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Executors are often surprised to learn that the compensation they have received is considered to be income from an office or employment and therefore, subject to income tax withholdings, CPP and T4 reporting requirements. Unfortunately, these may ultimately become the personal responsibility of the executor.
Christmas is a time to think about giving. Many of us give to various charities throughout the year and if we can do this in a tax efficient way we will be able to give more or our giving will be less of a drain on our pocket book. Our Government has taken big steps to reward those who give with substantial tax savings.
Read two distinct scenarios that Tammy has encountered time and time again, and the steps required to set yourself up for the Good - and avoid the Bad and Ugly.
Executors are often surprised to learn that the compensation they have received is considered to be income from an office or employment and therefore, subject to income tax withholdings, CPP and T4 reporting requirements. Failure to comply may result in an unexpected personal tax bill for the executor and an additional liability for the estate including payroll taxes, interest and non-compliance penalties. Unfortunately, these may ultimately become the personal responsibility of the executor.
Testators may consider including specific gifts in their Will for the person they have named as Executor with the intention that the amount will be considered a specific bequest which is not subject to tax. The effectiveness of this depends on the wording contained in the Will. For example, if there is a reference to the work to be performed by the person receiving the gift in the Will it will likely be considered to be executor compensation. If the amount is set out in the Will as a specific gift to the person who is also named as the executor then one could argue that this is a specific bequest and therefore, not subject to tax. A word of caution, executors could double dip in this situation by claiming executor compensation in addition to the specific gift they have received as set out in the Will.
Beneficiaries may also consider making a gift to the executor instead of the executor taking the compensation that they are entitled to from the estate. Since gifts are not taxable, some may consider this to be an effective means to avoid the taxation of executor compensation. For tax purposes, a gift is a voluntary transfer of property without consideration. Since the executor has provided services to the beneficiaries the payment would not be considered to be a gift and fully taxable as a “barter transaction”. Where the executor is a beneficiary of the estate and chooses not to receive compensation a portion of their bequest would not necessarily be considered taxable as compensation.
Any payments for the reimbursement of expenses incurred in the course of the executor’s administration including the payment of a reasonable mileage allowance are not taxable. Each year the Canada Revenue Agency sets out prescribed travel allowance rates (normally $0.50 per km). Travel allowances paid at or below these rates are considered reasonable and therefore, not taxable.
The payment of executor compensation can be straddled over two or more calendar years which may reduce personal income taxes as a result of lower marginal rates. This can also reduce the amount of CPP payable since the $3,500 CPP income threshold is annual. Executor fees are included in earned income calculations which may increase future RRSP contribution limits. Finally, the $1,000 non-refundable employment tax credit will be available for the executor who does not normally earn employment income.
Christmas is a time to think about giving. Many of us give to various charities throughout the year and if we can do this in a tax efficient way we will be able to give more or our giving will be less of a drain on our pocket book. Our Government has taken big steps to reward those who give with substantial tax savings. If we plan properly to take advantage of these tax saving provisions we will effectively be taking funds, which would have otherwise ended up in the tax coffers of the Canada Revenue Agency and redirecting them to our favourite charities.
The first thing that is important to know is that you will generally enjoy a tax saving of 50% of your charitable giving even though you may only be paying personal taxes between 25% and 39%. Therefore, a $10,000 donation may only cost you $5,000 and the charity will still receive $10,000 in contributions to further its cause. There will be additional tax savings if you choose to donate shares which have significant unrealized gains, in kind, because the inclusion rate on any capital gains is reduced to nil.
For example, you may decide that you wish to donate $10,000 to the Mustard Seed Ministry. Rather than using cash on hand you can donate some of your BCE shares currently valued at $10,000. Assuming that you purchased these shares 10 year ago for $4,000 the effective cost of your $10,000 gift will only be $3,830. Wow! Now you can use the tax savings of $6,170 to purchase some more BCE shares or some other investment. Alternatively, if you are feeling really generous you can take the $6,170 in tax savings and give it to the Cancer Society. This will result in additional tax savings of $3,085 and the giving cycle can continue. If you do the math, your original $10,000 gift to the Mustard Seed could effectively translate into a donation of over $20,000. The Government is effectively funding the additional $10,000 received by the charities.
Maximizing your charitable tax receipt is a smart thing to do and can only enable you to give more.
The burden of financial management was an area that you started helping your mother with after your father’s passing. She could still make decisions and her memory was good but she had difficulty dealing with the financial institutions. Also, the computer was not something she ever wanted to learn. She decided to sell the house, vehicles and move into a place where she wouldn’t have to cook anymore. You were there to help her deal with the real estate agent and lawyer when she listed and sold the house. You came along for the meeting at the bank to discuss how the proceeds were going to be invested. You helped clean out the house and created online advertisements to sell the furniture and vehicles. You also drove your mother around to some local senior residences and helped her choose a place as well as read through the contract she had to sign. You helped her move in and now visit her three times a week and accompany her to doctor appointments.
After about a few months you start to notice things. Your mother was very confused at the mall when you are shopping together and couldn’t remember her pin number to pay for her purchases. When you called to check on her over the last couple of weeks she started calling you Donna, the name of your aunt that passed away a couple of years ago. Last time you went to visit and were helping her put new sheets on the bed you found a pile of hundred dollar bills stuffed in between the mattress. Today you came to visit and she was talking to two police officers about her jewellery that was stolen.
You had to travel every other day to deal with something for mom and it was becoming very time consuming so you thought it would be easier if her accounts were joint and you could sign cheques for the things she needed. Your vehicle expenses were also increasing with all the extra driving and you asked your mom if she could help out with some of these costs. You were talking with a colleague about it who suggested that $0.75 per km would be a reasonable amount to reimburse you for all your gas, insurance and the leasing cost of your vehicle. You decided to prepare mom’s tax returns instead of paying the accountant since they were simple and you already did your own. You met with mom’s investment advisor who gave you some information on a new investment approach that would produce far better returns than the 1% GIC’s mom had before. The downside was that she was going to be paying more tax and you thought that it might be better for everyone if mom passed on some of her wealth now rather than waiting until later. You helped her write up some cheques to send everyone for Christmas and filled in the amounts for her. Also, a friend told you about some new charities that provide excellent tax advantages which would be better than continuing mom’s giving to the local church.
After a couple of years your sister asked to see mom’s financial records. You weren’t sure what that meant but you did keep a file of her bank statements you received. You start to look though the statements and notice some of them were missing. They had been mailed to mom’s old address and must not have been forwarded properly. You looked at a couple of the statements and couldn’t recollect what all the transactions related to. You picked up the latest investment statement and noted that recently they had not done as well as you had thought. You did have a file of the invoices for the mileage and other payments that you had made to yourself which included estimated km for the weekly trips to town you always took for shopping and banking errands for yourself and your mom. You make a copy of all the documents together with last year’s tax return and sent it to your sister.
A month later you receive a letter from a lawyer representing your sister requesting a full and complete accounting of all transactions since your father’s passing. The letter also questions the monthly payments made to yourself and the decrease in the value of the investment portfolio. You visit the family lawyer who recommends that you retain independent legal representation. You are required to pay the lawyer a retainer of $10,000 and are advised to retain the services of an accountant to prepare a proper accounting. The accountant requires a retainer of $2,500 and provides you with a list of documents to gather together. You spend the next week calling the banks to obtain copies of the missing statements which will take a few weeks to obtain and will result in additional charges.
The first draft of the accounting includes a number of unknown payments which the accountant has requested you to provide some details on. You are having difficulty finding anything that would provide a clue for some of these payments. Unfortunately, you didn’t always complete a full description in the cheque register and you couldn’t remember what some of the payments were for. The accountant gives you a form to have completed by your mom’s doctor so that amendments can be filed to claim some additional credits your mother was entitled to. The accountant explains that the refund from the additional credits will offset some of the additional tax payable on the special charitable claims that were disallowed by Revenue Canada. The accountant mentions that the mileage and other payments to yourself were taxable and is concerned that there may be some penalties since these payments totalling over $20,000 were not properly reported to Revenue Canada.
Your lawyer informs you that your sister has requested that you repay all the payments made to yourself and that the management of mom’s affairs be passed onto the public trustee. Your choices are to agree to repay everything or try to have your accounts and compensation claim passed by the court. This will cost an additional $25,000 in legal fees and additional work will have to be undertaken by the accountant for an additional fee. Your lawyer explains that there is a good chance that your compensation and accounts may not be approved by the court since you failed to act properly in a number of areas.
You call your mother’s doctor who suggests making an appointment for your mother to come in. After meeting with her the doctor informs you that she is no longer able to manage her affairs and provides you with documentation. He recommends that you bring her to another doctor for a second opinion. He recommends a colleague who sees your mother and reaches the same conclusion. Your mother had named you as Personal Representative and Attorney in her new Will and Enduring Power of Attorney (“EPA”). You decide to meet with the family lawyer who advises you to take over your mother’s financial affairs under the EPA and maintain proper records.
You gather together the most recent bank statements and make a list of all of your mother’s bank and investment accounts and the most recent balances. You meet with your bank advisor and open new bank and investment accounts in your name to be held in trust for your mother. You deliver letters to all of your mother’s banks with written instructions to transfer funds to the new accounts. You complete the documentation to have your mother’s monthly pension automatically deposited to the new account. You contact your mother’s residence, the phone company and pharmacy and set up preauthorized debits to pay her monthly bills from the new account and to have the monthly bank statements sent to your mailing address.
You set up files for each bank and expense account. You also maintain a file for receipts for all the personal expenditures made for your mother using the debit card you obtained for the new account. You maintain a cheque register and write down descriptions for all the payments you make for your mother. You review the monthly bank statements and note descriptions for each debit and credit and follow up any unexplained items. You maintain a mileage log for any travel you make to deal with your mother’s financial affairs as well as a daily journal describing activities undertaken on your mother’s behalf and time spent.
You review the existing GIC’s and other investments owned by your mother with your investment advisor. He recommends that you keep half of the existing GIC’s since the interest rates are good given current market conditions. The remaining GIC’s are collapsed and invested into low to medium risk investment portfolio that is expected to produce capital gains and dividends as recommended by your mother’s tax advisor. The registered investment portfolio is kept intact since it is invested in low to moderate risk fixed income investments and your investment advisor recommends the status quo given your mother’s cash requirements and historical risk tolerance.
Mother always donated about $1,000 per month to the local church she attended. She also gave $100 to each of her grandchildren and $1,000 to each of her children for their birthdays and Christmas every year. Mother had sufficient income to continue this pattern of giving and so you prepare cheques for her to send during these special occasions and to bring to church.
You review your mother’s most recent assessments to ensure that everything is up to date and in order. You write a letter to the local tax centre advising Revenue Canada that you are acting on behalf of your mother under the EPA attached. You maintain a file for all of the tax slips you have received for your mom and arrange for her tax return to be completed prior to the April 30th filing deadline. You arrange for the completion of the Disability Tax Credit Certificate provided by the accountant in order to claim some additional tax credits on your mom’s tax return.
Your sister is concerned about the state of your mother’s financial affairs and requests an accounting from you. You arrange for an accountant to compile a balance sheet for your mother at the time when you began to act on her behalf under the EPA as well as a detailed listing and summary of all the transactions which have occurred since that time. You also include a current balance sheet and summary of anticipated receipts and disbursements for the next year.
The accountant prepares some calculations of amounts to compensate you for the travel and time that you have spent acting for your mother. The total compensation amounts to $10,000 plus a reasonable mileage allowance which is included in the accounting provided to your sister.
Your sister is disappointed with the way that you have invested your mother’s money and complains that you could have obtained a better return. She is also angry about the compensation that you have requested and feels that you should not be paid anything since she is your mother should not have to pay for your help. She is also unhappy that you have made donations to the local church your mother attends and feels that you don’t have the right to make those decisions since it isn’t your money. You make an appointment with the family lawyer who recommends a colleague to assist you in getting your accounts passed, or approved, by the court including all transactions you have undertaken to date on your mother’s behalf and the compensation that you have requested.
You meet with the lawyer who prepares an affidavit based on the accounting that has already been prepared. You also include some historical details on your mother’s investment portfolio and annual donations. The court finds no fault with work that you have done and passes the accounts you have prepared including your compensation.
You continue to maintain your files and daily journal and have the accountant prepare annual accounts that you provide to your sister. After three years have passed the accountant prepares a compensation claim along with an accounting summary for the past three years which your sister approves.