Whether a gift to an executor is taxable compensation

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By Doug Carroll | Nov. 23, 2012, 8:12 p.m.

Indemnisation

At issue
Compensation received by an executor is income from an office, and thereby taxable.

Where an individual is both named as executor and provided a legacy or bequest in the Will, there is a presumption that that gift is in lieu of compensation. For distinction, a legacy is a dollar amount, whereas a bequest is an item of property.

Either way, the amount of compensation would be the fair market value of the gift. Ironically in the case of a large single property bequest, an executor who lacks cash liquidity may have to dispose of the item in order to pay the corresponding tax bill.

The executor may rebut the presumption that a gift is compensation by offering evidence of the testator’s contrary intention, either through the Will or by surrounding circumstances.

Boisvert v. The Queen, 2011 TCC 290

Guy Boisvert and a notary were named as liquidators (the proper term for executor in Quebec) of the estate of Marcel Sauvé. The Will provided that as a “token of gratitude” for the services as liquidator, Mr. Boisvert would be bequeathed the deceased’s residence and contents. In time, Mr. Boisvert was assessed for income from an office in the amount of $68,080, as quoted in the estate’s declaration of transmission.

On appeal, Mr.Boisvert testified that, despite the words in the Will, he had a very small role in the estate administration, deferring much to the notary. In turn, the value of the property should be seen as disproportionately large to be characterized as remuneration.

The court held that even if he played a small role, he “had accepted the office and the responsibilities that came with it” and therefore the presumption of compensation was not rebutted, and the tax assessment was upheld.

Re Hayes (Estate of), 2006 ABQB 427

This matter came before the court as a contested passing of accounts, opposed in part by the Public Trustee on behalf of minor beneficiaries who were grandchildren of the deceased. Among the arguments offered, it was asserted that the gift of a residence to one of the executors constituted compensation, and therefore there should be no further claim for personal expenses of the executors.

After summarizing the arguments, the judge simply stated the view that “the gift to Delwin Hayes as Bert’s son was personal and therefore the presumption has been rebutted.” Though this was not a tax case, the opposite finding would certainly not have been helpful to Mr. Hayes in dealing with his subsequent tax return.

Capital Trust Corpn. Ltd. v. The Minister of National Revenue, [1937] S.C.R. 192
Joseph Mackenzie was one of a number of executors of the estate of his father, who died in 1923. A Codicil to the Will provided that Mr. Mackenzie should be paid $500 monthly, which was to be in addition to any entitlement that “courts or other authorities may allow him in common with the other executors.”

For reasons unexplained, the monthly amount was not paid until a catch-up payment of $19,500 was made in 1927.
Mr. Mackenzie’s argument that this constituted a gift was not successful as he would not have been entitled to it had he not accepted the appointment. Furthermore, he was taxed on the full amount as received in 1927, and specifically was not allowed to allocate the amounts proportionately across the intervening years.

Practice points

A testator should understand that where a gift is closely tied to an absence of compensation, it is likely that the executor will be taxed on that amount. Bear in mind as well that it is often the case, especially with small and quickly administered estates, that there is little or no corresponding tax deduction to the estate, effectively resulting in a gratuitous windfall to the government.-
An executor who is a beneficiary of a bequest or legacy may wish to review the Will before accepting the appointment. Depending on phrasing, this could bring a gift under tax scrutiny that might not have occurred had the individual been strictly a beneficiary. On the other hand, if there is a direct connection between accepting executorship and the gift, a taxable gift is likely better than nothing at all.