Written on April 17, 2014 – 8:40 am | by Corina Weigl
In my March 14th blog, Eyes Wide Open, I asked the question – why did the named executor ever agree to take on the administration. My blog was followed by a rhetorical answer meant to remind all of us – advisors and potential executors alike – we ought to do some due diligence before we accept these appointments. Another aspect of assuming the role that potential executors and trustees ought to be clear on is with respect to the question: what is their ability to be paid for completing the task and their ability to be reimbursed for expenses they incur in the administration. Understanding their rights and obligations in this regard, will go a long way to making sure there are no surprises at the end of the day.
The matter of compensation of executors and trustees is often misunderstood. In Ontario, this is partly due to the language of the statutory charging section but it is also due to the judicial decisions giving meaning to the statutory charging section. Section 61 of the Trustee Act (Ontario) provides that executors and trustees are entitled to receive “such fair and reasonable allowance for the care, pains and trouble and time expended in and about the estate, as may be allowed by a judge of the Superior Court of Justice.” Hopefully the inherent difficulty in being able to understand what this may actually mean is apparent. In essence, the quantum of compensations has no fixed formula and, unless it can be approved by all of the beneficiaries because they have the capacity to so approve it, the quantum must be allowed by a judge…on a court application.
In terms of being reimbursed for expenses, section 23.1 of the Trustee Act gives an executor and a trustee the power to pay an expense directly from the trust property, or personally with the ability to recover the amount from the trust property. In order to be able to rely on this provision, the trustee must be of the opinion that the expense was properly incurred in carrying out the trust. In order to be properly incurred, an expense must be appropriate and reasonable. If it turns out a beneficiary successfully challenges an expense as not being properly incurred, the Superior Court of Justice may later disallow the payment – which means the executor or trustee will be personally on the hook for the expense.
These comments are fairly succinct statements of the law related to compensation and reimbursement of expenses meant to set the stage for an additional consideration, which is the income tax consequences of receiving compensation. Leaving aside those executors and trustees that are in the business of providing these services, to the extent someone who is a “lay” executor or trustee receives compensation, the amount is considered to be income from an office and thereby taxable to the recipient. In other words, it ought to be reported on the individual’s T1 Return.
Recently I read a Technical Interpretation issued by CRA (see 2012-0438941E5 E) where it considered the question: can an executor, who is not in the business of acting as an executor, claim expenses they incurred for travel, automobile and meals that were not reimbursed by the estate. Unfortunately, CRA’s response was not positive. In order for a taxpayer to be able to deduct an expense from income earned from an office or employment, one of the conditions that must be met is that the taxpayer must be “required under the contract of employment to pay the travel and motor vehicle expenses incurred”. CRA’s view on this issue was that “the executor’s appointment to administer an estate does not typically require the executor to pay the travel or other expenses related to the administration of the estate as an estate is generally obliged to reimburse an executor’s properly incurred out-of-pocket expenses.” This statement is consistent with the law in Ontario.
On the facts it appears that the estate had been wound up (i.e. distributed) before the executor sought to recover the personal expenses they had incurred. Had that not been the case, then so long as the travel, meals and automobile related expenses (e.g. mileage) were reasonable and otherwise appropriate (e.g. the meals were necessary as they related to completing the administration of the estate), they would typically be considered to be reimbursable expenses for purposes of the provisions of the Trustee Act referred to above. The lesson to be learned here is go into the job with eyes wide open and keep them open. If you’ve incurred expenses that are proper, make sure you have them accounted for and reimbursed before you distribute the estate; otherwise you may find yourself having personally underwritten the estate.
Thanks for reading.