The administration of an estate by a trustee (also called an executor) can be very time consuming and involved. As a result, estate trustees have a statutory right to be paid for their services. The form and amount of compensation can vary widely based on the size of the estate, the time and skill required and the success achieved in administrating it. As a general rule of thumb, estate trustees typically take a percentage of the gross value of the estate as compensation. The figure of 5% is widely acknowledged as a starting point. However, there are a number of ways to structure the compensation. There can be a specific amount set out in the will to be paid to the estate trustee. Likewise, the executor can take a gift or bequest as compensation. This occurs when they are left something in the will as a form of compensation. The way the compensation is structured is very important.
Many estate trustees are surprised to learn that their compensation from the estate can attract income tax as an office or employment source. This brings with it many of the T4 and CPP requirements that, if left unreported, can attract a personal tax bill for the executor and payroll liabilities for the estate. Some people may prefer to structure the compensation as a specific gift to the estate trustee. These gifts will not be taxable but the testator (person making the will) should be careful that the gift cannot be construed as compensation for the executor’s work.The CRA generally upon close examination of an estate will deem a bequest in lieu of executor compensation as taxable income. The practical point is the unlikelihood of a CRA audit of an estate. If it is, the gift will become taxable. Another option that will not avoid tax, but may lower the tax payable, is to straddle compensation over different calendar years. This can lower the marginal tax rate of the estate trustee, which can result in less tax being paid.
In addition to direct compensation, estate trustees can bill travel expenses to the estate. These expenses must be related to the administration of the trust and they must be reasonable. Reasonable travel expenses will not attract tax but there are a number of requirements that the Canada Revenue Agency (CRA) has. Estate trustees should be careful with their travel expenses and comply with the CRA requirements or else they could be subject to tax. The irony is that executors rarely claim the fees received as income.
The implications of tax on estate planning are very complex but can result in large savings. A blog post cannot fully do justice to the complexity of this field of law. If you are thinking about estate planning and want to provide the most efficient system for administrating your estate, you should seek legal advice. The lawyers at Dale Streiman Law LLP have experience with all facets of wills and estates. They are ideally suited to create the most effective succession plan based on your unique needs.
