There are many reasons that a beneficiary, co-executor or other interested party might want to remove an executor, including hostile relations, failure to act or possible misconduct. However, courts have generally been reluctant to do so, preferring not to interfere with the deceased’s choice of who should administer the estate.

“The threshold for evidence to be submitted in these kinds of cases is very high,” said Shruthi Raman, an estate and trust lawyer with Synergys Law LLP in Toronto. “The conduct has to be so egregious and so harmful to the administration of the estate or to the interests of the beneficiaries that the court must seriously consider removal.”

The court will prioritize the welfare of the beneficiaries, said Matthew Urback, partner with Shibley Righton LLP in Toronto: “If there’s any risk to [estate] funds — risk of loss, risk to the trust, a risk that there could be further impropriety — that’s when this turns into something a little bit more contentious, and an executor may be removed.”

An individual named as an executor in a will does not have to accept the role. However, once they begin administering an estate, they must continue to do so unless they are removed by the court, either after  applying to step down or after someone else has applied to remove them.

Anyone with an interest in an estate can apply to court to have an executor removed if they think the executor is not fulfilling their fiduciary duties to the beneficiaries or not acting in the best interests of the estate.

The most common reason is breach of fiduciary duty, Raman said: “They could have come across information or [identified] assets that they have failed to disclose to the beneficiaries, or they are refusing or failing to provide an accounting for work to date, or they just simply failed to keep a balanced and even hand between the beneficiaries.”  

Urback said misconduct, acting in bad faith, personally benefiting from the estate, acting to the detriment of the beneficiaries, and an inability or an unwillingness to do their job are all relevant considerations for the court.

Where multiple executors are administering an estate, friction between executors can jeopardize the timely administration of an estate and lead to executors asking the court to remove another executor, Raman said.

Someone might also look to remove an executor who has become incapable due to illness, has declared personal bankruptcy, or is facing a criminal conviction, Raman said: “Anything that would affect the trustworthiness, or the creditworthiness, of the executor could create grounds for proceeding with an application to have them removed.”

Courts will look for evidence that the executor’s continued administration presents a risk, Urback said.  “If, say, there was a single incident that the beneficiary may not have agreed with, that may not necessarily establish that there is an ongoing risk to the administration of the estate.”

Where interested parties are seeking to remove a sole executor, the court will look to see whether another person is willing to step in as a replacement with the beneficiaries’ support.

“When a beneficiary tries to remove an executor, or even an executor wants [to step down], they are best served by proposing a replacement who has already agreed to take on the role,” Urback said.

Where an estate is being administered by more than one executor, the court generally doesn’t need to name a replacement when ordering an executor’s removal.

An executor who has been removed by court order may seek and be entitled to partial compensation in certain circumstances: “It would be highly dependent on the reason for their removal and the work done to that point,” Urback said.

With small estates, beneficiaries and other interested parties may decide the cost of litigation isn’t worth the trouble of trying to remove an executor they don’t like, he said.

Both Urback and Raman said that an executor’s best strategy to prevent a contentious administration, or the most effective defense against attempts to remove them, is to keep good records and to regularly communicate with beneficiaries.

“If they have gotten advice from a professional — say, an accountant, or another lawyer — [it is] important to keep documentation about that. It’s important to set out who they’ve been relying on in some of their decision making, and why,” Urback said.

Executors should set out what they’ve done, as well as the reasons, so they have a paper record if their actions are challenged, he added.

Said Raman: “I always advise [executor] clients: keep your lines of communication open. That is the keystone of any relationship that hinges on trust — transparency and clarity.”

Rudy Mezzetta

Rudy is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on tax, estate planning, industry news and more since 2005. Reach him at rudy@newcom.ca.

Given our proximity to the United States, many Canadians have financial dealings on both sides of the border. This means some clients may be the beneficiaries on an individual retirement account (IRA).

While an IRA is the U.S. equivalent of an RRSP, the tax treatment at death can trip up many Canadian-resident beneficiaries.

U.S. taxation of IRAs at death

IRAs and RRSPs are similar but not identical. One difference is who is taxed on the proceeds at death. In the U.S., when an IRA holder dies, the named beneficiary — not the deceased — is taxed on the lump sum amount received. In Canada, the RRSP holder is taxed at death unless the beneficiary named is a qualifying survivor (spouse/common-law partner or a financially dependent child or grandchild). A qualifying survivor can defer tax on the amount received by, for example, transferring it to their RRSP or purchasing an annuity. The tax deferral options differ by qualifying survivor.

The Canada-U.S. tax treaty establishes how each country taxes their residents on income received from the other country. Generally speaking, when U.S. income would otherwise be taxable to a U.S. taxpayer, it’s taxable in Canada when received by a Canadian resident. So Canadian residents who receive amounts as an IRA beneficiary must report this as taxable income on their Canadian tax return and pay tax in Canada. If there is any non-resident withholding tax on the IRA payment (which could be up to 30% on lump sum payments), it can be used as a tax credit to reduce Canadian tax. (The early withdrawal tax of 10% that would normally apply to IRA withdrawals prior to age 59-and-a-half doesn’t apply on withdrawals due to the IRA account holder’s death.)

While there may be U.S. tax-deferral options available for U.S.-resident beneficiaries, these options may not be available to Canadian residents. This would need to be confirmed directly with the U.S. financial institution. One option that could be available to Canadian residents is to receive a lump-sum payment from the deceased’s IRA.

IRA beneficiaries fall into one of two categories: non-spouses and spouses (including common-law partners). While the Canadian tax treatment of the lump-sum withdrawal is the same for both, the option for deferring Canadian tax is different.

Non-spouse beneficiary

When an IRA beneficiary is not the spouse of the deceased, the amount received as a lump sum is fully taxable in Canada. It may also be subject to non-resident withholding tax at source in the U.S.

What if the beneficiary wants to reduce the Canadian tax owing on the amount received from the IRA? The answer is simple: contribute an amount up to the pre-tax IRA lump sum payment in Canadian dollars to their RRSP. The contribution must be made no later than 60 days after the end of the calendar year in which the IRA amount was received (the same timing as with a normal RRSP contribution). Since this would be considered a new contribution, the beneficiary needs to have enough RRSP contribution room available.

Spouse beneficiary

Like a non-spouse beneficiary, a spouse can deposit the lump-sum received from an inherited IRA to an RRSP (not a spousal RRSP or RRIF) to defer tax. Again, non-resident withholding tax may apply at source in the U.S. However, unlike a non-spouse beneficiary, this can be done as a transfer and doesn’t require RRSP contribution room.

This is possible because the Income Tax Act allows for U.S. IRAs to be transferred to RRSPs. Generally, this transfer option is considered when the IRA holder is alive. However, it can also be used by a surviving spouse to transfer a lump sum from their deceased spouse’s IRA to their own RRSP. This effectively makes the tax treatment of the inherited IRA the same as when a surviving spouse transfers the amount received from the deceased spouse’s RRSP to their own. To qualify, the following conditions must be met:

1. The amount received from the IRA is included on the recipient spouse’s Canadian tax return as taxable income.
2. The amount received was funded by contributions made to the IRA by either the recipient or the recipient’s spouse. This is known as an eligible amount.

To complete the transfer, the RRSP deposit must be made no later than 60 days after the end of the calendar year during which the lump sum IRA payment is received.

The basic steps for the transfer are:

1. Request and receive a lump-sum payment from the deceased’s IRA.
2. Deposit the amount, converted to Canadian dollars, into an RRSP no later than 60 days after the end of the year the payment was received. This is different from transfers between RRSPs, which must be done directly between the accounts.
3. Report the IRA income on the recipient’s Canadian tax return.
4. Spouse beneficiaries would report the RRSP deposit as a transfer on Schedule 7. Non-spouse beneficiaries would report the RRSP deposit as a new contribution on Schedule 7.

These steps allow the RRSP deposit to be deducted from the lump-sum payment that was reported as income. If the two amounts are equal, there is no Canadian tax. Any withholding tax paid in the U.S. can be used as a tax credit to reduce Canadian tax paid in that same year via the foreign tax credit. Unfortunately, if the foreign tax credit isn’t fully utilized, the unused amount can’t be carried forward or back and is lost.

Finally, the RRSP deposit doesn’t impact the spouse beneficiary’s RRSP contribution limit.

Many Canadian-resident beneficiaries of IRAs are surprised to learn that the amount they received is taxable to them. The good news is there’s a simple way to reduce or eliminate tax — their RRSP. Whether the RRSP deposit is a transfer (spouse beneficiary) or a new contribution (non-spouse beneficiary), the result is the same — Canadian tax is deferred.

Curtis Davis

Tax & Estate

Curtis Davis, FCSI, CFP, TEP, is director for tax, retirement and estate planning services, retail markets at Manulife Investment Management.

With the federal government’s expanded trust reporting regime taking effect later this month, the Canada Revenue Agency (CRA) has granted temporary relief to bare trusts, which will be subject to filing requirements for the first time.

Bare trusts that file late for the 2023 tax year will not incur late-filing penalties, the agency announced Friday.

The new trust reporting rules — effective for trusts with year ends of Dec. 31, 2023, and after — apply to more types of trusts, including bare trusts. Trustees also are required to report information such as the names, addresses and social insurance numbers of beneficiaries and other parties connected to a trust.

Trustees affected by the new rules must file a T3 trust return along with a new Schedule 15 beneficial information return by the filing deadline of March 30 (April 2 in 2024).

“You don’t want to be waiting until the last minute [to collect the data],” said John Oakey, vice-president of taxation with CPA Canada in Dartmouth, N.S. Trustees may find that beneficiaries of the trust are unreachable, unresponsive or unwilling to provide the information. If a beneficiary’s data is unavailable, “you want to document that you made a reasonable attempt.”

“Most bare trusts are not formally documented — there’s no trust indenture that goes along with them in the same way that, say, a family trust might have,” said Stephen Latimer, tax partner with Grant Thornton LLP in Halifax. “The big risk here is that a lot of clients may not recall putting these bare trusts in place.”

In guidance released Dec. 1, the CRA indicated there will be no penalties for filing a trust return and a Schedule 15 for bare trusts after the deadline for the 2023 tax year. However, the filing requirement remains in effect. If the failure to file is made knowingly or due to gross negligence, penalties may apply, the CRA stated.

“CRA recognizes that the 2023 tax year will be the first time that bare trusts will have a requirement to file a T3 return including the new Schedule 15,” the agency stated. “As some bare trusts may be uncertain about the new requirements, the CRA is adopting an education-first approach to compliance and providing proactive relief.”

The new reporting rules also include a new penalty for failing to file: $2,500 or 5% of the property’s value, whichever is greater, in addition to existing penalties for failure to file a trust return.

Advisors should be “asking [clients] questions about [whether they have] any trusts that have been settled in the past that we’re not aware of — making sure we’re flushing that information out — to protect them from those non-compliance penalties,” Latimer said.

In December 2022, Ottawa passed legislation to expand the trust reporting rules to include express trusts (created with a settlor’s express intent) and bare trusts (in which a trustee’s only duty is to transfer property to a beneficiary on demand). Previously, only trusts with taxes payable for the year or those that disposed of capital property had to file an annual trust return.

Many clients will have a reporting obligation and not know it, Oakey said.

For example, a parent co-signing a mortgage with an adult child might constitute a bare trust, with the parent being the legal owner of the property and the child the beneficial owner.

Common trusts set up for estate planning purposes, such as alter ego, joint partner and spousal trusts also now have a reporting requirement.

Rudy Mezzetta

Rudy is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on tax, estate planning, industry news and more since 2005. Reach him at rudy@newcom.ca.

Executors have a duty to file tax returns and pay any tax liabilities on behalf of the deceased.

As the legal representative of the deceased for the purposes of the Income Tax Act, the executor becomes that taxpayer to the extent of the estate’s assets. This means they may be held personally liable for tax if they distribute estate assets before paying all tax amounts owed.

“An executor steps into the shoes of the deceased and they take on liability, as well, for any taxes that are owing, whether they’re aware of it or not,” said Matt Trotta, vice-president of tax, retirement and estate planning with CI Asset Management in Calgary. “They need to be mindful of when they distribute [estate assets to beneficiaries] to ensure that they’ve covered their bases on any tax liability before doing so.”

There are special rules governing the filing of income tax returns and the payment of any balance owing for the deceased.

The executor must file a T1 Income Tax and Benefit Return and pay any balance owing for the year of death (see “T1 filing timeline,” below). And there are three optional TI returns that may allow the executor to reduce the deceased’s total tax liability (see “Optional T1 returns,” below).

Executors are also responsible for filing any previous returns the deceased didn’t file. If the person died before April 30, for example, they probably hadn’t filed a tax return for the previous year. In that case, the deadline for filing and payment of tax for the previous year’s return is six months after the date of death. However, for any other unreported returns from previous years, the deadline for filing and payment remains April 30 of the following year. For example, if the deceased didn’t file a return in 2021, the deadline for filing the return and payment is April 30, 2022.  

In preparing tax returns, the executor may discover the deceased had not complied with their tax filing obligations in previous tax years.

“It could be something as simple as [unreported income from] a foreign pension,” said Rosa Maria Iuliano, a tax partner with Baker Tilly in Ottawa. “That happens a lot.”

In such cases, the executor is obligated to report unreported income, and would be wise to seek professional tax advice and to consider whether filing a voluntary disclosure with the Canada Revenue Agency might be appropriate. If the CRA identifies non-compliance, the agency may assess interest and penalties in addition to any tax owing on the unreported income, which will represent a liability to the estate.

“When you notice one [non-compliance] issue, that’s when you question whether there are others,” Trotta said. “You want to protect the estate, the beneficiaries and [yourself as] the executor from headaches, complications and added costs, and that’s where we would recommend a deeper dive.”

It’s also a good idea to consult with a tax professional about opportunities for reducing the estate’s overall tax liability at the time of death, Trotta said. For example, it may be possible to carry back losses realized in the first year of an estate to the final return and claim the losses against capital gains, if certain conditions are met.

After filing the final return and any estate returns, and before making distributions, the executor should consider applying for a clearance certificate from the CRA. The certificate confirms the estate has paid all tax owing and relieves the executor of personal liability on any tax the estate might be found to owe in the future.

However, executors should be aware that the CRA, while processing a clearance application, may discover non-compliance that the executor hadn’t identified, Iuliano said. In the case of one her clients, the CRA looked back through land transfer records to discover the deceased had unreported income from a sale of real estate 10 years before their death.

“One of the pieces of advice I tend to give executors on Day 1 is to be very cautious about doing interim distributions [to beneficiaries],” Iuliano said. “If you don’t know what [the deceased’s] tax history is, or how compliant they were, you have to be prepared for something that CRA could find as well.”

T1 filing timeline

The executor must file a T1 Income Tax and Benefit Return, and pay any balance owing, for the year in which the deceased died by April 30 of the following year. If the deceased died in November or December, the deadline is six months after the date of death. If the deceased or their spouse was self-employed, the deadline is June 15 of the following year. (If the deceased died between Dec. 16 and Dec. 31, it’s six months after the date of death.)

Optional T1 returns

There are three additional optional TI returns that can be filed for the deceased: a Rights and Things return, a Partnership or Proprietorship return and an Income from a Graduated Rate Estate (GRE) return.

If income is reported on one or more of these optional returns, the executor may be able reduce the deceased’s total tax liability by accessing another set of graduated tax rates and tax credits.

The executor can claim any income payable to the deceased, but not received by them before they died, on the Return for Rights or Things. For example, salary or vacation pay earned before death but paid after death could be claimed on a Rights or Things return.

Executors can claim any income received between the end of a business’s fiscal year and the date of death on a Partnership or Proprietorship return if the deceased was a sole proprietor or partner and the business did not have a calendar year-end. Any income received by the deceased from the GRE of another person between the fiscal year-end of the GRE and the deceased’s date of death can be claimed on the Income from a GRE return.

T3 returns

The executor may have to file a T3 income tax return for the estate, which is a trust, to the CRA annually until final distributions are made.

Also, if the deceased’s will created other trusts — for example, a trust for a disabled beneficiary — an annual T3 return will have to be filed for those trusts too.

These requirements to file a final T1 return for the deceased and T3s for the estate and other trusts with the CRA should not be confused with applying to probate the will, and paying any associated probate tax, with the provincial government.

Rudy Mezzetta

Rudy is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on tax, estate planning, industry news and more since 2005. Reach him at rudy@newcom.ca.

Most Canadians use RRSPs as a savings and investment vehicle for retirement, due in part to tax-deductible contributions, employer contribution opportunities, and tax-sheltered growth. As a result, the plans tend to feature prominently in most Canadians’ estate plans.

In conventional planning, RRSPs are passed on to surviving spouses or common-law partners in first-to-pass scenarios. RRSP rollovers or transfers allow such beneficiaries to receive the benefits of the deceased’s RRSP and defer tax until a later date.

However, there are cases when a person is widowed, unmarried or unpartnered, does not wish to pass on an RRSP to a partner or has no other eligible beneficiary (such as a qualifying disabled minor). In these instances, determining the ideal beneficiaries requires significant planning and re-evaluation, as beneficiary designations can carry serious consequences for estates. In these cases, whether someone opts to name RRSP beneficiaries or directs their RRSP to their estate to allow the net proceeds after tax to be subject to trust terms or otherwise distributed as they determine in their will, the RRSP transfer at death will trigger a tax event.

While naming beneficiaries can have positive outcomes in the right circumstances, such as potential savings in estate administration taxes/fees and expediency of transfer to intended beneficiaries, there are significant risks and drawbacks when not properly considered.

Unlike with many RRSP withdrawals during life, financial institutions generally do not withhold any tax from RRSP proceeds transferred to a beneficiary on death. The result could be tax liability to the estate, as the funds move elsewhere and leave the estate with a cash shortfall. When this occurs, both the executor and RRSP beneficiary can expect to hear from the Canada Revenue Agency (CRA).

Consider the following hypothetical scenario:

• Mr. X is unmarried with no partner or children, and his assets consist of an RRSP valued at $300,000 and a bank account with $80,000. He rents an apartment in downtown Edmonton and has a full-time job earning roughly $60,000/year. His personal effects have nominal financial value.
• In his will, Mr. X named his estate as the beneficiary of his RRSP.
• His will also states that his sister, Ms. Y, and her children will benefit from the net proceeds of his estate.
• Six months after drafting his will, Mr. X visits his bank and designates his RRSP to Ms. Y. He felt this would shorten administration, allow his sister access to the money sooner, and be simpler. As this new designation supersedes the designation in the will,[1] he did not feel he needed to update his estate plan with his lawyer.
• Mr. X passes away shortly thereafter, and the RRSP passes to Ms. Y outside of the estate.
• Mr. X’s estate has a tax liability at death of roughly $125,000 (plus interest and penalties if paid late).
• Since the RRSP did not enter the estate, the estate has only the $80,000 in the bank account to cover debts, taxes, and administration costs. As a result, the estate is insolvent and does not have sufficient cash to pay the tax liability.  
• In the meantime, Mr. X’s executor used some of the $80,000 in the bank account to pay for funeral expenses, legal fees, some administration expenses, and tax return preparation.
• The executor also paid Mr. X’s credit card bills and final month’s rent, totalling roughly $10,000.
• There is only approximately $55,000 remaining in the estate’s bank account.

The result? Mr. X’s estate and Ms. Y are both liable for tax arising from the RRSP, and Mr. X’s executor is personally liable for up to $10,000.

Why is Ms. Y liable? Subsection 160.2(1) of the Income Tax Act renders a taxpayer who received a benefit from an RRSP, as a consequence of the annuitant’s death, liable with the annuitant for the income tax on the benefit arising at death. As Ms. Y received an approximate benefit of $300,000, she would be potentially liable for the remaining tax owing, as the benefit received exceeds the amount of tax owing.

Why is Mr. X’s executor personally liable? Subsection 159(3) of the act states that a legal representative (including an executor) becomes personally liable up to the value of the deceased taxpayer’s property that is distributed if there is a tax liability. This personal liability can extend to both unpaid taxes and any accrued interest.

However, an executor may be granted an “allowance” for “reasonable funeral, testamentary and administration costs.”[2] This is consistent with court rulings in Alberta, which have held that “even with an insolvent estate, funeral, testamentary and administration expenses are paid in priority to other claims and bequests.”[3]

While funeral expenses, legal fees, administration expenses, and tax return filing are generally considered in priority to CRA as an allowance and not considered subject to the application of ss. 159(3), rent and credit card payments are generally not. As a result, even if it was otherwise prudent for the executor to avoid added interest payments on the credit card and reasonable to close off the rental, the CRA may assess the executor for up to $10,000, as he distributed that amount in priority to the CRA’s tax claim.

Assuming that the estate used the remaining $55,000 to partially repay the CRA, such amount will first be allocated to the income tax owing on Mr. X’s taxable income and then allocated to the amount owing on the RRSP at death.

While any payment from Ms. Y or Mr. X’s executor will reduce the amount the other owes under ss. 160.1(2), there is no bright-line test as to who pays first. They both face liability. This could lead to further delay and dispute, which may serve to increase the cost of the final tax bill and administration costs.

How could this situation have been avoided? Ironically, in this instance, by doing nothing.

Mr. X already had an effective plan in place, and if he sought to make changes, he should have discussed them in advance with his professional advisors.

As there was no apparent tax benefit to naming Ms. Y as beneficiary on the RRSP, it could have been more prudent to leave the estate as beneficiary. This way, the estate would have had ample cash on hand to pay all debts and taxes, and then pass on the remainder to Ms. Y, as well as her children.

Unlike most Canadian provinces, Alberta currently has a maximum probate fee of $525, whether the estate is valued at $250,001 or $250 million. That said, even in provinces that charge up to 1.5% in tax on the value of the estate, like Ontario, care should be taken in addressing the desire to reduce probate tax, given the potential to create estate issues and tax liability.

Even if this scenario took place in Ontario, based on a $380,000 estate, the amount of savings in bypassing the estate by naming RRSP beneficiaries would be roughly $4,500. An amount in excess of this number is now likely to be borne by others (as well as the estate) in penalties, interest and additional professional fees.

As the bank account had significant funds, there was already a need to obtain a grant of probate, so there were no savings there. While a financial institution may hypothetically waive the requirement for probate on smaller accounts, it is under no obligation to do so, and may require a grant for any amount.

While Ms. Y received funds quicker than she would have if she had to wait for a distribution from the estate, she now must deal with the CRA, and those delays may result in her keeping less of the RRSP proceeds than she would have if they entered the estate first.  

Even in cases where the outcome may not be as dire as this case study, it is strongly recommended that beneficiary designations, especially on registered plans such as RRSPs, be reviewed regularly with qualified professionals. Any changes to these designations should also be assessed in advance.

[1] Wills and Succession Act, SA 2010, c W-12.2, ss. 71(7)

[2] For examples, see CRA Roundtable, STEP conference, 2011-0429101C6 and CRA technical interpretation 2010-0390311E5

[3] Boje Estate, 2009 ABQB 749 at paragraph 44

Matt Trotta

Tax & Estate

Matt Trotta is vice-president, Tax, Retirement and Estate Planning with CI Global Asset Management.

When it comes to inheritance, boomers and millennials aren’t seeing eye to eye.

A recent survey conducted by Ipsos for Sun Life revealed that boomers are intending to leave a much greater inheritance than millennials are expecting to receive.

The survey found, on average, that boomers who intend to leave 100% of their inheritance to their kids are planning to give around $940,000. In contrast, millennials are expecting about $309,000.

This gap widens even further when baby boomers work with a financial advisor, as they are expected to leave over a million dollars.

However, of the 44% of boomers surveyed who plan to leave an inheritance, the survey found that less than half (47%) have an estate plan and one-quarter (26%) have not discussed their plans with the intended recipient.

“Receiving an inheritance presents a huge opportunity for millennials whose generation has faced immense economic pressure including volatile interest rates and exorbitant housing costs,” said Brian Burlacoff, an advisor at Sun Life. “It’s important for boomers and millennials alike to have transparent conversations about estate planning.”

The survey is based on an Ipsos poll conducted between Aug. 30 and Sept. 1 that included a sample of 750 millennials (aged 27-42) and 750 boomers (aged 58-77).

Staff

The staff of Advisor.ca have been covering news for financial advisors since 1998.

Of the myriad duties executors must perform, disposing of the deceased’s remains is one of the first and most fundamental obligations.

“[Executors] have a right of possession of the remains and a positive duty to dispose of the remains in a dignified and appropriate manner,” said Monique Charlebois, an estate lawyer in private practice in Oakville, Ont. and a former senior estates counsel with the Office of the Public Guardian and Trustee in Ontario.

While executors can, and usually do, follow any wishes the deceased left in a will or other document, “the executor has the final say,” said Paula Lester, assistant vice-president of trust solutions with Solus Trust, an affiliate of Raymond James, in Ottawa.

And it’s a criminal offense to neglect a lawful duty to properly care for a dead body, said Demetre Vasilounis, an estate lawyer with Fasken Martineau DuMoulin LLP in Toronto.

He said an executor’s duties under common law as it pertains to funeral arrangements can be classified under four categories.

The executor must dispose of the remains in a decent, dignified and timely manner; make funeral arrangements befitting the deceased’s station in life; pay for the funeral with a corresponding right to be reimbursed by the estate for reasonable expenses; and inform the deceased’s next of kin of the funeral arrangements.

Even though the responsibility is ultimately the executor’s, they will generally consult and coordinate with the deceased’s family on funeral arrangements. Executors will usually carry out a deceased’s funeral wishes unless the cost of doing so is unreasonable relative to the size of the estate.

In Ontario, the courts have regarded both burial and cremation, including the reasonable disposition of cremated remains (the scattering of ashes), as representing decent and dignified methods of disposing of remains.

In recent years, however, more clients are including funeral wishes in their wills involving alternative forms of burial, in particular ones considered to be more environmentally friendly, Vasilounis said.

In providing a funeral befitting a deceased’s station in life, executors should be guided primarily by the size of the estate. A lavish and expensive funeral for a person with a modest estate would be considered inappropriate and could be challenged by beneficiaries or creditors.

However, it could be considered reasonable for an executor to spend relatively more on a funeral if the deceased belonged to a community, or came from a cultural background, where larger or more lavish funerals are the norm, Lester said.

It would also be inappropriate for an executor to arrange for a bare-minimum funeral if the size of the estate and the circumstances justify a larger expense.

Executors are responsible for paying for funeral expenses, which the estate will reimburse. If someone other than the executor pays for the funeral, they may ask the executor to reimburse them for reasonable expenses from the estate assets.

If the liabilities of the estate are greater than the assets, an executor needs to be careful about how much they spend on a funeral, Lester said.

“While reasonable funeral and burial costs come first in priority of debts to be paid, what is considered reasonable by the court gets really pared back,” she said.

Where there’s no money in an estate to pay for a funeral, the onus to pay may fall on anyone who had a support obligation in respect of the deceased, such as a spouse or a parent. If someone else pays for the funeral, that person can make a claim for reasonable funeral expenses against the person who had the support obligation.

In practice, a family member or friend will often step up to pay for a funeral without seeking compensation if the estate has no money, Lester said. If no one can pay, the municipality in which the deceased last resided may pay for a burial or cremation if the deceased had a low income or was on public support at the time of death.

Finally, the executor has a duty to promptly inform family members about the funeral arrangements and about how the remains will be disposed, Vasilounis said. Depending on the circumstances, an executor may be found to be in breach of their duty if they fail to do so.

Rudy Mezzetta

Rudy is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on tax, estate planning, industry news and more since 2005. Reach him at rudy@newcom.ca.

Tax practitioners say the federal government’s proposed new alternative minimum tax (AMT) regime may discourage philanthropy by punishing people who make large charitable donations. 

“The fundamental concern about these changes is they treat charitable donations as tax evasion or personal expenditure,” wrote Malcolm Burrows, head of philanthropic advisory services with Scotia Wealth Management, in a Sept. 21 article on All About Estates. 

While Ottawa may have good reason to target aggressive tax planning and tax evasion, “charitable donations are different,” said Burrows, who is a founder of the Aqueduct Foundation, a donor-advised fund managed by Scotia Trust. “Donors make irrevocable gifts to benefit charity and the community. They reduce their wealth by doing so.” 

In the 2023 federal budget, the government proposed increasing the AMT rate to 20.5%, up from 15% under the existing AMT regime. The AMT exemption level would increase to an estimated $173,000 (indexed annually) from a fixed $40,000. The changes are meant to take effect Jan. 1, 2024.

Ottawa hopes the changes will ensure the highest earners cannot combine certain incentives in the Income Tax Act, including the donation tax credit, to drive their tax rate below a minimum rate. 

Among other proposed changes, only half of the donation tax credit can be applied against the AMT, down from 100% under the current rules. Meanwhile, 30% of capital gains on the donation of publicly listed securities will now be included in adjusted taxable income (ATI). 

The AMT proposals “are expected to affect very few taxpayers” due in part to the significant increase to the basic exemption amount, wrote tax and estate experts Jamie Golombek, Debbie Pearl-Weinberg and Kate Lazier in a Sept 2023 CIBC Private Wealth report. 

In addition, “high-income donors generally won’t pay AMT no matter the size of a cash donation if they earn primarily (self) employment or rental income,” the authors stated. 

However, if a client realizes a large capital gain — such as from selling a business — and makes a significant donation, their AMT under the proposed regime may increase relative to the existing regime. The AMT could also increase if the client generated dividend income and made a large cash donation. 

In a Sept. 21 webinar about the AMT presented by Toronto-based Oberon Capital Corp., Kim Moody of Moodys Private Client in Calgary presented a hypothetical scenario of a B.C. client who had $500,000 in capital gains and $250,000 in eligible dividends in 2024, and who chose to donate $300,000 cash that year. Under the proposed regime, the client would owe AMT of $48,995 as opposed to none under the existing rules. 

Citing calculations provided Jay Goodis, a CPA and CEO and founder of Tax Templates Inc. in Aurora, Ont., Moody said the same client could reduce their AMT to zero under the proposed rules if they donated just $3,060. 

“I find that, just from a [tax] policy perspective, very, very offensive,” Moody said. 

Henry Korenblum, vice-president of sales and tax planning at Oberon Capital, said during the webinar: “You’re going from a $300,000 donation to basically nothing to wipe out the AMT, even though the donation is genuinely impoverishing you. It’s not as if you’re consuming something — you’re making a donation to some charitable activity, something designed to promote universal good.” 

Under the proposed rules, the AMT will remain recoverable to the extent regular income tax exceeds AMT in any of the following seven calendar years. 

However, if the taxpayer doesn’t earn enough employment income in any of those seven years, the tax loss may become permanent, said the authors of the CIBC report. 

“In addition, AMT recovery may be further impacted by a gift to charity because the individual can no longer earn income on the gifted property,” they said.

In its Sept. 1 submission to the Department of Finance, the Canadian Association of Gift Planners (CAGP) argued that the proposed AMT rules could jeopardize the donation of “transformational” gifts in the six- to nine-digit range. These gifts represent 35% of the annual $11.8 billion in charitable giving by Canadians, the CAGP said. 

To the degree the proposed rules might discourage large donations, “charities and Canadians will look to government to replace this funding in order for vital programs and services to continue,” the CAGP said. 

Tax practitioners suggested clients talk to their tax advisors regarding ways to make large gifts while limiting the negative effect of the proposed new AMT regime.  

For example, clients could consider making large donations before the end of this year rather than in 2024. Observers expect the federal government to introduce enabling legislation in Parliament to implement AMT changes sometime this fall. 

Clients might also consider donating via a will or through a private corporation, as the AMT does not apply at death or to a corporate donor, suggested the CIBC report. 

The Department of Finance released draft legislation on Aug. 4 to implement the AMT proposals, and the consultation period ended Sept. 8. 

Rudy Mezzetta

Rudy is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on tax, estate planning, industry news and more since 2005. Reach him at rudy@newcom.ca.

“I don’t want to be a vegetable.”

Brandi Bailey said she hears that statement frequently when she brings up the topic of serious illness planning.

But “that is not a medical-planning conversation,” said Bailey, vice-president of marketing with Plan Well Guide, a medical planning company based in Kingston, Ont. “There’s a whole lot of grey area between good health and death’s door.” Bailey was speaking at the IAFP Symposium in Edmonton last week.

When loved ones are called upon to make medical decisions in an emergency situation, whether or not a patient will end up “in a vegetative state is [just] a sliver of the different types of decisions one might have to make when they come into the hospital,” she said.

Unfortunately, Bailey said, most people aren’t equipped to make these decisions for themselves or their loved ones.

“Incapacity planning, as it’s currently done, doesn’t give people enough information to determine their values and beliefs,” she said, noting that most of this planning is conducted in the context of end-of-life planning.

“But this does not allow you to think ahead to serious illness planning,” she said. “What if there’s a chance I might live?”

She added that thanks in part to television and movies, many people do not understand how medical interventions actually work. For example, CPR is widely depicted as an intervention that people literally walk away from.

“In real life, chest compressions are often followed by mechanical ventilation, [where] tubes go down your throat to force you to breathe,” Bailey said. CPR “is very hard on the body” and was found to only be successful in 22 out of 100 cases, according to a 2009 study published in the New England Journal of Medicine, she added. (That figure plummets to three out of 100 for frail people living in nursing homes.)

She also said people should know the three types of care available when they have a serious illness: intensive care, which takes place in the ICU; medical care, which is surgeries and medications; or comfort care, which involves alleviating symptoms and providing peace during an illness.

Bailey said that once people understand these concepts, they can connect them to their “values and preferences” regarding those treatments.

Examples of values and preferences could include wanting to live as independently as possible after medical care, or avoiding as much pain as possible.

Bailey shared examples of her preferences: “I like to be clear-headed, so for me a medical intervention that involves medicines that compromise my clarity would be a difficult thing for me,” she said. “Anything that would inhibit communicating with my loved ones would [also] be a big sticking point for me.”

She said determining, documenting and sharing these wishes prepares a client and their loved ones to make decisions jointly with a medical professional.

Clients should also designate someone who can make health-care decisions for them should they become incapacitated. This person is called an attorney for personal care in Ontario, a substitute decision-maker or health-care agent in Alberta, and a representative (via a representation agreement) in British Columbia.

Bailey said a spouse may not be the best person for this role. “[You want] the pitbull in your life: the person who’s willing to be vocal; the person who’s willing to ask a lot of questions; the person who likes a lot of information and is willing to think through things,” she said.

She encourages clients to prepare their substitute decision-maker with as much information about their personal-care preferences as possible.

For example, a client can state whether they want family members or a professional to care for their body during an illness; the types of food they would or would not want to eat; and the types of clothes they’d want to wear. She also recommended that clients address what they would want their caregivers to know if caregiving created a financial hardship.

Bailey said Plan Well Guide offers several guides and resources to educate clients, prompt reflection on serious illness planning, and to document values and preferences.

She cautioned that once a plan is created, “don’t set it and forget it.” When there are lifestyle changes, revisit the documents. “What accompanies all these plans is the conversations around them” with families and other loved ones, she added.

Because financial advisors aren’t medical professionals, they shouldn’t give medical advice and should instead steer clients toward resources and conversations with appropriate experts and service providers, Bailey said.

Nonetheless, helping clients with medical planning is a relatively new service, she said, and doing so can provide advisors with a way to stand out from their peers. She also said that clients can often be receptive to discussing these issues.

“People are far more open to conversations about serious illness than they are death and dying,” Bailey said.

Did you know?

Since 2014, Alberta has had a “Green Sleeve” program, which is a standardized green plastic pocket that holds a personal directive, “goals of care” designation and advance care planning tracking record. The sleeve is meant to be carried around at all times, and all Alberta health-care providers know to review a person’s Green Sleeve if they become unresponsive or incapacitated. When entering someone’s home, first responders are trained to look for a Green Sleeve near the refrigerator.

Disclosure: Advisor.ca was a media sponsor of the IAFP symposium. Part of the sponsorship included transportation costs. No coverage was guaranteed in exchange for the sponsorship.

Melissa Shin

Melissa is the editorial director of Advisor.ca and leads Newcom Media Inc.’s group of financial publications. She has been with the team since 2011 and been recognized by PMAC and CFA Society Toronto for her reporting. Reach her at mshin@newcom.ca. You may also call or text 416-847-8038 to provide a confidential tip.

Clients who are named as an executor in a will, or who are asked to perform the job when the deceased did not name an executor, should think carefully before accepting the appointment.

Serving as an executor is “neither an honour nor an obligation,” said Monique Charlebois, an estate lawyer in private practice in Oakville, Ont. and a former senior estates counsel with the Office of the Public Guardian and Trustee in Ontario.

An executor named in a will can decline the role as long as they haven’t already begun administering the estate.

However, “once you start down the path of acting as the executor, it’s very hard to extricate yourself. It’s the type of thing that needs a lot of thought before you start taking steps,” Charlebois said.

Clients might feel comfortable accepting the job where the estate administration appears straightforward — for example, in a scenario where the executor is also the sole beneficiary, said Jandy John, director of estates and trusts at Concentra Trust in Toronto. And many people accept the role out of a sense of duty to a family member or friend.

John also noted that estate lawyers, trust companies and accountants can help executors navigate the settlement. However, when the estate is complex, the would-be executor should consider whether they can handle the work.

“The first question is: Do I have the time to do this?” John said. “Is this going to add stress and anxiety to an already very busy and strained life and possibly send you right over the edge?”

In deciding whether to take the job, a would-be executor is allowed to gather information about the estate without being considered to have “intermeddled” and accepted the role.

Executors should consider the family dynamics, specifically whether there is a risk that one or more of the beneficiaries will be difficult or litigious, said Krystyne Rusek, estate lawyer with Speigel Nichols Fox LLP in Mississauga, Ont. Executors have a fiduciary duty to administer the estate on behalf of the beneficiaries and can be held liable if a court finds they’ve failed in this duty.

For example, a beneficiary might challenge whether an executor received the best price on the sale of a house if it wasn’t sold on the open market or the executor failed to get a proper appraisal. “Beneficiaries can make any claims they want,” Rusek said.

If a person is serving as an executor as a favour to a deceased friend, they may be regarded with suspicion by the family member beneficiaries, John said. “You have to be the decision maker for this family. They may be looking at you, asking, ‘Why are you doing this [job]?’”

An executor who’s been named co-executor of an estate should consider whether they’ll be able to work well with any other executors.

“It’s a double-edged sword,” John said. Co-executors can divide responsibilities, making administration easier, but if one co-executor shirks their duties, the other co-executors remain responsible. Unless the will states otherwise, estate administration decisions require unanimous approval from the executors, further complicating matters.

Executors should be particularly wary of estates where the assets aren’t sufficient to pay the deceased’s debts, Charlebois said. Executors have a duty to pay the estate’s debts before distributing to beneficiaries and can’t favour one creditor over another, except for preferential creditors such as the Canada Revenue Agency.

Good legal advice is “absolutely essential” when dealing with insolvent estates, Charlebois said.

A person who has a claim against the estate — for example, a surviving spouse making a dependent relief claim — can’t also serve as an executor, Rusek said, as they would be in a conflict of interest.

Would-be executors must consider whether they have the resources to pay for any expenses on behalf of the estate over the short-term, until they can be reimbursed by the estate, John said. For example, the deceased might have died owning a home but relatively little in the way of savings or investments.

“You have to pay the electricity [for the home], you have to pay property taxes, and at some point, that might be out of pocket until you can figure out how to get that [reimbursed],” John said.

On the other hand, some executors may decide to take on the role because of the opportunity to receive compensation, particularly if the estate was large. Depending on the circumstances, executor compensation can be as high as 5% of the value of the estate, though the amount can be challenged by beneficiaries in court.

Rudy Mezzetta

Rudy is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on tax, estate planning, industry news and more since 2005. Reach him at rudy@newcom.ca.