Introduction - Executor's Compensation & Estate Planning
Addressing executor's fee is an important facet of estate planning. When left unaddressed by the will, this fee can negatively impact the amount of bequests that a taxpayer intends to leave for his or her loved ones. Many taxpayers include specific clauses in their will that address the issue of executor compensation. Unless the wording in the will is clear on its face, a court may interpret the compensation left for the executor as a gift. This means that the executor has the right to demand compensation from the estate, in addition to the gift the deceased taxpayer has left for the executor. In instances where the executor fee is left unaddressed, either because the will does not address the issue clearly or at all, or the taxpayer does not have a will, the executor can sue the estate for the compensation that he or she is entitled to. This in turn, has the potential to reduce the value of the estate and the beneficiaries' entitlement.
Executor's Compensation is Consequential: Impact on Beneficiaries
The executor, the person who administers a will, is legally entitled to compensation. This means that even in instances where family and friends agree to take on the task of estate administration for free, they still have the right to subsequently ask for and receive compensation for their services. The likelihood this scenario materializing increases especially in instances where the estate is complex and the executor is required to invest significant amount of time in its administration.
A well-drafted will should include at least the amount, if not the method for calculating executor's fees. For example, a will may indicate that the executor is entitled to receive a valuable painting as his or her compensation, or that the executor is to receive $5,000 in fees once the estate is wound up.
In instances where the will does not address the issue of executor's fees, the statute, and its interpretation by the courts set out the methodology for determining the amount of compensation. The relevant statutes do not set out any fixed fee formula; rather a method for calculating the fees is outlined. The Trustee Act states that the executor's compensation must be fair and reasonable. Generally, in assessing what fair and reasonable mean in a particular scenario, the courts look at five factors:
- the gross value of the estate;
- the amount of revenue receipts and disbursements;
- the complexity of the work involved and whether any difficult or unusual questions were raised;
- the amount of skill, labour, responsibility, technological support and specialized knowledge required;
- the time expended by the executor;
- the number and complexity of tasks delegated to others;
- the number of personal representatives appointed in the will, if any
Considering these factors, the courts have generally accepted as fair and reasonable an executor's fee that is about 5% of the estate value, plus the ongoing management fee of 2/5 of 1% of the average annual value of the estate assets during the estate administration process. The executor may be entitled to additional compensation if the estate becomes unduly complicated, requiring quite significant time, knowledge and expertise from the executor in carrying out his responsibilities.
Taxation of Executor Fees: CRA's Position
The CRA considers the compensation received by an executor to be taxable income. Generally, the CRA classifies these fees as employment income taxable in the year that the fees are paid to the executor. Even if the executor receives a lump sum payment for the services rendered over several years, this income becomes taxable only in the year the executor receives the payment. Thus, the year that the executor receives payment is the year that the he or she is obligated to report this employment income to the CRA.
As the employer, the estate is liable to make the appropriate payroll deductions and T4 filings. Generally the payroll deductions include the appropriate amount of income tax, Canada Pension Plan (the "CPP") and Employment Insurance (the "EI") contributions. The appropriate rate for all three deductions is set out by the relevant statutes. The CRA offers an online tool whereby employers can calculate the appropriate payroll deductions applicable to the executor fee. 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.
Tax Tip: Proper estate planning should address executor fees
Estate litigations pertaining to executor fees can be quite costly, resulting in considerable reduction in the value of the estate available to the beneficiaries A well drafted will, one that appropriately addresses executor fees is an important first step in reducing the expenses, fees and taxes that an estate can incurs. In turn, this has the potential to maximize the value of the estate distributable to the beneficiaries. Contact one of our experienced Canadian tax and estate planning lawyers in Toronto with your estate planning needs.