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Executor compensation – part 2: How does an executor properly take compensation?

( Disponible en anglais seulement )

juillet 2, 2020 | Christopher Crisman-Cox

In Part 1 of this series on executor compensation, we looked at what is an appropriate amount for an executor to receive in compensation for their work for the Estate.

In this post, we look at the proper method for an executor to actually receive their compensation from the Estate.

Pre-taking

The first rule is that an executor should generally avoid taking compensation before the administration of the Estate is complete (referred to as “pre-taking”), at least without the consent of the beneficiaries.

It is worth noting that there are two schools of thought as to whether an executor can take compensation early. The first school is represented by William George King Trust (Re), 1994 CanLII 7497. The view set out in this case is that an executor is entitled to make payments from the Estate funds in order to cover valid costs incurred by the Estate. This would even include payments that an executor makes to themselves as compensation for services rendered to the Estate. So long as these compensation payments are reasonable, the executor is not breaching their duty of trust to the Estate.

The second school of thought is represented by Knoch (Re), (1982), 12 E.T.R. 162 (Ont. Surr. Ct.) (not available publicly online). The view set out in this case is that an executor is not entitled to pre-take compensation without the approval of the beneficiaries.

Although the dispute between these two schools may not have been definitively settled yet, recent cases suggest that the approach in Knoch is preferred. Moreover, even if it is accepted that the view in William George King Trust is correct, it would still be risky for an executor to pre-take compensation, as there is no guarantee that the amount taken would be determined to be “reasonable”.

Ultimately, the safest course of action for an executor is to assume that pre-taking of compensation is not allowed without the consent of the beneficiaries.

Passing of accounts

Once the Estate administration is nearing completion, the executor will generally make a proposal to the beneficiaries regarding the total amount of executor compensation. If the beneficiaries all agree, then there is no requirement to go to court for approval.

However, if executors and beneficiaries cannot agree on the amount of executor compensation, then it will be necessary for the executor to go through a court procedure known as a “passing of accounts.” This is a court application in which the executor compiles a full accounting of all their activities, listing all transactions in which money flowed into or out of the Estate. The executor will ask the court to approve this accounting, as well as the executor’s request for compensation.

The beneficiaries will have the opportunity to set out their objections to any items in the executor’s accounts, as well as their objections to the amount of compensation requested. If necessary, the matter will proceed to a court hearing, and a judge will determine whether or not to approve the executor’s accounts and set the appropriate amount of compensation. If the accounting reveals that the executor has engaged in any mismanagement of the Estate, then the judge may order the executor to pay restitution to the Estate.

Taxable

Once the executor receives their compensation, it is not necessarily the end of the story. Executor compensation is seen as taxable income since it is a payment from the Estate for services rendered by the executor. As such, an executor will need to make sure that this income is reported properly. For non-professional executors, this will require the Estate, as the “employer”, to file a T4 and to make applicable statutory deductions.

A testator may attempt to leave a gift in the Will to the executor, in lieu of compensation, in order to avoid taxes on the compensation. Depending on how this is structured in the Will, this gift may or may not still be considered executor compensation and, thus, taxable. To determine whether this is the case, it would be necessary to examine and analyze the particular circumstances.

If you have further questions or require legal assistance regarding executor compensation, contact Miller Thomson’s estate litigation team.

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