Introduction - Executor'due south Compensation & Estate Planning

Addressing executor's fee is an important facet of estate planning. When left unaddressed by the will, this fee tin can negatively bear on the amount of bequests that a taxpayer intends to leave for his or her loved ones. Many taxpayers include specific clauses in their volition that address the effect 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 correct to demand bounty 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 conspicuously or at all, or the taxpayer does not take a volition, the executor tin can sue the estate for the compensation that he or she is entitled to. This in plough, has the potential to reduce the value of the manor and the beneficiaries' entitlement.

Executor'south Compensation is Consequential: Impact on Beneficiaries

The executor, the person who administers a volition, is legally entitled to compensation. This means that fifty-fifty in instances where family and friends hold to accept on the task of manor administration for free, they still take the right to subsequently inquire for and receive bounty for their services. The likelihood this scenario materializing increases especially in instances where the estate is circuitous and the executor is required to invest significant corporeality of time in its administration.

A well-drafted will should include at least the corporeality, if non the method for calculating executor's fees. For case, a will may indicate that the executor is entitled to receive a valuable painting every bit his or her compensation, or that the executor is to receive $v,000 in fees in one case the estate is wound up.

In instances where the volition does not address the consequence of executor'due south fees, the statute, and its estimation past the courts set out the methodology for determining the amount of bounty. The relevant statutes practice not set out any fixed fee formula; rather a method for calculating the fees is outlined. The Trustee Act states that the executor'due south bounty must exist fair and reasonable. Generally, in assessing what off-white and reasonable mean in a particular scenario, the courts look at v factors:

  • the gross value of the estate;
  • the amount of revenue receipts and disbursements;
  • the complexity of the work involved and whether whatsoever 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 complication of tasks delegated to others;
  • the number of personal representatives appointed in the volition, if any

Because these factors, the courts have by and large accustomed every bit fair and reasonable an executor'south fee that is about 5% of the estate value, plus the ongoing management fee of 2/5 of 1% of the boilerplate annual value of the estate assets during the estate assistants 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'southward Position

The CRA considers the compensation received past an executor to be taxable income. Generally, the CRA classifies these fees every bit employment income taxable in the year that the fees are paid to the executor. Fifty-fifty 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 study 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 advisable amount of income tax, Canada Pension Plan (the "CPP") and Employment Insurance (the "EI") contributions. The appropriate charge per unit 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 notation that in that location are instances where the person or entity interim as the executor tin exist 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 volition, one that appropriately addresses executor fees is an important first pace in reducing the expenses, fees and taxes that an estate can incurs. In plow, this has the potential to maximize the value of the estate distributable to the beneficiaries. Contact ane of our experienced Canadian tax and estate planning lawyers in Toronto with your estate planning needs.

The content of this commodity is intended to provide a general guide to the subject affair. Specialist advice should be sought about your specific circumstances.