Tag: Income Tax Act
If you are asked to be someone’s estate trustee/executor, you may wonder what liability you are assuming. That is on top of the regular workload, as settling the testator’s financial affairs and distributing the remaining assets to their beneficiaries usually takes a year, involving visits to banks, lawyers and other relevant parties. Much can happen in that time, and beneficiaries may be pressuring you to quickly pass along their share of the estate.
Here are some important points to keep in mind with personal liability.
Many Last Wills and Testaments contain phrasing meant to protect loved ones as they carry out their executor duties, usually along the lines of: “No trustee acting in good faith shall be held liable for any loss, except for loss caused by his or her own dishonesty, gross negligence or a wilful breach of trust.”
That type of clause is important, but there is still some liability that comes with the position.
First, let’s make it clear that an executor does not incur personal liability for the debts and liabilities of the deceased. However, it is the executor’s duty to ensure that financial obligations are paid from the estate before any money goes to beneficiaries.
The potential liability here is particularly significant with respect to taxes. Most estates will have taxes owing, so it is the executor’s duty to ensure that all outstanding tax matters are resolved. Section 159 of the Income Tax Act requires executors to obtain a clearance certificate. This document confirms that the taxes of the deceased have been paid in full. If the executor does not obtain this certificate and the funds from the estate have already been distributed, they will be personally liable for taxes owed.
There is always a chance that an executor could discover the testator was not meeting their tax obligations to the Canada Revenue Agency (CRA). There are a number of reasons this may arise, ranging from simple carelessness to deliberate tax evasion. No matter the situation, the executor is responsible for rectifying that shortcoming using the estate’s funds, before money is given out to beneficiaries.
The CRA has created a Voluntary Disclosure Program that allows executors to come forward and voluntarily correct any errors or omissions without being subject to penalties or prosecution.
Personal liability for executors also arises if they spend money on professionals to help with the administration of the estate. That could include such people as lawyers, accountants, investment advisors, real estate agents, or art appraisers. Estates can be complex, so it is well within the scope of diligent executors to seek professional guidance. Accordingly, the cost for these services will be borne by the estate, not by the executor.
Detailed records must be kept of any money spent, as executors have a duty to account to the beneficiaries. These records must show all expenses paid by the estate and what money the estate received, from insurance benefits, banks or other sources.
In most cases, beneficiaries of an estate will approve, or consent to, the accounts as kept by the estate trustee. But if they feel finances were not properly managed, they can ask for court approval of the records, known as a “passing of accounts.”
Since executors have a duty to maximize the recovery, and value, of estate assets, they are personally liable for any losses they cause. That could include being reckless with the assets, which causes a loss in monetary value. Examples of this would be if an estate has to pay penalties on a tax return that the executor filed extremely late for no good reason, or if a home was sold for much less than market value.
The good news is that if an executor performs their duty diligently and honestly, any financial liability they assume will be paid by the estate.
Be safe, and have a great day.
Changes made in 2016 to the Income Tax Act resulted in unfair treatment to disabled Canadians by restricting which types of trusts were eligible for a “principal residence exemption” (PRE). Now the Department of Finance has issued a letter of comfort, attempting to rectify these unfair changes.
What is the PRE?
In short, the PRE allows Canadians, when selling their principal residence, to avoid being taxed on their realized capital gains. Without this exemption, someone selling their principal residence would be taxed on 50% of their capital gains, which could be very significant when taking into account the value of the property.
Injustice with the Current Rules
The changes introduced in the Income Tax Act in 2016 meant only three categories of trusts could claim the exemption. The first was life interest trusts, the second was qualified disability trusts, and the third was inter vivos or testamentary trusts established for a minor child with one or more parents being deceased.
This definition significantly restricted the type of trusts that were eligible to claim the PRE. Because the second category, qualified disability trusts, are testamentary trusts (resulting from death), this meant that disabled taxpayers who were the beneficiaries of inter vivos trusts (not resulting from death) could not claim the exception and would have capital gains on their principal residence taxed at the highest rate.
In practice, this would result in an unexpected and significant amount of income tax being due 21 years after the creation of the trust, because after 21 years the trust will have been deemed to have disposed of its capital property. If a disabled beneficiary did not have enough funds available in the trust to pay the capital gains tax, there could be severe consequences.
In response to this problem, the Department of Finance has issued a comfort letter stating that it will make recommendations to the Minister of Finance to fix the issue. This would involve amending the Income Tax Act to permit certain inter vivos trusts to claim the PRE. This would also be subject to certain conditions. Firstly, the beneficiary needs to be a resident in Canada who is disabled (able to claim the disability tax credit). Secondly, the beneficiary must be a child, spouse, common-law partner, or former spouse or partner of the trust’s settlor. Thirdly and finally, no one other than the qualifying disabled beneficiary can receive the income or capital of the trust. If these three conditions are satisfied, the disabled beneficiary would be able to claim the tax exemption for their principal residence.
Fixing the injustice
This proposal was made recently and has not yet been implemented. Any laws that put disabled Canadians at a disadvantage, even inadvertently, ought to be changed and the injustice should be corrected. Implementation of these recommendations would be welcome and cannot arrive soon enough.
Thanks for reading,
Suzana Popovic-Montag & Sean Hess
Immigrants come to Canada from many countries around the world and when they die their estates in Canada can involve foreign beneficiaries and asset transfers. According to an article in the Ottawa Citizen, most Canadians don’t seem to have the foggiest notion of how many immigrants and refugees this country admits every year. When asked the question, during one of Citizenship and Immigration Canada’s annual tracking surveys, 43 per cent of the Canadian adults polled wouldn’t even hazard a guess. Fully one-third thought the number was less than 100,000 a year. In fact, from 2001- 2014 Canada opened its doors to about 250,000 immigrants and refugees a year. (Only nine per cent of those surveyed suggested a number remotely close to that.) Although this newspaper article is from August 27, 2014 the statistics are likely much the same today.
The total number of foreign-born Canadians is interesting. According to the 2016 Census, there were 7,540,830 foreign-born individuals who came to Canada through the immigration process, representing 21.9% or over one-fifth of Canada’s total population. This proportion is close to the 22.3% recorded during the 1921 Census, the highest level since Confederation in 1867. In urban areas the percentage is higher, with Toronto currently at approximately 46%. Historically, immigrants and their families have always comprised an ongoing significant contribution to Canada’s population composition.
So what are some of the challenges an estate trustee or lawyer faces when there is a deceased person with beneficiaries outside of Canada? There are many tax considerations to be dealt with on an average estate, even without any international aspects to it. One additional concern with international inheritance is Section 116 of the Income Tax Act which creates a potential additional obligation and liability for estate trustees and lawyers. Persons in Canada, who handle money that is paid to a “non-resident” will want to review Section 116 of the Income Tax Act . After reviewing the section everyone should consider whether a hold back of 25% of the monies to be paid would be appropriate, until further clearance is obtained.
Thank you for attention,
If a Registered Retirement Savings Plan passes outside of an Estate, for example to a spouse or child, who pays the tax – the recipient beneficiary or the Estate?
In order to answer this question, first consider the terms of the Will.
If the Will does not clearly set out who is responsible, attention must be turned to the statute and common law.
According to section 160.2(1) of the Income Tax Act, the deceased testator and the recipient of the RRSP are jointly and severally liable for the payment of the tax. The section specifically states that “…the taxpayer and the last annuitant under the plan are jointly and severally, or solidarily, liable to pay a part of the annuitant’s tax…”.
Ontario common law has, however, held that the payment of any tax liability with respect to an RRSP remains the primary obligation of the estate. Payment should be sought from the RRSP recipient, only if there are insufficient assets in the estate to satisfy the tax obligation.
In Banting v Saunders, Justice J. Lofchik held that:
“…the estate, rather than the designated beneficiaries, is liable for the income tax liability arising from the deemed realization of the R.R.S.P.’s and R.R.I.F.’s so long as there are sufficient assets in the estate including the bequest to Banting, to cover the debts of the estate and it is only in the event that there are not sufficient assets in the estate to cover all liabilities that the beneficiaries of the R.R.S.P.’s and the R.R.I.F.’s may be called upon.”
Nonetheless, as set out in O’Callaghan v. The Queen, the CRA may first seek payment directly from the RRSP recipient, instead of the estate, especially if there is a possiblity that there are insufficient assets in the estate to satisfy the tax.
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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.
Thank you for reading.
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