When taking on the role of estate trustee, there is no shortage of responsibilities and obligations. Along with other obligations described within our previous article, the fiduciary duties of an estate trustee include income tax and accounting requirements that must be met.
Under the Income Tax Act, the estate trustee is responsible for filing all required returns for the deceased, ensuring that all taxes owing are paid, and letting the beneficiaries know which of the amounts they receive from the estate are taxable.
With respect to filing the final returns, there are two returns that must be filed on behalf of the deceased’s estate. The first is referred to as the final or terminal personal tax return. In the deceased's terminal tax return, the estate trustee must report all of the deceased’s income from January 1 of the year of death up to and including the date of death.
The second return is the T3 Trust Income Tax and Information Return. All income earned by the estate following the date of death must be reported within this return. If testamentary trusts are established by the will, another T3 return should be filed for each trust. In the rare occasion in which the estate is distributed immediately following death, there may be no income generated by the estate. In this case, it is possible that a T3 return may not be required.
The estate trustee should also be aware of the possibility that the deceased did not file a return in previous years and, if so, is responsible for filing any missing personal tax returns as well. In the event that the estate trustee is unable to determine whether a previous year's filings have been completed, the best course of action is to contact the Canadian Revenue Agency (the “CRA”) and make any necessary inquiries, as opposed to making distributions and later discovering that there are insufficient funds to satisfy all tax liabilities.
Careful attention should be paid to the filing deadlines for estate tax returns, as an estate trustee may be personally liable if penalty fees for late filing are incurred. Furthermore, if an estate trustee does not feel competent to complete these forms as a result of a more complex financial situation, professional advice and assistance should be sought.
In filing tax returns, the estate trustee may want to consider opportunities that may be available to minimize the taxes payable by the estate and, in some cases, the estate trustee must consider these opportunities as part of his or her fiduciary obligations. For instance, a spouse can benefit from having a Registered Retirement Savings Plan (an “RRSP”) rolled over to the surviving spouse, which has the effect of deferring the tax liability until funds are withdrawn from the RRSP. Charitable giving is another common method of reducing tax burdens.
While there are a great variety of methods that can be used by an estate trustee to minimize taxes payable by an estate, these methods tend to be much more restricted and inflexible than what can be achieved pre-mortem. For example, the use of multiple wills has become a common method of avoiding payment of probate taxes on certain assets. Other methods include lifetime gifting, using joint ownership to transfer title by right of survivorship, and designating beneficiaries for insurance polices so that the proceeds are transferred outside of the estate.
When the administration of an estate nears completion, it may also be prudent to obtain a Clearance Certificate from the CRA. This document certifies that all amounts for which the deceased is liable to the CRA have been paid or that the CRA has accepted sufficient security for the payment of outstanding taxes. The certificate covers all tax years up to the date of death. However, it does not cover income generated by the estate or a separate trust following the death of the testator. While obtaining a Clearance Certificate is not mandatory, it is highly recommended in situations where, without it, the estate trustee can assume personal responsibility for amounts that the deceased owed to the CRA.
Aside from the income tax requirements, there are also certain accounting requirements to which an estate trustee should adhere. As a fiduciary, the estate trustee is obligated to keep a record of all accounts. The format of estate accounts required may be more or less formal, depending on the circumstances.
At the most basic level, the estate trustee keeps informal accounts. These can consist of something as straightforward as an excel spreadsheet that matches what comes in with what goes out of the estate, along with all supporting documentation such as receipts and invoices.
In some cases, the estate trustee may be required to prepare formal accounts presented in form proscribed under the Rules of Civil Procedure and to submit the accounting to the Court for approval (referred to as a passing of accounts). A passing of accounts can be a voluntary process or a beneficiary can apply for an order compelling an estate trustee to do so. An estate trustee will typically apply to pass accounts in situations where a beneficiary challenges the conduct of, or compensation claimed by, the estate trustee.
This obligation to account endures until the administration of the estate is complete and releases signed by all beneficiaries are obtained. In circumstances in which releases cannot be obtained from all beneficiaries, a judgment of the Court passing the accounts may serve as an alternative.
Ian Hull and Suzana Popovic-Montag are partners at Hull & Hull LLP, an innovative law firm that practices exclusively in estate, trust and capacity litigation. To watch more Hull & Hull TV episodes, please visit our Hull & Hull TV page.