Executors Fees and Canada s Goods and Services Tax

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1 Executors Fees and Canada s Goods and Services Tax By Paul Casuccio, Fasken Martineau For executors trying to determine whether to charge Canada s goods and services tax ( GST ) on the fees for their services, it is more important for them to look at who they are, rather than what services they actually performed. 1 Part IX of Canada s Excise Tax Act ( ETA ), under which the GST is imposed, is structured such that fees charged by professional executors are treated differently for GST purposes than fees charged by others, notwithstanding that the actual services provided may be nearly identical. Put plainly, where an individual, a partnership, or a company earns compensation as an executor for services provided in the course of carrying on a business, such compensation will generally be subject to GST. Accordingly, those entities in the business of acting as executors trustees, trust companies, law firms and lawyers ( Professionals ) will generally be required to charge and remit GST on the fees they charge for such services. Conversely, where non-professional individuals act as executors, other than in the course of carrying on a business, such as commonly occurs when a friend or relative asks it as a favour, any compensation for such services will not generally be subject to GST. Where Professionals are acting as executors other than in the course of their business, such as for friends or family, it becomes a question of fact as to whether GST must be charged on their services. This article discusses the requirements to register, charge and remit GST on the provision of executor services in the context of these types of situations. 2 The ETA requires every person to be registered for GST purposes if it makes a taxable supply in Canada in the course of a commercial activity engaged in by the person in Canada. 3 Person is defined very broadly in the ETA to include among other things: trusts, individuals, 1 The term executor will be used throughout this article to refer to personal representatives of a deceased individual or the estate of a deceased individual, as that term is defined in subsection 123(1) of the Excise Tax Act (Canada). This term is defined as: the executor of the individual's will, the liquidator of the individual s succession, the administrator of the estate or any person who is responsible under the appropriate law for the proper collection, administration, disposition and distribution of the assets of the estate parties that are charged with the administration of a deceased person s estate, whether they are named in the will or appointed by a court. 2 This article assumes that both the estate and the executors are located in Ontario; there are additional rules and considerations that must be engaged where either are non-residents of Canada, or where either are resident in one of the three provinces that harmonized their provincial sales taxes with the GST (Newfoundland, Nova Scotia and New Brunswick). 3 Subsection 240(1), ETA (All statutory references are to the ETA, unless noted otherwise). Fasken Martineau DuMoulin LLP 1

2 partnerships, corporations, and even estates of deceased persons. 4 Accordingly, it is difficult to imagine an executor, of any description, that will fall outside of the definition of person, and therefore must register for GST if it makes taxable supplies in the course of commercial activities. The primary consequence of this duty to register is the complementary duty to charge GST on the provision of its taxable supplies 5 and to file a GST return that accounts for such tax charged and to remit all net tax collected. 6 There is, however, a specific provision that exempts small suppliers of taxable goods and services from the requirements of both registering and charging the GST. 7 A person is considered to be a small supplier if the total of all taxable supplies made by the person in the four previous calendar quarters does not exceed $30, Therefore it is only in situations where the executor is earning less than $30,000 per year from all the taxable supplies it makes not just executor services that it need not register for GST purposes. A taxable supply is defined as a supply that is made in the course of a commercial activity, and a supply is defined to include the provision of property or a service in any manner, including sale, transfer, barter, exchange, licence, rental, lease, gift or disposition. 9 Executor services are clearly included in the broad phrase provision of a service in any manner, particularly given that service is defined to include everything other than property, money and services performed in the course of or in relation to the office or employment of the person. 10 Accordingly, to the extent that an executor is providing services in the course of a commercial activity, and not as an officer or employee, that executor will be forced to register for GST purposes, subject to the aforementioned small supplier rules. Determining whether executor services are being performed in the course of a commercial activity is generally accomplished by asking whether the service was performed, and fees earned, as part of the business of the person performing it. Where a service is performed as part of a business carried on the executor, it is considered to be performed in the course of a commercial activity and thus is subject to GST. As it relates to the supply of services, commercial activity Subsection 123(1), c.f. person. Subsection 221(1). Sections 238 and 228. Sections 240 and 166, respectively. Section 148. In circumstances where a charity or other public service body is acting as the executor, the threshold is $50,000 rather than $30,000. A public service body is defined in subsection 123(1) of the ETA as a: non-profit organization, a charity, a municipality, a school authority, a hospital authority, a public college or a university Ibid. cf taxable supply and supply. 10 Subsection 123(1), c.f. service. Fasken Martineau DuMoulin LLP 2

3 is defined in the ETA to include a business carried on by the supplier, and business is very broadly defined in the ETA to include: a profession, calling, trade, manufacture or undertaking of any kind whatever, whether the activity or undertaking is engaged in for profit, and any activity engaged in on a regular or continuous basis that involves the supply of property by way of lease, licence or similar arrangement, but does not include an office or employment. 11 This definition is sufficiently broad that any corporate entity, such as a trust company, that is acting as an executor is almost certainly going to be included, and thus the services will be considered to have been performed in the course of commercial activity and thus are taxable. Notwithstanding that the executor services are actually performed by individuals at the company, the services are effectively performed by the company as a whole, which then receives the compensation, on which GST is going to be exigible. 12 This analysis is slightly different for lawyers and law firms, but the effect is the same where a lawyer or law firm provides executor services in the course of the business it or they carry on, GST will be exigible on such services. The situation is different because partnerships, which most law firms are, are not considered to be separate legal entities for estate planning purposes. Accordingly, most law firms cannot act as executors; only their constituent lawyers can. 13 In such scenarios, where a client of the law firm engages the firm for the provision of executor services, and a specific lawyer from that firm is named executor, the fees earned are often billed by, and paid to, the partnership rather than the executor. In these scenarios, as with the trust companies, for GST purposes the services will be considered to have been supplied by the firm, which will generally be considered to be acting the course of the business it carries on. Accordingly, assuming the firm is not a small supplier and thus required to be registered, GST must be charged by the firm. It should be noted here that although law firms often treat executor fees differently from the legal fees it charges, from a GST perspective, this normally makes little difference; they are still fees earned for services supplied in the course of a business, and thus are subject to GST. It is only in cases where it is arguable that the service was supplied other than in the course of the business carried on by the lawyer that executor services will not be subject to GST. Although the above may be the norm for Professionals, it is not uncommon for individual Professionals, such as lawyers or trust officers, to be approached directly, rather than in their professional capacity through the firm or company they work for. The most common of these 11 Subsection 123(1), c.f. commercial activity and business. 12 There is no GST applicable on the salaries of such employees by virtue of the definition of service in subsection 123(1), which specifically excludes services performed by employees. 13 Law firms that are professional corporations are likely acceptable executors for the same reasons that a trust company is acceptable the corporate body is a recognized legal entity. Fasken Martineau DuMoulin LLP 3

4 situations occurs when a close friend or family member asks the Professional individual to act as an executor because of the close relationship, rather than the professional skills. In such cases it is more difficult to determine whether the services are being provided in the course of a business carried on by the individual. However, business is defined so broadly in the ETA that such individual Professionals will almost invariably fall into at least part of the definition, as will non-professionals whose other professions or jobs have nothing to do with acting as an executor. Specifically, the business of an individual person will include undertakings of any kind, so long as there is a reasonable expectation of profit from such an undertaking. 14 Thus where anyone undertakes to act as an executor and can reasonably expect to profit from it, he or she may still be considered to be acting in the course of a business. 15 However, the breadth of this definition is tempered by an explicit exception in it that exempts supplies made in the course of acting in the course of office or employment. Since executors are not generally employees of the estates, where the fees they earn can be considered income from an office, the individual executor, whether a Professional or not, can avoid the requirements of charging and remitting the GST on them. 16 Office is defined in the ETA by referencing the definition of office in the Income Tax Act (Canada) ( Act ), but adds some very specific exclusions. The Act defines office as meaning the position of an individual entitling the individual to a fixed or ascertainable stipend or remuneration. It is clearly arguable that an individual acting as an executor is acting in a position that entitles them to remuneration that is ascertainable in advance under either the terms of a contract or the will, or failing the existence of such terms, under the Trustees Act. 17 Accordingly, it would seem viable to argue that no GST should be exigible on fees earned by an executor because he or she is earning them in relation to an office, which is specifically not a business. However, specifically excluded from the ETA s definition of office is the position of an executor where that executor s remuneration for acting in that capacity is treated as business 14 In cases where the professional is asked to act for reasons other than his or her profession, it is assumed that it is the professional as an individual, rather than a company, partnership or any other entity, that is acing as the executor. In such cases, the definition of commercial activity in subsection 123(1) requires that the executor have a reasonable expectation of profit in any business undertakings, notwithstanding that the definition of business does not generally require a reasonable expectation of profit. 15 It should be noted therefore that in scenarios where individual executors perform services without taking compensation, there can be no expectation of profit and therefore the service is not performed in the course of commercial activity and consequently no GST must be charged. 16 Technically, where an executor falls within the definition of an officer (i.e. they earn income from an office), they also are deemed to be employees under the definition in subsection 123(1) of the ETA. Therefore no GST is payable on fees earned by an officer, because they are earned in relation to both employment and office. 17 Section 61, Trustees Act. Fasken Martineau DuMoulin LLP 4

5 income for income tax purposes. 18 Income is considered to be business income for income tax purposes where it is received in respect of, among other things, services performed in the course of business. 19 Therefore in a seemingly circular manner, the ETA ensures that where an individual executor earns fees from carrying on a business, such fees will not be exempt from GST by use of the argument that the executor was actually earning the income from an office. Accordingly, the basic question that must be answered for all individual executors is the same as it is for trust companies and law firms: are the services provided in the course of carrying on a business? 20 If so, then the services are being supplied in the course of a commercial activity and are consequently taxable supplies and thus subject to GST on the fair value of the services performed. 21 However, this general rule is still tempered by the small supplier rules, which allow any individual to act as an executor without registering for, charging, or remitting GST, even if it is in the course of a business, so long as he or she remains a small supplier. 22 Accordingly, to the extent that the individual executor is not already required to be registered for GST, and supplies less than $30,000 worth of taxable executor services in a year, there is no requirement to register for GST purposes, nor to charge or remit the GST on the services provided. 23 This will generally eliminate the need for non-professional individuals to register, charge and remit GST when they receive compensation for acting as an executor. 18 Subsection 123(1), c.f. office. 19 The CCRA s Interpretation Bulletin IT-377R states the following with respect to fees earned by executors: A fee earned for the administration of an estate by an executor thereof will be treated either as income from a business or income from an office, depending on the particular circumstances of each case. Fees earned by a taxpayer for acting in the capacity of executor in the course of business form part of the business income of the taxpayer, and expenses incurred in this connection are deductible in the usual way in computing such income, to the extent they are not recoverable from the funds of the estate. Where the executor is a person who does not act in this capacity in the course of carrying on a business, the fee for acting as executor is considered to be income from an office. 20 The CCRA has confirmed this in its Headquarters Letter , dated November 20, 2002, which states: The treatment under the ETA of executors' fees paid to an individual turns on a determination of whether the fees are income from a business or an office under the Income Tax Act. Whether the fees are income from a business or an office is a question of fact. Therefore, where it is determined that the fees paid to an individual for acting as executor in the administration of an estate are income from an office and not of a business under that Act, they will not be subject to GST/HST under the ETA. 21 Section As defined above, supra note Sections 240 and 166. Also, for those individuals already registered for GST for other purposes (e.g. sole practitioner lawyers), GST must still be charged on all supplies of taxable executor services (those made in the course of a business), regardless of the amount of compensation received. Fasken Martineau DuMoulin LLP 5

6 For those individuals that are already registered for GST purposes, and for those that will surpass the small supplier threshold, the question of whether the executor services were provided in the course of a business carried on is always a question of fact. Although it is never possible to predict with certainty how the CCRA is going to assess a matter, certain facts and scenarios are more likely to lead to a determination that the services were provided in the course of a business than others. The degree of proximity of the relationship between the executor and the deceased can be very indicative; acting as an executor for a parent or sibling is less likely to be viewed as a business activity than acting for a distant wealthy cousin. However, even where the deceased is a close friend or relative, the frequency with which the executor has been asked to act in such a capacity can be indicative. If an individual act as executor for all the members of his or her family, and receives compensation from the estate, it will be very difficult to argue successfully that the services are not being provided in the course of a business. The more often and regular that an executor acts in this capacity, the more likely it is that he or she will be considered to be earning income from a business rather than from an office. This is true notwithstanding that the fees may be paid directly to the executor and not to the firm or company on behalf of which he or she normally performs such services, because of the breadth of the definition of business in the ETA. Acting in the course of one s profession is clearly included in the definition of business, and therefore to the extent that the profession of the individual includes executor or similar activities, it will generally be difficult to argue that the services were not provided in the course of that profession. In such cases, the executor will have to show how the services provided to his or her friend and family member is different than the services provided in the normal course of their job. And even where it is possible to do so, the CCRA may still take the view that if one s profession is to act as an executor, then in every circumstance where one acts as an executor, one will be engaged in business. Of course, this leads to questions about situations in which a lawyer that is engaged in other areas of the law and whose professional activities do not generally include acting as an executor or dealing with estates. In these situations, the frequency with which the lawyer acts as an executor is likely to be determinative; if he or she is often an executor, then it will be difficult to argue that he or she is not engaged in the business of providing such services. This is supported by the CCRA, which has stated that where the executor is a lawyer whose normal practice does not include executor services, and the lawyer was appointed on personal grounds, the income could be characterized under the Act as income from an office, rather than income from business. 24 It is important to note that the CCRA states that the lawyer could be so characterized, rather than that it would, or even should, be so characterized. This indicates that 24 Interpretation Bulletin IT-377R at para. 5. Fasken Martineau DuMoulin LLP 6

7 other contextual factors would likely be examined and that the CCRA entirely retains the right to rule that the income was still income from business if the other facts warranted it. To summarize, although there are certain situations when it will be very clear whether the GST will be applicable to the services provided by an executor such as when the small supplier rules apply, or when a professional trust company is providing executor services in many cases it will be a matter of argument as to whether the GST is applicable. In all but the clearest of cases, the facts must be carefully scrutinized to determine just how much the situation looks like the executor is actually carrying on a business of acting as an executor. Where these facts seem to indicate a business, it is always safer to register for and then collect and remit the tax, since the failure to file a required GST return can result in liability for fines of up to $25, and imprisonment for up to twelve months Subsection 326(1). Fasken Martineau DuMoulin LLP 7