Our blog has previously covered the issue of inheritance tax.
As a reminder, inheritance tax is charged on estates of a certain value or greater on a percentage basis. Smaller estates (different amounts depending on the jurisdiction) may be exempt, with the applicable tax charged on the portion of the estate exceeding the exemption limit. Inheritance tax does not apply to Canadian estates or their beneficiaries. While we see individuals go to great lengths to avoid the payment of Estate Administration Taxes payable on assets administered under a probated will in Ontario and other provinces, the rate (at approximately 1.5% in Ontario) is significantly lower than what we see in jurisdictions where estates are subject to inheritance tax (up to 55% in Japan).
In particular, we have covered a number of developments in U.S. inheritance tax, which saw some fluctuations during Donald Trump’s presidency. Trump had proposed the elimination of inheritance taxes all together. More recently, President Joe Biden’s government has been considering a number of measures to increase the taxation of large estates: the reduction of the estate tax exemption to $3.5 million (from $11.7 million), increasing inheritance tax rates from 40% to 65%, and/or increasing taxes on capital gains in respect of inherited assets. News reports suggest that there has been resistance to the proposed increased tax burden to estates as the proposed increased capital gains tax makes its way through congress. However, the measures proposed by President Biden could generate an additional $213 billion to $400 billion over the next ten years.
Having just seen another federal election in Canada, it is interesting to follow along with how inheritance tax has been used as an important part of political agendas in other jurisdictions. It will be interesting to see if inheritance tax or other taxes applied to estates become part of political platforms locally in coming years, as we continue to approach the greatest ever transition of wealth from one generation to the next.
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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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