpoint that we see a lot of is when there are legal or accounting fees that are paid to firms to which the trustee is a member of. So when the trustee is acting and looking for compensation pursuant to the tariffs and guidelines that we’ve talked about and also looking in addition for legal fees and accounting fees, then those kinds of things need to be looked at carefully.
Ian Hull: A classic deduction that can be made is looking at the question of care and management. And the question of care and management can be a big ticket item. When we talked about this formula, if you look at the formula and when you calculate care and management, you’re entitled to, if compensation and a commission should apply here, 2/5ths of 1% on the annual value. So if you do that over a five year period, that number can add up, regardless of the size of the estate. That’s a significant commission so to speak that you can charge. Now one of the easy questions that you could ask yourself when you look at this, and we always start by looking at our Will or trust that we’re looking at before we start to audit these accounts, is, is this a proper case for care and management? Or is it an immediately distributable estate? And I mean, immediately distributable that on death, within the year of death, you’re supposed to generally be able to distribute the estate with only a holdback for liabilities such as taxes. And if it is an immediately distributable estate, unless you have a pretty good reason, the Courts get a little grumpy about paying yourself care and management in those situations.
Alright, so really from our standpoint, the last podcast we’re going to do on this whole accounting question before we go back into some more administration issues, is going to be talking about the delineation between executor’s compensation and professional work of a lawyer or an accountant. And that is worth, I think, at least one podcast and we’ll fit it into one in our next one because that distinction is an important deduction. It can actually turn out to be a significant deduction on compensation so therefore an important audit item that you want to make sure you’ve got a handle on but one that there is no hard and fast rules on. And so we want to spend some time on our next podcast talking about deductions for compensation that arise out of the delineation between the role of executor and the role of the professional, for example, the lawyer or the accountant.
Suzana Popovic-Montag: Well, that’s great Ian. Thanks very much. I just want to remind our listeners to feel free to give us a call with any comments or questions they might have at 206-457-1985.
Ian Hull: And e-mail, of course. We enjoy receiving them and we’ve had a good barrage of them over the summer, email@example.com. And we welcome your comments, questions or thoughts.
Suzana Popovic-Montag: Thanks very much Ian.
Ian Hull: Thanks Suzana.
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