Tax Withholding on Fees Paid to a Non-Resident Executor

An estate wants to pay compensation to an executor who lives outside Canada. Before the cheque goes out, someone has to ask whether Canadian tax must be held back and sent to CRA. A payer who fails to withhold when required can be liable for the amount plus interest and penalties.

This article explains how executor compensation is set, what the Canadian withholding rule says, where the uncertainty lies, and how to approach CRA. Because the answer can turn on the facts and on tax treaties, you should confirm it with an accountant or CRA before paying.

How executor compensation works in Ontario

A trustee, guardian or personal representative (which includes an executor) is entitled to a fair and reasonable allowance for care, pains and trouble and the time expended in and about the estate, as allowed by a judge of the Superior Court of Justice. The amount can be settled even though the estate is not before the court in an action, and a judge can allow the allowance on a passing of accounts.

That statutory rule does not apply where the allowance is fixed by the instrument creating the trust, so a will that sets compensation, or says the executor acts without pay, governs. Where compensation has not been fixed by the trust instrument or otherwise, the judge on the passing of accounts can fix it, and the trustee may then retain that amount out of money held.

If the executor is a lawyer who has rendered necessary professional services to the estate, the allowance may be increased by a fair and reasonable amount for those services.

The Canadian withholding rule

Income Tax Regulations s. 105(1) says every person paying a non-resident a fee, commission or other amount for services rendered in Canada must deduct or withhold 15 per cent of the payment.

CRA's circular on this rule says the payer includes individuals, corporations and trusts. Whether an estate or estate trustee making the payment is in the payer's position is worth confirming with CRA or an accountant. The circular is dated 2005, so check current CRA guidance.

Does an executor's fee fall under the rule?

This is the unsettled part. The rule applies to amounts paid for services rendered in Canada. An executor abroad may do much of the work from outside the country, or may travel to Ontario for some tasks. Whether the fee counts as payment for services rendered in Canada, and whether a tax treaty offers relief, depends on the facts and should be confirmed with CRA or a cross-border tax adviser.

• Where the executor performed the work: in Ontario, abroad, or both.
• Whether the fee is fixed by the will or allowed by a court.
• Which country the executor lives in, since a treaty may matter.
• Whether any part of the payment is for something other than executor services, such as professional services by a lawyer-executor.

If withholding applies: what the payer must do

The waiver timing is the practical trap: if you may want a reduction, apply before the fee is paid, not afterwards. Waiver procedures can change, so confirm the current process and form with CRA or an accountant before relying on this summary.

What to do next

• Check the will to see whether it fixes compensation or says the executor acts without pay.
• Decide whether the amount will be agreed with beneficiaries or approved by the court on a passing of accounts.
• Document where the executor's work was done.
• Ask an accountant or CRA whether the 15 per cent withholding applies, before paying anything.
• If a reduction may be available, apply on Form R105 in good time.
• Keep the estate's tax filings on track, since a legal representative who distributes without a clearance certificate is personally liable for unpaid amounts up to the value distributed.

If the will does not fix the compensation and beneficiaries disagree with the amount, a judge can fix it on a passing of accounts. A lawyer can explain how that works and how it interacts with the tax question.

Frequently asked questions