When a loved one passes away, the person named as the executor in their will takes on the critical role of settling their estate. This involves responsibilities like collecting assets, paying debts, filing tax returns, and distributing the remaining assets to the beneficiaries. It's a big job that can take significant time and effort. In recognition of this, executors receive compensation for their work.
But are executor fees taxable income in Canada? The answer is yes—executors must report the compensation they receive as income on their tax return and pay income tax on it. This compensation is reported on line 10400 – Other employment income.
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What is executor compensation?
Executors (estate executor, estate trustee, personal representative, or liquidator in Quebec) are receive payment for the time and effort they spend administering an estate. The amount of compensation depends on factors like:
- The size and complexity of the estate of the deceased person.
- The amount of work and time spent by the executor.
- The executor's level of skill and responsibility.
- The results the executor achieves for the estate and beneficiaries, especially if it is a complex estate.
Executor fees vary by province and circumstances
Sometimes, the will specifies the amount or a formula for calculating the executor's compensation. If the will is silent, each province has guidelines or standard practices for determining reasonable compensation. For example:
- In Ontario, executors commonly receive 2.5% to 5% of the estate's total value.
- 0.4% to 5% is typical in British Columbia, depending on the estate's value.
- In Alberta, 1% to 5% is typical.
Some provinces like Ontario also allow a “care and management fee” of 2/5 of 1% per year on average assets under administration.
Remember, you are not obligated to accept the role of an executor.
Out-of-pocket costs are expensed
Executors receive reimbursement for a reasonable allowance of out-of-pocket expenses they incur while administering the estate, like postage, photocopying, and mileage. These reimbursements are not taxable to the executor. Expenses cannot exceed the gross aggregate value of the estate.
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Are executor fees taxable income?
The income is taxable at the executor's marginal tax rate.
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Yes, the Canada Revenue Agency (CRA) considers executor fees taxable income. The CRA views executor compensation as either employment income (if the executor does not act in this capacity regularly) or business income (if they do).
No Canada Pension Plan (CPP) or Employment Insurance (EI) premiums are deducted as employment income, but the estate may have a T4 slip reporting requirement. As business income, the executor may be able to deduct certain expenses from their fees.
In either case, the executor must report their fees on their T1 personal tax return in the year they receive it. The income is taxable at the executor's marginal tax rate.
Taxation timing
Executors have some flexibility in timing when to take their compensation. Some take annual fees throughout the estate administration period, while others take a lump sum at the end when the estate is wound up.
From a tax perspective, it's often advantageous for executors to spread their fees over several years. This may allow more income to be taxed in lower tax brackets. The executor may also be able to use deductions and credits to offset the income.
By contrast, taking all the fees in one year could result in a significant spike in taxable income and a larger tax bill that year. However, executors should be aware of the deadlines for filing the estate's final return (typically April 30 of the year after the year of death).
What happens if executors don't report fees?
If executors fail to report fees they've received, they could face consequences from the CRA. These may include:
- The requirement to pay the income tax owing plus interest.
- Potential penalties for failure to report income.
- Risk of audit on their personal tax return.
Executors should keep good records of the amounts paid and received. If they are not receiving all the compensation they are entitled to, they should document this in case the CRA reviews the estate's tax returns.
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Tips for executors
Here are some best practices for executors to handle compensation:
- Familiarize yourself with the role of executor, executor duties, and the provincial fee guidelines.
- Discuss fair compensation early on with co-executors and beneficiaries to avoid disputes. Given the duties of the executor and volume of work, this is the best way to ensure respect of remuneration.
- Keep detailed records of your time and effort working on the estate. Specific circumstances of the administration of the estate of the deceased might require a spectrum of fees.
- Consult an estate lawyer or accountant to determine a reasonable fee amount. Legal fees can add up quickly if not planned in advance.
- Consider spreading out fee payments over multiple years to manage the tax impact.
- Ensure you report all fees received on your personal tax return each year
Settling an estate is a big responsibility and hard work. Executors deserve to be compensated fairly for the time and effort involved with this important undertaking while being aware of the tax implications. Executives can fulfil their duties by planning and getting professional advice while maximizing their executor's fee and minimizing disputes or tax obligations.
Simplifying estate planning with Epilogue
Financial planning involves preparing for the future and ensuring your loved ones are cared for. Epilogue, a Canadian online estate planning platform, simplifies creating a legally binding will. It offers a user-friendly interface that guides you through preparing a will, power of attorney, and other essential documents.
With Epilogue, you can have peace of mind knowing that your wishes will be fulfilled and your executors will have a clear plan to follow.
| Epilogue features | Description |
| Online will creation | Easy-to-use platform guides you through the process of creating a legally binding will |
| Power of Attorney documents | Prepare essential documents to designate someone to manage your affairs if you become incapacitated |
| Affordable pricing | Competitive pricing plans to fit your budget and needs |
| Secure data storage | Your information is kept safe and secure with encryption and data protection measures |
| Legal expertise | Wills are reviewed by legal professionals to ensure validity and compliance with provincial laws |
| Lifetime updates | Make unlimited updates to your will as your life circumstances change |
Using Epilogue's services, you can simplify the estate planning process and ensure that your executors have a clear roadmap to follow when the time comes. This can help reduce the burden on your executors and minimize the risk of disputes or challenges to your will—without requiring a law firm.
To learn more about Epilogue, check out this article that reviews their services in detail.
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