Executor Charging Fees An executor is within his legal rights to charge the estate service fees for executing a will document, paying creditors and distributing the assets of the estate. ... You want to create a fund to pay funeral costs, taxes, and probate fees. The usual percentages are up to 5% on the value of capital assets, and up to 5% on the value of income collected in the estate. Discuss executor fees up front Many provincial governments also levy probate taxes or probate fees at death. The compensation and reimbursement of an executor for time expended and costs incurred in connection with the administration of an estate are questions of fact and trust/estate administration law. Steven Frye. There have been court decisions which could have an impact on the deductibility of fees paid by estates/trusts. You may also claim a management fee. For more information, see Guide RC4445, T4A-NR – Payments to Non-Residents for Services Provided in Canada. The taxpayer was required under the contract of employment to pay the travel and motor vehicle expenses incurred in performing the duties of the office or employment; and. When you die, your debts must be paid first – before any money or property you leave behind is passed on to your loved ones. I haven't done anything to the property while owning it. But it does mean that, in the majority of cases, recourse to the court is available to determine the appropriate fee. It is well-established law in Canada that any additional fees received by a beneficiary of an estate for the performance of executor’s duties is fully taxable under the Act. Deduction of expenses against exectuor fees - Thomson Group. However, even the definition of reasonable compensation differs between states. It is possible for the testator (person making the will) and executor to agree on the level of compensation (or no compensation) at the time the will is made. For more information, see Line 254 - Capital gains deduction in CRA’s General Income Tax and Benefit Guide. Until the next time. The beneficiary filed a notice of objection claiming that the executor was negligent. But exercise caution if the will leaves a legacy to the executor—beneficiaries could argue that the legacy was intended to be in lieu of compensation. Conversely, however, if the executor makes decisions that are clearly wrong, self-interested, or unreasonable, then it may be very appropriate to reduce the executor’s compensation and/or require the executor to reimburse the estate for the value lost. Key duties are central to the administration of an estate or trust. Share this article and your comments with peers on social media, Restraints to testamentary freedom when drafting a will, Effective beneficiary designations when converting RRSPs to RRIFs. var CurrentYear = new Date().getFullYear()
It is well-established law in Canada that any additional fees received by a beneficiary of an estate for the performance of executor’s duties is fully taxable under the Act. While the specifics and terminology vary from province to province, the gist of each provision provides for a court to allow compensation to an executor that is “a fair and reasonable allowance for the care, pains and trouble and the time spent in administering the estate or trust.”. Yes, but the ordinary and necessary expenses incurred are deductible by the estate on its 1041 (if one were filed). Elaine Blades is a Toronto-based trust and estate professional. If his estate is large enough that estate taxes are an issue, the estate can deduct legal fees incurred in the probate process when the executor files the estate tax return. There have been many cases where the issue of executor fees is settled by a court. ... Give your executor enough information to make use of any unused capital losses when you die. This is in response to your email in which you asked us to confirm whether an executor who is not acting in the course of a business, is able to deduct out-of-pocket travel expenses incurred for the administration of an estate in arriving at net income for income tax purposes. If the Executor fee is not stipulated in the Will, it will usually be calculated based on a percentage of the value of the Estate. Judges can reduce or cancel compensation for executor delay, mistakes or misconduct. This would mean you managed an estate and did not distribute it immediately. While the Trustee Acts of several provinces (British Columbia, Nova Scotia, Prince Edward Island and Newfoundland and Labrador) establish maximums, no further legislative guidance is provided. How you declare these fees as income and how they are taxed depends on whether you are in the business of being an executor." This can be a point of contention if the work was not equally shared. (If trusts are established under the will, an annual care and management fee also applies.) In this respect executor fees paid by the estate/trust in relation to the earning of income could be considered deductible. Courts generally accept that the executor is entitled about 5% of the estate’s value, plus an ongoing management fee of 2/5 of 1% of the average annual value of the estate assets during the settlement process. This can be done via a clause in the will, or by a separate compensation agreement that is “incorporated by reference” into the will. A recent case decided in March (Flood v The Queen, 2006 TCC 186) involved the deductibility of legal fees paid by an executor to challenge the Canada Revenue Agency's (CRA) income tax assessment of the deceased's final tax return (the "terminal return"). Estate Management Fees. Fees paid to an agent (lawyer, accountant, trust company) retained to perform duties on behalf of the executor must be deducted from any fees otherwise payable to the executor. Any fee taken prior to approval is known as “pre-taking” and is generally not permitted. Also, all applicable taxes (GST/HST) must be charged and withholdings, such as CPP payments, may apply. Without a grant of probate, the institutions that hold or register your assets are unlikely to deal with your executor. Acting as an executor can be highly demanding and time-consuming. Re: Deduction of expenses against executor fees. Unless you are in the business of being an executor (which is highly unlikely), the income is reported as Other income on Line 8 of Schedule 1 which, in turn, will wind up on Line 7a of your Form 1040. 3. I am handling the estate for a friend. Failure to do either may result in penalties of up to $2,500 per instance. Pandemic complicates discretionary trust payouts, Top tips from portfolio managers in 2020: Part 2, Canadians share their top financial goal for 2021, First-time homebuyers see new opportunities, challenges in pandemic economy. Only those expenses deemed to be reasonable will be approved for reimbursement. If an executor keeps track of all these extra little costs that the estate doesn't pay for, the executor is entitled to reimburseme… Robert Flood is a senior real estate and estates and trusts solicitor in Brockville, Ontario. Starting and stopping Canada Pension Plan deductions Canada's social security agreements with other countries Canadian Forces Members and Veterans Re-establishment and Compensation Act, … The Income Tax Act indicates that expenses incurred to produce income from business or property are deductible. REASONS: The fee received by an executor not acting in a business capacity is considered to be income from an office. Courts generally start with what are now termed the “usual percentages,” then access the result against a set of criteria established through case law. The executor paid the interim invoices for legal fees out of estate monies for a total of $48,437.18. How two advisors are riding out the Covid-19 storm - and gaining clients. The CRA offers an online tool whereby employers can calculate the appropriate payroll deductions applicable to the executor fee. The amount received by a lay executor is treated as taxable income in his hands. Note: all executor compensation is subject to Court supervision; the rate approved for large or simple estates may be lower than suggested by this calculator. However, clients acting or considering acting as executor should bear in mind that they are entitled to seek court approval of their accounts and compensation (in most provinces), subject to the terms of any compensation agreement, and that beneficiaries have the right to require them to present their accounts and proposed compensation to the court for approval. Beneficiary approval is possible as long as all beneficiaries are sui juris (have attained the age of majority and are mentally capable) and consent to the amount proposed. The following is a ruling from the Canada Revenue Agency. PRINCIPAL ISSUES: An executor who does not act in the course of a business may incur expenses for the administration of an estate and the expenses may be reimbursable by the estate. The guidelines set out four categories of executor fees: Fees charged on the gross capital value of the estate. Should a lay co-executor wish to be paid, he must negotiate separately with the beneficiaries. Legal fees relating to your deceased father's estate are tax deductible. In Alberta, the fees are some of the lowest in Canada. We apologize for the delay in responding. Travel and motor vehicle expenses are only deductible where the taxpayer was required by a contract of employment to pay such expenses. Robert Flood is a senior real estate and estates and trusts solicitor in Brockville, Ontario. Fees earned by a taxpayer for acting in the capacity of executor in the course of business form part of the business income of the taxpayer, and expenses incurred in this connection are deductible in the usual way in computing such income, to the extent they are not recoverable from the funds of the estate. There will also be “estate administration tax” – … However, it is only the starting point. Courts generally accept that the executor is entitled about 5% of the estate’s value, plus an ongoing management fee of 2/5 of 1% of the average annual value of the estate assets during the settlement process. The filing of a T4 is not due until February 28th of the year following the year the fees are paid. And executor fees by state vary. The fee should be reasonable given the amount of work involved and skill required. More significant administrative costs, such as appraisals, professional fees and court filing fees, are estate expenses paid by the beneficiary and are usually paid directly from estate funds. To ensure the consent is informed and not open to future challenges, the executor should provide the beneficiaries with full disclosure—a complete account of the estate administration, including details of how the compensation was calculated. (In fact, probate fees aren’t deductible by the estate for income tax purposes.) Where a lay executor is involved, it’s less common to see compensation referenced in the will. Regardless, the executor is entitled to reimbursement from the estate for any out-of-pocket expenses. Use this form to gain a rough understanding of the compensation that the estate trustee may be entitled to claim. This can be done via a clause in the will, or by a separate compensation agreement that is “incorporated by reference” into the will. The latter approach is generally preferred by trust companies, as it promotes transparency and typically eliminates the need to seek court approval. I sold it in 2015 for $39,000.00 and paid $1,233.81 in legal fees and $4,407.00 to my realtor. Executor fees can vary significantly, and are dependent on both state law and the decisions of the probate court. Instead, executors should obtain approval for any proposed compensation before charging a fee to the estate. Subsection 8(2) limits the expenses which may be claimed as a deduction from income from an office or employment to the deductions permitted under section 8. This technical interpretation provides general comments about the provisions of the Income Tax Act. Payment of compensation to an executor has traditionally been deemed to be a conflict of interest and, therefore, not permissible. The following is a ruling from the Canada Revenue Agency. there’s a compensation agreement in place; any agents were retained to assist with the administration; and. The CRA considers the compensation received by an executor to be taxable income. The latter approach is generally preferred by trust companies, as it promotes transparency and typically eliminates the need to seek court approval. It is important to note that only estates valued over $5.12 million are required to pay federal tax. In the absence of a compensation agreement, executors shouldn’t assume they’re automatically entitled to 5% of the value of the estate, for instance. The court considers five factors in making this decision: The court has wide discretion to adjust, or even disallow, the amount of compensation claimed. 2. PRINCIPAL ISSUES: An executor who does not act in the course of a business may incur expenses for the administration of an estate and the expenses may be reimbursable by the estate. Therefore, the Act does not allow for the deduction of the said expenses which would be typically recovered from an estate but in actual fact are not reimbursed before the estate is wound up. Factors to consider include whether: It is possible for the testator (person making the will) and executor to agree on the level of compensation (or no compensation) at the time the will is made. Discuss executor fees up front. To do so, the trust or estate will have to open accounts with the Canada Revenue Agency to facilitate the tax withholding. A thorough understanding of the rules involves reference to common law and statute. In other cases, potential executors are motivated by the sometimes lucrative compensation that may be available. However, your Executor will still have to file your final income tax return (and also possibly pay capital gains taxes on some assets). Where estate is wound up before the expenses are reimbursed, can the executor claim the non-reimbursed travel, automobile or meal expenses in arriving at net income for income tax purposes? A fee earned for the administration of an estate by an executor thereof will be treated for tax purposes as either income from a business or income from an office, depending on the particular circumstances of each case. The executor would be entitled to deduct its proper business expenses from such income. Co-Executors Share Fees Discuss the issue of executor fees with your family and your executor when making your estate plan. But before agreeing to an appointment or assuming the role, clients should understand both the inherent responsibilities and the compensation rules—how much and how to claim. The good news for an executor is that she does not have to pay these expenses out of her own pocket. The court will not become involved in dividing the fee among co-executors. Executor compensation is taxable income in the year it is received. A statement of claim was issued by the beneficiaries suing the executor for negligence. In the absence of a set statutory fee, a percentage-based approach has evolved. You must report these amounts on a T4A slip.
If the trust paid fees to a non-resident of Canada for services performed in Canada and the non-resident acts in the capacity of an executor in the course of a business, complete a T4A NR slip. Following the rules can help ensure that clients who are acting as an executor receive fair and reasonable compensation for their work. You must be able to show you actively managed estate assets. In our view, the executor's appointment to administer an estate does not typically require the executor to pay the travel or other expenses related to the administration of the estate as an estate is generally obliged to reimburse an executor's properly incurred out-of-pocket expenses. You may also claim a management fee. 3% to 5% is charged on the first $250,000; 2% to 4% on the next $250,000; and 0.5% to 3% on the balance. We hope our comments will be of assistance. It is important to note that there are instances where the person or entity acting as the executor can be exempt from the CPP contributions. I paid $1,802.93 in HST and $1,643,93 in legal fees. You calculate this fee as 2/5 of 1% of the average value of the gross assets you administer. "Is this deductible?" The perceived attractiveness of compensation for would-be executors is subject to a few additional realities. This would mean you managed an estate and did not distribute it immediately. Most people take on the role of executor because they think it’s an honour to be selected, or because they feel a duty to act. Deciding If You Need Life Insurance in Canada. I am not in the business of being an executor. While the result is similar, the practice differs in Ontario, where the general rule is to further categorize between receipts and disbursements, and charge 2.5% on each entry.