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. Is a beneficiary considered to have income earned in the estate payable to him or her by virtue of their residual entitlement to the estate? 2. Would CRA's previously outlined position on the executor’s year be impacted if a portion of the executor’s year were to fall outside of the first fiscal year of the estate?
Position: 1. It depends. 2. Yes.
Reasons: 1. Question of fact and law dependent on the terms of the will and applicable laws impacting administration of the estate. 2. Question of fact and law.
2017 CPA Alberta Roundtable
Question 25 - Estates – Income Paid or Payable
An individual’s will commonly provides for his or her estate, or the residue thereof, to pass to one or more beneficiaries in fixed proportions. As an example of such a will, assume the deceased has left the entirety of his estate to his three children, in equal proportions. All of the children are over age eighteen, and no trust provisions are provided in the will. It provides for the executor to simply pay all debts, and distribute the estate in equal portions to the three children. Assume further that the estate assets have not been fully distributed, but that the estate has passed the end of the “executor’s year”, such that the beneficiaries may possess the legal right to enforce payments from the estate.
a) Does the CRA consider the income of the estate to be payable equally to the beneficiaries by virtue of their entitlement to an equal share of the residue?
b) If the answer to (a) is No, what action would the CRA consider the executor is required to take to result in the income being payable?
c) If the answer to (a) is Yes, does the CRA perceive any action the executor could take to result in the income not being payable to the beneficiaries? Assume that a designation under Subsections 104(13.1) and (13.2) is not possible, as this would result in taxable income in the estate.
d) Does the CRA accept that income earned in the executor’s year is not payable to beneficiaries, such that it would be taxable in the estate absent payment to the beneficiaries? Does this depend on whether the estate fiscal year falls entirely within the executors’ year?
CRA Response (a) – (c)
The CRA has previously noted that pursuant to subsection 104(6) there may be deducted in computing the income of an estate or trust for a taxation year, such amount as the estate or trust claims that would be its income for the year as became payable in the year to a beneficiary. Subsection 104(24) provides that, for the purposes of subsection 104(6), an amount is deemed not to have become payable to a beneficiary in the year unless the amount was actually paid to the beneficiary in the year, or the beneficiary was entitled in the year to enforce payment of it.
On the death of an individual, the individual's property comes under the control of an executor or other personal representative and thus the property is held in an estate, which is treated as a type of trust for purposes of the Income Tax Act. It is the executor's role to administer the estate, which involves, inter alia, determining and paying creditors and distributing the remaining assets of the estate to the beneficiaries as soon as possible. Generally, the law provides the executor with a year (often referred to as the “executor's year”) to administer an estate, during which time the right to income of the estate is unenforceable by a beneficiary. After this time, it is a question of fact as to whether the executor is able to distribute property and whether the income of the estate is payable to the beneficiaries.
In the example presented, the entitlement to an equal share in the residue of the estate would not in and of itself result in the income of the estate being automatically payable to the beneficiaries. The executor and the beneficiaries would instead have to determine whether the executor has complied with the terms of the will as a whole and any laws affecting the administration of the estate.
CRA Response (d)
With respect to the executor’s year, paragraph 6 of Interpretation Bulletin IT-286R2 notes that the CRA will consider the income of the trust for that year to be payable to the beneficiary or beneficiaries of the trust pursuant to subsection 104(24), where the sole reason for the rights of a beneficiary being unenforceable is the existence of an executor's year, the taxation year of a testamentary trust coincides with the executor’s year, and all of the beneficiaries agree to this treatment.
This portion of the question appears to contemplate a situation in which the executor has chosen the initial taxation year end of the estate to be a date that is prior to the end of the executor’s year; as a result, the executor’s year would extend into the second taxation year of the estate.
In this situation, the comments in paragraph 6 of IT-286R2 would also apply to the initial taxation year of the estate.
Where a portion of the executor’s year falls within the second taxation year of the estate, it is possible that income earned by the estate during that portion of the year may be subsequently paid or become payable to the beneficiary during the remainder of the estate’s taxation year. As a result, the income earned during the portion of the executor’s year which falls within the estate’s second taxation year may instead be taxable in the beneficiaries’ hands. This ultimately relies on whether an amount is paid or whether the beneficiary is entitled to enforce payment of the amount, which is dependent on the applicable facts and law.
September 14, 2017
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