Suppose a straightforward will with very simple instructions to the executor: The executor is to pay the debts and expenses of the deceased, execute certain specific bequests of property and with some general instructions, distribute the residue of the estate to the named beneficiaries.
During the administration of an estate, taxable income is generated during the course of paying all the debts and executing the specific bequests.
Because it might make sense to do so, can the executor pay or make payable this taxable income to the residual beneficiaries, such that the amount of the taxable income would be considered payable to the beneficiaries and therefore deductible to the estate, pursuant to the relevant sections of the Income Tax Act?
The Canada Revenue Agency (“CRA”) was asked this very same question recently.
Subject to the terms of the will and any other laws that impact the administration of the estate, the CRA confirmed that where there is no specific direction in this regard, generally the executor can make the payment as he (she) wishes as long as he (she) act impartially (and even handed) and all other directions regarding distributions have been respected. The residue of the Estate can include taxable income (and not necessarily comprised only of after tax amounts). Therefore the income of the estate may be paid or made payable to a residual beneficiary, and a deduction to the estate may be taken in computing the income of the estate.
This assumes there was no direction or instruction in the will to pay the taxes owing on the income generated by the estate and distribute the after tax “residue” to the residual beneficiaries. In such cases distributions to residual beneficiaries could not be considered to be income payable to a beneficiary for the purposes of the ITA and therefore not deductible to the estate.