Today’s blog was written by Douglas Buchmayer, partner with the Ottawa office of Gowling WLG (Canada) LLP.

 Executor compensation can be a challenging and sometimes uncomfortable topic to address with clients when preparing their wills. If the will does not mention compensation, the default rule under section 61 of the Trustee Act (Ontario) is that a trustee (which includes an executor) is entitled to fair and reasonable compensation for their work, unless the will or trust document specifically provides otherwise. Although there is no set statutory rate, case law has established that 5% of the gross value of the estate is generally considered standard.

Under the Income Tax Act (Canada), compensation paid to an executor is treated as taxable income. For lay executors (such as friends or family members), it is treated as employment income, and the estate is regarded as an “employer” with all the associated reporting obligations. For professional executors, compensation is treated as taxable income from an office, and HST is also payable.

When professionals or trust companies are appointed as executors, compensation is rarely a surprise, as their fees are usually set out in a separate agreement referenced in the will or trust document. However, for lay executors, expectations are often unclear.

Some clients may be surprised by the level of compensation that an executor is entitled to claim. While some lay executors may decide not to take any compensation, or may accept a reduced amount, it is generally unreasonable to expect an executor to work for free or for less than the standard rate, given the considerable amount of work involved—something beneficiaries may not always recognise. Including a provision in the will that no compensation will be paid can discourage someone from agreeing to act as executor.

If certainty is important, the testator can specify in the will how compensation will be determined—whether as a fixed amount, an hourly rate, a percentage, or another method. It is also advisable to discuss the matter with the intended executor in advance.

Some clients may be tempted to disguise executor compensation as a legacy or bequest in the hope of avoiding scrutiny by the Canada Revenue Agency (CRA). However, the law presumes that a gift to an executor is in lieu of compensation, and the CRA is particularly vigilant about this issue, especially when reviewing a will before issuing the final Clearance Certificate. If there is any link between the gift and the executor’s role, the CRA will treat it as taxable income. If there is no link, there is a risk that the intended executor may accept the gift but decline the role.

After death, some lay executors may try to avoid declaring their compensation as taxable income by “forgiving and renouncing” it, only to have it “gifted back” to them by “cooperative” beneficiaries. Although gifts are generally not taxable under the Income Tax Act, the CRA considers such arrangements to be “barter transactions” and treats them as fully taxable.

It is essential to discuss executor compensation and its tax implications with a client who is drafting a will. Failing to do so can lead to unexpected and undesirable consequences. For potential executors, clarity about compensation helps them make informed decisions about accepting the role. Including a provision in the will such as, “It is my wish that my Executors and Trustees seek such fair and reasonable compensation as they are entitled to for their care, pains and trouble and the time expended in and about the administration of my estate and any trusts in this Will,” can also help set clear expectations for beneficiaries.