21 December 2012 External T.I. 2012-0457901E5 - Executor fees and other costs

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: 1) Are amounts paid to an executor of an estate for the maintenance and sale of the estate property, deductible?
2) Can a portion of the executor's fees that relate to increasing the value of the property before it is disposed of, be added to the cost of the property?
3) Where the executor fee is considered to be an employment income to the executor, can the estate deduct the employer portion of the CPP contribution?

Position: 1) Question of fact.
2) If it can be established that the expense was incurred for the purpose of disposition of the property.
3) Probably not.

Reasons: 1) Expenses must have been incurred for the purpose of disposition of the property.
2) Pursuant to paragraph 53(1)(n), if it can be established that such amounts were incurred for the purpose of acquisition or disposition of the property.
3) Only if the executor fee is deductible by the estate.

XXXXXXXXXX V. Srikanth
2012-045790
December 21, 2012

Dear XXXXXXXXXX

Re: Deductibility of Executor's fees

This is in response to your correspondence of July 30, 2012 wherein you requested our views on the deductibility of certain expenses incurred by an estate. Specifically, you wanted us to comment on the following:

• Whether any portion of the fees paid to an executor of an estate, pertaining to the maintenance and subsequent sale of the residence of the deceased, could be deducted by the estate in determining the income of the estate;
• Whether any portion of the fees that were incurred to increase the value of the property, could be added to the adjusted cost base of the property; and,
• Where it is determined that the amount paid to the executor is employment income to the executor, whether the estate will be allowed to deduct the employer portion of the CPP contribution.

Our Comments

Written confirmation of the tax implications inherent in actual proposed transactions is given by this Directorate only where the transactions are the subject of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, entitled ‘Advance Income Tax Rulings', dated May 17, 2002. This Information Circular and other Canada Revenue Agency publications can be accessed on our website at http://www.cra-arc.gc.ca. Your request was not submitted as an advance income tax ruling request, however, as stated in paragraph 22 of IC 70-6R5, we do provide written opinions on general enquiries and we are prepared to provide you with the following comments.

The deductibility of fees for the services of an executor is determined in relation to the facts of each case, taking into account the nature of the duties performed. If such expenditure is made for the purpose of gaining or producing income from a business or property, it may be deductible in computing income of the trust for tax purposes, subject to various statutory limitations.

Accordingly, in the given scenario, if you can establish that any portion of the executor fee paid by the estate was for the purpose of earning income from a business or property, the estate may be allowed a deduction pursuant to paragraph 18(1)(a) of the Income Tax Act (the "Act"). However, as earlier indicated, this is a question of fact and we do not have enough information to make this determination.

Generally, subsection 53(1) of the Act provides for the additions to the cost base of a property of a taxpayer. While there is no specific provision in subsection 53(1) that would allow any portion of the executor fees to be added to the cost of the property, paragraph 53(1)(n) provides for an addition to the adjusted cost base of a property for the costs of surveying or valuing the property where such costs were incurred by the taxpayer for the purpose of acquiring or disposing the property and to the extent that such costs are not deducted by the taxpayer in computing income for any taxation year or attributable to any other property.

In addition, paragraph 40(1)(a) of the Act provides for a deduction, in the computation of a taxpayer's gain from the disposition of property, of any outlay and expense, to the extent it is incurred for the purpose of making the disposition. As stated earlier, whether any portion of the executor's fee was incurred for the purpose of a disposition of the property, is a question of fact. In our view, the Courts' following conclusion in Avis Immobilien G.M.B.H. v. Her Majesty The Queen 94 DTC 1039 (T.C.C.), (affirmed in 97 DTC 5002, F.C.A.), stands for the proposition that the outlay or expense must be directly related to the disposition":The words "for the purpose of" in subparagraph 40(1)(a)(i) mean "for the immediate or initial purpose of" and not the eventual or final goal which the taxpayer may have in mind. To give the words the latter meaning would permit the most indirect or most distantly related outlay or expense to reduce the amount of a gain. This could not have been Parliament's intent. We are not dealing in subparagraph 40(1)(a)(i) with the computation of income from a business, which is of an ongoing nature, but, rather, expenses or outlays made or incurred to dispose solely of capital properties. The statutory provision under consideration sets out a rule to determine a taxpayer's capital gain from the disposition of property and only expenses or outlays to be applied in reducing the gain are those incurred or made directly for the purposes of making the disposition. Subparagraph 40(1)(a)(i) does not contemplate expenses or outlays which may have merely facilitated the making of the disposition or which were entered into on the occasion of the disposition."

Generally, the fees earned for the administration of an estate or trust by an executor or trustee are treated either as income from a business or as income from an office. Where the taxpayer does not act in the course of carrying on a business, the executor fees are included in income under paragraph 6(1)(c) of the Act. Any source deduction payments that the trust may make on these amounts may be deductible to the trust only if such payments are made for the purpose of gaining or producing income from a business or property.

We trust our comments will be of assistance to you.

Yours truly,

Phil Kohnen
For Director
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch