Is Executor Compensation Taxable Income in Ontario?

If you are an executor who is also a beneficiary, you may be asking two things: do I have to pay tax on executor fees, and would it be better to skip the fees altogether? Both questions are common, and the answers depend on your whole financial picture.

This article explains how the Canada Revenue Agency treats the fees, the tax duties that come with the role, and what to weigh before you take or waive compensation. An accountant can run the numbers for your situation.

Executor fees are taxable

Executor's fees are taxable. The Canada Revenue Agency treats fees paid to an executor or administrator as business income if the person acts in that role in the course of a business, and otherwise as income from employment or office.

Which of the two categories fits you depends on whether you act in the role in the course of a business. If you are unsure which applies, that is a question for an accountant.

The legal right to be paid is separate from the tax result. An estate trustee is entitled to a fair and reasonable allowance as allowed by a judge, and the receiving trustee reports what is paid as income.

Taking fees or waiving them

Whether and how you take compensation depends on your situation and the terms of the will, so it is worth confirming with a lawyer. Some executors who are also beneficiaries choose not to take fees, and the tax difference between receiving fees and receiving an inheritance can matter. How each is taxed in your case depends on the facts, so ask an accountant before deciding.

If you do want fees, the timing matters:

• The will may fix the allowance, in which case the Trustee Act's general allowance does not apply.
• An estate trustee may take compensation before passing accounts only with the agreement of all interested adults, with court approval, or where the will provides for it.
• If compensation is taken early and the court later approves less, the difference can be ordered repaid to the estate.

If you decide to waive, it is sensible to record that decision clearly, and a lawyer can help you do so in a way that fits the estate's circumstances.

Tax duties that come with the role

Fees are only one tax topic. The legal representative must make sure the deceased's tax returns are filed and any balance owing is paid before distributing the estate.

An estate can be a graduated rate estate for up to 36 months after death. If it winds up earlier, its tax year ends on the date of final distribution, and the final T3 is due within 90 days after that. The rules for trust reporting have changed several times, so check current requirements with an accountant.

Clearance certificates and personal liability

A clearance certificate, requested on Form TX19, confirms that all income tax, GST/HST, interest and penalties owed have been paid. Request it only after the required returns are filed and assessed, not at the same time as filing them.

This matters to you personally. A legal representative who distributes property without a clearance certificate is personally liable for unpaid tax, up to the value of the assets distributed.

If the executor lives outside Canada, the estate's tax residence turns on where its central management and control actually takes place, and the executor's residence does not always decide this. Cross-border situations call for tax advice.

What to do next

• Decide, with an accountant, whether to take fees or waive them.
• If taking fees, get the agreement of all interested adults, court approval, or confirm the will allows it before you pay yourself.
• Keep accurate records of the assets and transactions in the estate, including every payment made. It also helps to note the time you spend.
• Diarize the due dates for the final T1 and the estate's T3.
• Apply for a clearance certificate, as needed, once returns are filed and assessed and before distributing any assets.
• Speak with a lawyer if beneficiaries disagree about the fees.

Frequently asked questions