Executors’ fees

For quite some time now, the CRA has taken the position that (to quote the Employers’ Guide – Payroll Deductions and Remittances ):

Fees paid to executors or liquidators and administrators are either income from office or employment or business income, depending on whether the executor or administrator acts in this capacity in the regular course of business.

IT-377R (archived) discusses the distinction in more detail:

5. A fee earned for the administration of an estate by an executor thereof will be treated either as income from a business or income from an office, depending on the particular circumstances of each case. Fees earned by a taxpayer for acting in the capacity of executor in the course of business form part of the business income of the taxpayer, and expenses incurred in this connection are deductible in the usual way in computing such income, to the extent they are not recoverable from the funds of the estate. Where the executor is a person who does not act in this capacity in the course of carrying on a business, the fee for acting as executor is considered to be income from an office. (Such a situation could exist even where the executor is a lawyer if the normal practice does not include executorships and the lawyer was appointed on personal grounds, perhaps because he or she was a friend or relative of the deceased.)

My practice does not usually include acting as an executor of estates, but I do act as the executor of my father’s estate. If I were to earn fees for acting as the executor of my father’s estate, I would be considered to earn income from an office for tax purposes, according to the CRA.

Sometimes this distinction can be quite important. The deductions available under the Income Tax Act to an employee or officer are more limited than those available to someone carrying on a business. Moreover, an estate that pays fees to an executor who is an “officer” is required by the Act to withhold and remit source deductions in respect of the fees. Subsection 153(1) provides that

every person paying at any time in a taxation year […] salary, wages or other remuneration […] shall deduct or withhold from the payment the amount determined in accordance with prescribed rules and shall, at the prescribed time, remit that amount to the Receiver General on account of the payee’s tax for the year

“Salary, wages or other remuneration” is defined as “the income of a taxpayer from an office or employment […] and includes all fees received for services not rendered in the course of the taxpayer’s business”.

The Income Tax Regulations contain detailed rules on the amounts to be withheld from remuneration and the timing of the withholding. The Regulations will prescribe when and what amounts must be withheld from an executor’s compensation. An estate paying such compensation is required to obtain a payroll account number to effect the withholding. The CRA withholding guide also makes it clear that executor’s compensation, where the executor is an employee, is subject to CPP and, in certain cases, EI withholding.

The detailed rules in the Act and the Regulations governing source deductions are beyond the scope of this article. In any case, each case must be reviewed carefully in light of the requirements of these rules to determine what must be withheld and when. Any executor, or any person advising an executor, would do well to consult these rules and the CRA publications that attempt to explain them before paying compensation to an executor. Failing to withhold can leave the estate and its executors liable for interest, penalties and, in certain circumstances, the amount that was not withheld.