In a follow-up to her recent article, our Estate and Trust expert, Karen Slezak, answers questions commonly asked by estate executors in this second instalment.
Q. My aunt died a few weeks ago. When do her taxes have to be paid?
A. Your aunt's final personal tax return is due by the later of six months after the date of her death or April 30th of the following taxation year (June 15th if she was self employed before death). Income taxes for the year of death are due at the time of filing. Additionally, estate tax returns are due 90 days after the taxation year of the estate, and tax is payable at that time.
Q. Are funeral expenses deductible?
A. Unfortunately, no. Only expenses that are incurred by the estate to earn income are tax deductible. These expenses are: professional money manager fees, bank charges, accounting fees and the portion of trustee or executor fees related to earning income for the estate. Expenses of a personal nature (e.g., paying debts of the deceased) or those relating to the administration of the estate are not deductible (i.e., most legal fees, probate fees and executor fees related to administration).
Q. I'm an executor, do I have to charge HST on my executor fees?
A. If you are in the business of providing executor services, you are required to charge HST on your executor fees, unless you meet the small supplier rule (i.e., earning less than $30,000 per year and you have not been registered in the HST system). If a family member or friend acts as an executor, who doesn't regularly provide these services, then he/she is considered to earn income from an "office" and the amount is taxable in the same fashion as a salary. The fees are subject to tax and Canada Pension Plan (CPP) withholdings. A payroll account will need to be opened and a T4A filed for the year. Executor fees are not subject to employment insurance premiums.
Q. I'm an executor who is about to wind-up an estate. I've heard that I should apply for a tax clearance certificate. What is this all about?
A. As the executor, you are responsible to ensure that all tax returns for the deceased and the estate have been filed and all tax liabilities are paid (i.e., income tax, GST, and payroll taxes). In the event that any taxes are unpaid, you will be held personally liable if the estate assets have been distributed and tax is assessed at a later time. One way to mitigate this risk is to request a tax clearance certificate from the Canada Revenue Agency. This involves providing information about the estate, the assets held at the time of death and the distribution plan. The Canada Revenue Agency will review all of the tax filings and if they are satisfied they will issue a clearance waiver. Once issued, which unfortunately can take a year or longer, you are released from any further liability.
Q. Some of the estate's beneficiaries are non-residents of Canada. Is there anything special that needs to be done before I distribute assets to them?
A. Yes. Any income paid or allocated to a non-resident beneficiary is subject to withholding tax. This tax is often reduced if there is a tax treaty with the country they live in. For instance, the withholding tax is reduced from 25% to 15% if the person is a resident of the U.S. The estate executor will need to file an NR4 tax return related to the payments and withholding. Payments of capital (e.g., estate residue) may also be subject to a 25% withholding tax if the estate derives more than 50% of its value from real estate, resource property, and certain other properties at any time in the previous five years. In these cases, there are disclosure requirements to the Canadian government in addition to the withholding requirements. It is possible to obtain a special tax waiver to reduce or eliminate this withholding tax and advice from an estate specialist should be sought to assist with this process.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
