What do you do with an estate where the administration of the estate is all done and as an estate trustee or lawyer you are at the stage where you are ready to pay money to a foreign resident as a beneficiary of the deceased’s estate?
Do you charge HST to a non-resident beneficiary receiving money from an estate? The answer is – it depends.
The HST is a consumption value added tax (VAT) that is assessed incrementally based on the increase in value of a product or service at each stage of production or distribution. In theory, it is designed to pay for infrastructure and services provided by a state and funded by its taxpayers for services relied upon for that product or service. It is a tax that is used by many countries around the world. As of 2018, 166 of approximately 193 tax collecting countries employ a VAT, including all 35 of the more advanced Organization for Economic Cooperation and Development (OECD) members, except the United States which uses a sales tax system instead. The HST is used in provinces where both the federal goods and services tax (GST) and the regional provincial sales tax (PST) have been combined into a single value added sales tax (HST). In Ontario the HST is 13% of which 8% is the provincial portion.
The tax is structured in a way that mostly does not apply to non-residents. Many services provided in Canada are “zero-rated” for the HST when supplied to a non-resident. However, if a service is rendered to an individual, the individual generally has to be outside Canada while the service is being performed for there to be no HST. If legal services are provided to a non-resident or if the non-resident is receiving a bequest, then there is no HST charged,while the individual is resident in a foreign country.
There are situations where a person might be deemed to be resident although never having been in Canada. This would include when a person is subject to, or commences a court proceeding in Canada. Legal services and other advisory, consulting, or professional services provided to a non-resident are generally not charged except: a service rendered to an individual in connection with criminal, civil, or administrative litigation in Canada (however, a service rendered before the start of such litigation may be zero-rated and not charged); a service in respect of real property situated in Canada; a service in respect of goods situated in Canada at the time the service is performed, among others.
In regard to international inheritance and the HST it therefore depends if litigation was commenced in Canada in regard to that estate, or if there was some other event linking the beneficiary to Canada, other than the receipt of money. Where there is litigation then that portion of the service provided will be subject to the HST and should be charged to the non-resident. Otherwise, there is no HST charged to a non-resident beneficiary.
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Under the common law, trustees are not permitted to take compensation unless authorized to do so by the will or trust document, an agreement of all the beneficiaries, or court order. In Ontario, trustees have a statutory right to compensation. Section 61 of the Trustee Act provides for two types of compensation arrangements: (i) the “fair and reasonable allowance for the care, pains and trouble, and the time expended in and about the estate” or (ii) compensation “fixed by the instrument creating the trust”.
Bequests made under a will, being capital distributions, are not taxed as income in Canada. On the other hand, compensation claimed by an estate trustee will be subject to income tax.
But does an estate trustee have an obligation to charge HST on the compensation?
The Canada Revenue Agency (CRA) takes the position that executor’s compensation received for administrating an estate, not performed “in the regular course of business”, is income from employment or an office under section 3 of the Income Tax Act (“ITA”). This compensation is therefore subject to income tax for the year the compensation is paid, even if the work was performed over the course of two or more years. An executor who does not administer estates “in the regular course of business” does not appear to have an obligation to charge HST in addition to the compensation.
If the executor’s compensation is considered to be income from employment or an office, the estate trustee or administrator must request a payroll account be opened for the estate and generate a t4 slip for the estate trustee or executor. Pursuant to section 153(1) of the ITA, the estate must withhold an amount determined by the Income Tax Regulations.
If the executor administers estates “in the regular course of business,” HST must be imposed pursuant to Part IX of the Excise Tax Act (“ETA”). Accordingly, trust companies must charge HST for any compensation claimed. Whether a lawyer must charge HST on compensation for administration of an estate is a question of fact. A lawyer whose regular practice includes the administration of estates must charge HST on claimed compensation. Conversely, a lawyer who does not administer estates as a part of his or her practice but acts as an executor for the estate of a friend or family may not be under an obligation to charge HST on the compensation they claim. In this case, the compensation would be considered income from employment or an office rather than income earned in the regular course of business.
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