Gustafson Accounting – Oak Bay Victoria Accountant

What are the tax responsibilities of an Executor/Executrix?

When agreeing to take on the role of Executor for someone’s Estate or when beginning an Executorship after someone’s decease it is good to have a clear understanding of your responsibilities in this role.  This blog addresses some common considerations:

  1. An executor or executrix, as representative of the Estate, is responsible for all the final reporting of the deceased’s income to the Canada Revenue Agency as well as any residual Estate income that may arise from a continuing testamentary Trust or residual assets or receipts that take time to liquidate or receive.  This can be an onerous task as it requires a tabulation of all assets at death including investments, properties, registered plans, life insurance etc…  including foreign sources.  If advance planning has been done then the final tax reporting obligations should be straight forward as assets will have been identified and proper documentation and contacts identified.
  2. Number of returns – It is possible to file as many as four tax returns for an individual in the year of their decease.  This offers many tax planning opportunities and opportunities to minimize taxes on the final return.  This can be significant as all assets held by the individual are deemed to be sold on the date of death which may trigger significant tax consequences.  Which returns are available to a given individual will vary depending on individual circumstances.
  3. Continuing trusts – A Will may establish a testamentary Trust that will continue for years to come until some final condition/s are met.  In such cases it will be necessary for the Executor to file a Trust tax return each year that the Trust continues.   Testamentary trusts have many tax advantages, including access to regular marginal tax rates that are unavailable to other Trusts, which make them potentially important Estate planning tools, however, the ongoing responsibilities for tax reporting will fall to the Executor or Executrix of the Estate.
  4. Notifications – It is also important to notify appropriate Agencies as part of the Executors duties.  Service Canada and CRA should both be advised as soon as possible in order to cease all Pension payments (CPP, OAS etc…) and to have final tax slips issued.  A handy checklist for this purpose has been provided by Service Canada: http://www.servicecanada.gc.ca/eng/lifeevents/loss.shtml.
  5. Executor/Executrix Tax Liability – This is also a significant consideration for Executor’s to consider.  In the event that a previously unidentified tax liability of the Estate is identified and all assets of the Estate have already been distributed to the beneficiaries, the CRA may hold the Executor responsible for the additional or outstanding taxes levied.  This is a rather thankless position to find oneself in for providing a service to a friend or family member.  It is usually possible to relieve oneself of future liability for an Estates’s taxes once all returns have been properly filed and assessed by the CRA by requesting a Clearance Certificate.  Once granted by CRA such Certificates will provide protection to Executors against future tax liability in most circumstances.
  6. Foreign assets – In estate’s involving foreign assets, including vacation properties or investments, there may be additional reporting issues to consider for other jurisdictions.  In such cases professional assistance is strongly advised as coordination of foreign and domestic reporting will be necessary.

Being an Executor or Executrix is an important and complex role that most of us will only perform once or twice in our lifetimes.  As such it is advisable to consider obtaining professional assistance to ensure all paperwork is properly addressed and potential pitfalls avoided.

Update:

If you do not wish to impose this kind of responsibility and risk on a family member or friend, you may also consider engaging a professional executor, such as an accountant, lawyer or professional trustee.  Executory services will be provided on a fee for service basis that typically will run in the range of 1 to 3.5% value of the estate.  The globe and mail has recently commented on this option.  The full article may be viewed here:

http://www.theglobeandmail.com/globe-investor/personal-finance/how-to-prepare-for-executor-duties/article1666058/

What do you think?  Have you been an executor?  What did you learn from the experience and what would you recommend to others?

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Disclaimer

Information contained within this blog or on this website, either expressly or by reference, does not constitute professional advice and is designed strictly for general information purposes. As individual circumstances vary widely anyone seeking assistance with either their accounting or tax situation are strongly encouraged to seek appropriate professional advice.

5 Comments

  1. Gloria says:

    I have a question… can an excetur or executrix claim all expenses from the estate of the person died, for example the if the estate is a town house and then there are some levy tax to be paid and strata fee from the time of death and after until the Will has been probated, is this apply when the excutrix or executor of the Will hasa LIFE STATE to stay in the property ESTATE as per Will, are all the property expensesll be paid on her/his own MONEY or will be coming out from the estate account. Just curious. Thank you, hope to hear your legal opinion.

  2. Hi Gloria, As you point out this is really a legal question. Unfortunately as a Chartered Accountant I cannot provide a legal opinion to you. The responsibility for the expenses you describe will depend on a number of factors including the terms of the Will and any applicable Trusts and their terms. If you are unclear I would suggest that you discuss them with a lawyer who practices in the area of estates and trusts. Sorry I can’t be more helpful.

  3. Rosanne says:

    I am currently executrix of my sister’s estate. She was single and had no children and had a couple of unmatured RRSPs. She also named a charitable society as a beneficiary in her will. Will the Charitable donation lower the amount of taxes that have to be paid on her RRSPs? Am I also correct that the RRSP has to be claimed as income on her final return and the donation can be claimed on the estate return? I am just not sure of the tax implications.

  4. Hi Rosanne, My condolences on the passing of your sister.

    Charitable donations that are named in a Will should be claimed on the final return of the deceased, not the estate return. Up to 100% of tax otherwise payable on the final return can be eliminated by credits generated by qualified donations. If the donee is not named, however, and is perhaps left to the discretion of the executor, then those donations must be claimed on the Estate return (T3), not the final return (T1) of the individual.

    Balances that remain in RRSP’s or RRIF”s are 100% taxable on an individual’s final return. Slips for these balances should be issued by the registered account administrator, but in any event are reportable and fully taxable unless they have been designated to a qualified individual (a spouse, financially dependent child/grandchild under 18, or financially dependent child/grandchild over 18 who has a qualifying disability).

    I hope this helps, but please also consider getting yourself some help to examine the specifics of your situation, as there are other nuances in preparing final and estate returns.

    Thanks for the questions.

  5. Rosanne says:

    Thanks for your condolences and the information James. This presents a catch 22 situation. The funds can’t be distributed from the estate until there is a final clearance from the CRA. I won’t have a donation receipt to claim on the final return until the funds are distributed.

    I know I should get some financial help, but I am trying to do the probate and taxes as inexpensive as possible as my sister named specific amounts to certain people and the balance to six of her friends and I am trying to make sure that they get as much as she intended for them to get. I’m not even taking any funds for being the executrix…I figure that I at least owe that to my sister.

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