A Few Points on the Taxation of Estate Executor Services

One unexpected but avoidable tax eventuality in estate administration can result from improper planning of an executor’s compensation. If a testamentary gift is in any way qualified by reference to the executor’s duties, the entire gift may be treated as the executor’s compensation, even if only a portion of it was meant to represent such compensation.

Executor compensation raises issues which should be considered when planning to maximize the value of the estate for its beneficiaries. In particular, such planning must recognize that while executor compensation is taxable to its recipient and could additionally be subject to payroll or HST expense to the estate, the deduction of such outlay to the estate is limited only to the extent the executor’s service generates taxable income. It is helpful that there is currently no obligation at common law or under the Income Tax Act (the “Act”)  to compensate an estate executor who doesn’t ask for compensation. Uncompensated executor’s work does not cause a deemed benefit to the estate.

The Canada Revenue Agency (the “CRA”) scrutinizes the language of a will to see if an executor’s inheritance is in any way linked to the carrying out of executor duties. It if is, the CRA generally treats the entire inheritance as taxable executor compensation (Boisvert v. Canada, 2011 TCC 290; Messier v. Canada, 2008 TCC 349).

In Boisvert, the executor was a good friend of the testator to whom the testator bequeathed a house “as a token of [] gratitude” for the executor’s services. The Tax Court of Canada allowed the CRA’s treatment of the entire value of the house as the executor’s taxable remuneration, even if such value amounted to overcompensation.

Boisvert highlighted a problem: in the absence of an accepted fair market value of executor services as a reasonable basis for their taxation, executors can be taxed on amounts that are not intended as compensation but rather intended to be gifts. This is different from other taxpayer contexts where the value of services is fully and easily determined by fair market value.