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: Can an Executor of an estate pay taxable income to residual beneficiaries?
Position: General comments given
Reasons: Generally depends on the wording of the Will
2016 CTF Annual Conference Roundtable
November 27-29, 2016
Often a Will is drawn up that is quite simple and uncomplicated, providing minimal specific instructions to the chosen administrator. Such a Will typically directs the Executor to pay the debts and expenses of the deceased, makes specific bequests of property and finally specifies what is to be done with the residue of the estate.
Where during the administration of an estate, taxable income is generated yet all debts and specific bequests have been paid, can the Executor pay or make payable this taxable income to the residual beneficiaries, such that the amount of this taxable income would be considered payable, under subsection 104(24) of the Act, for the purposes of subsections 104(6) and 104(13)?
For purposes of our response, it is assumed that the scenario we are addressing involves an estate that arises on and as a consequence of a death that occurs after 2015.
While the issue of whether a deduction pursuant to subsection 104(6) of the Act will ultimately depend on the terms of the Will and any other laws that impact the administration of the estate, in our view, the following key concepts will be useful in determining how to treat testamentary gifts (endnote 1) for tax purposes:
1. Where there is no indication in the Will from which assets the gift is to be paid, generally the Executor can make the payment as they wish as long as they act impartially (the even-hand rule), they follow the classification of gifts (and, as is noted in the question posed, they have paid the liabilities of the testator and the estate). The residue of the Estate can include income and the residue of an estate is not necessarily comprised only of after tax amounts (endnote 2). Accordingly, in such instances, the income of the estate may be paid or made payable to a residual beneficiary, and a deduction pursuant to subsection 104(6) may be taken by the estate (if no other provision of the Act prohibits such a deduction).
2. However, depending on the wording of the Will, after the debts and specific bequests of the estate have been paid, the Executor may be required 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 purposes of subsections 104(6) and 104(13). Accordingly, the estate would be precluded from claiming a deduction under subsection 104(6) in respect of the distribution. Instead, the income would be taxed in the estate, and the residual beneficiaries would receive capital distributions, comprised of after tax paid capital of the estate.
It should also be noted that, pursuant to subsection 104(7.02), no deduction may be claimed under subsection 104(6) by the estate in regard to a gift in respect of which an amount is deducted under section 118.1 of the Act in computing income for any taxation year of the testator.
1 Testamentary gifts are bequests (gift of personalty), devises (gift of real property) and legacies (gifts of money or money equivalents). Bequest and legacies are classified in four main classes: specific, general, demonstrative and residuary. Devises only have three classes: general, specific or residuary. The distinction between the types and classed of gifts is important to determine the order in which the assets are available to pay the testator’s debts and whether the gift adeems or abates. A specific gift adeems when its subject matter is not in the estate at the testator’s death whereas abatement is the pro rata reduction of gifts where there is insufficient funds in the estate to pay the debts and gifts in full. See Oosterhoff on Wills and Succession, Seventh Edition 2011, starting at page 525.
2 “A gift of residue is a gift of that part of the testator’s estate which he or she has not specifically disposed of. Hence, it includes all his or her property after pecuniary, general, demonstrative and specific gifts are satisfied (IBID at page 536).
November 29, 2016
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