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Passing of Estate Accounts

Estate Passing of Accounts                                                                                                                 August 29, 2017

 

Many Estates require a Passing of Accounts via a Court hearing. Such “Accounts” may also be required for grant of “Power of Attorney”, Executor of Estate or “Trustee of a Trust”. In this article, I will concentrate on Executor of an Estate, however the rules and issues in the other two categories are very similar.

A Court hearing occurs when no Executor was appointed in a Will, or as a result of contention between beneficiaries or between beneficiaries and Executor. The Executor is responsible for the Accounts and their supporting data, which include invoices, cancelled cheques, bank statements, deposits arising from   realization of assets and payments of liabilities of the deceased, and of the Estate itself.

In a Passing of Accounts for a sizeable Estate, the Accounts need professional presentation, and cross-referencing to support documents. Overall, the Accounts need be balanced, that is that the sum of the receipts and disbursements need agree to the funds in the Bank account. This gives a smack of Integrity to the data. A Passing of Accounts engagement is similar to what a Company does to maintaining its set of books. However the presentation is in a unique form, with many identifiable schedules dictated by judges to the Solicitors presenting to the Court.

To create a set of Accounts, the writer uses licensed software, “Do Process”, which follows the format  of various statement off Accounts required by Ontario Courts. I am a senior Chartered Accountant, CPA with depth of experience in Canadian taxation, and specializing in taxation for deceased persons and their Estates. In support of clients who need to respond to CRA regards the realization of deceased assets, I have put together many packages of data for CRA. The Passing of Accounts is a more formal report which ultimately is presented via solicitors at court.

The effective preparation of the Accounts requires careful organization of receipts and similar documentation in an order matching the Bank statement flow of entries, throughout the period of the Estate.

Often, family disputes arise from how a Power of Attorney for an elder parent granted to one family member was handled, and that was followed by similar doubts and litigation respecting the Estate Accounts.

The solution is much clearer to dispute or defend when the mass of data is boiled-down into a understandable set of facts. And that is how I believe I offer my strength and experience

 

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Executor Responsibilities to Canada Revenue Agency 

Executor Responsibilities to Canada Revenue Agency                                     August 29, 2017

 

This outline deals with matters between Executors on behalf of Estates, and CRA, the Canada Revenue Agency

  1. On death, the deceased is taxed on the gain on capital assets as well as RIF and RRSP holdings held at death. Capital assets exclude a principal Residence, but include all investments such as Cottage, Rental properties, Corporations, Stocks and Bonds. The market value less adjusted cost base is applied here.

 

This is in addition to any “income” otherwise earned during the year, of course.

 

  1. An important exception to the above is that these assets may rollover to a spouse without taxation, effectively at original or adjusted cost base. However, the rules also allow latitude to elect to rollover any individual asset at market value.

 

  1. Many assets such as Cash, Term deposits, etc., may be “jointly owned” for the purpose of gifting on death. However, capital assets are characterized based on who funds the investment.

 

  1. Post-death, when there is no living spouse, and apart from joint assets, remaining assets move by law to the entity of the Estate. The appointment of an Executor is made by will or by the Court. The role of the Executor is to liquidate all assets in according to the will and pay the beneficiaries, expeditiously but, with due care to maximize the beneficiary pay-outs.

 

  1. The continued growth in value, or of income earned by these assets, become taxable to the Estate. The Executor is obliged by law to file annually T3 tax returns; and to apply for a Trust account by T3APP; and to request a Clearance Certificate TX21 once assets are liquidated in such a way that no further income need Refer to #10 respecting TX19!

 

  1. The T3 allows a deduction for certain accounting fees and Legal fees.

 

  1. The law is clear that distributions to beneficiaries should proceed with due haste, so long as funds to cover liabilities are secured. Liabilities include income taxes, of course. Normally a holdback in the range of 5%-10% is retained for unseen

 

  1. Within 90 days of death, the Estate must file a Probate to the Court, defining “assets” and outlaying Probate tax, which varies up to 1.5% of assets of the deceased. The probated assets are taxed by the province in which the assets are based.

 

  1. Canada Revenue Agency takes its income tax enforcement seriously. Here are some issues:

 

  • It expects a T4 be issued to most individuals taking an executor fee;
  • Penalties and Interest are applied in the same way as to other taxpayers, for late filing and late tax payment;
  • Extensive audit

 

  1. Form TX19 is required to request CRA to ordinarily release of Executor and the related Estate of further income tax filings. This request may include Clearance of both T1 and T3 taxation returns.

In a TX19 request, CRA requires a high level of documented proof that all assets of the deceased that draw income taxes have been fully reported and taxed. CRA require substantial data/documents to permit comparison with the Tax returns filed for the Deceased. The details are listed on the Instructions for the TX19. Such as:

Date of death assets, ACB detailed; Fair Market Value of Property distributed; Statement of Distribution to date, detailed; Holdback and Plans for further Distribution;Details of Beneficiaries (SIN#, Address, etc);

This represents voluminous materials

 

 

Charles Russell CPA

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What is a Personal Services Business?

 

A PSB? • CONSIDER THAT COMPANY “B” HAS EMPLOYEES WHO ARE INPLACE ALONGSIDE OF EMPLOYEES OF COMPANY “A”. ONE NEEDS JUDGE WHETHER THESE EMPLOYEES ARE, FACTUALLY, EMPLOYEES OF “A” COMPANY, IF SO, THEN “B” IS A PSB.

COMPANY B SHOULD CAREFULLY GUAGE THE DETAILS OF THE ARRANGEMENT USING PUBLISHED LITERATURE, SINCE ITS OWN CORPORATE INCOME TAX RATE DEPENDS ON THE RESULT. ONE NEEDS WEIGH THE AGGREGATE FACTS AND CAREFULLY CONSIDER THE BODY OF VARIOUS LEGAL VIEWS AND FACTUAL TESTS, AND, IF NECESSARY, STUDY CASE LAW. CRA MAY NOT AGREE WITH YOUR DETERMINATION, SHOULD IT AUDIT.

There are various tests implied as sufficient to decide whether the entity B has been interposed in what would normally be an employer-employee relationship, this being done for the purpose of saving income tax. Typically the owner of entity B has made an agreement to work for entity A, however, A, and B, mutually agree that B would be interposed.

Frequently, A appoints C, a third party hiring agency, as middleman, to protect A, and manage the dealings with B, including remuneration. Many industries have companies within it which function within these parameters.

CRA, in its audits of companies, considers the PSB issue. Many of these companies, may fit either type A or B, above! It will then re-assesses companies whom it judges are PSB’s. A re-assessment will normally result in extra income tax to both B, and B’s shareholder. The additional income tax from the 17% additional tax rate due from a PSB, and the result of denial of many expenses permitted by a SBC (Small Business Corporation). The final incursion of CRA is to assess both Interest and Penalties on late taxes, both corporate and personal.

Tests for a possible a PSB situation (see below) are intended to assist in concluding the certainty of a possible PSB situation existence for (B). In the aggregate, if effective control of the employees of (B) rests with (A) company, B is a PSB.

Tools of work provided by whom? Degree of independence in hours of work?  Employee benefits, or lack thereof? Existence of substantial service by B to third-party companies?  Risk of Loss?  Use of an intermediary C?

CASE LAW IS WIEBE DOOR SERVICES

If B is PSB, small business deduction of approximately 15% not available, instead tax rate of 32%.

 

RECOMMENDATION
The owner of B needs consider, the corporate intention and schedule dialogue with your CPA, both carefully, and frequently. Lay the facts on the table. The CPA should address the Company’s PSB risk in the annual Engagement Letter.

It is possible to mitigate the Risk, by planning healthy amounts of T4 income and following the bonus rules.

 

 

 

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Charles Russell

Tax Filing for the Deceased

CHARLES RUSSELL CPA, CA practices income tax preparation specifically for Deceased Taxpayers, and the resultant Estates (T3 Returns). Charles will also accept worthy assignments to prepare accounts for Estates and Power of Attorney engagements. Charles has gained significant experience in these areas as a result of being  appointed Executor, or the POA, in more than one case, and has prepared, on behalf of Executors several Estate Accounts which are submitted to Beneficiaries and/or to the Court.

Comments on Income Tax Preparation:-Revenue Canada scrutinizes carefully the T1 filed for the final year of a taxpayer, and the subsequent Income tax returns (T3’s) for the year(s) of the deceased’ Estate In assessing tax, CRA takes careful note of final slips for RIF’s and dispositions of capital assets, such as securities, cottage property and the family home (principal residence).

There are many little-known ramifications in preparing the Deceased’ tax returns. Once these returns are filed and assessed by CRA, CRA then requires a Clearance Certificate request, submitted with additional data. The Clearance Certificate process can be quite onerous, and it is important this process be handled very carefully.

Complexity in filing tax returns are increased with multiple Executors, who reside in different jurisdictions, or when there are disputes  within the Executors role, or  with the beneficiaries.

ESTATE ACCOUNTS are most often necessary when there are multiple beneficiaries, and possible acrimony. When the Estate is extended for several years, while the executor(s) liquidate assets, distribute property and pay debtors including the taxman, the volume of transactions may be such that the Executors prefer to hire a CPA with the necessary skills to draw upon. This is the Professional approach! However, you need to know that accountant’s fees charged for preparing the  Accounts is a cost to the Executors.

The POWER OF ATTORNEY FOR FINANCE creates a similar obligation to present Accounts to beneficiaries, or to a Court. This may occur when the aged senior, while of sound mind, passes responsibility to a relative or close friend. The POA given is reportable in much the same fashion as the ESTATE ACCOUNTS.

These accounts may be prepared using Excel or using a specialized software. Generally, the CPA makes the choice of software based on which method is discerned as most cost-effective, given the facts. Once a choice is adopted, it is difficult to change method

For further information on these specialized matters, please call Charles Russell for a Consultation.

BLOG: October 20, 2016: Entrustment by Power of Attorney for Finance and/or Estate Executor

Many different circumstances result in a wide variety of Trusts and Estates, each with its unique needs. The Ontario law so far as guidelines for managing the trust is set out in the Substitute Decisions Act (for Power of Attorney) and Estates Act. This blog will also touch on the Estate Administration Tax Act of Ontario, recently updated.

As I am not a solicitor, I am not passing judgment on the legalities of abiding by the Trust law. Rather, the following comments are common-sense ideas which one should consider early in the process of accepting the duties when acting as POA or Executor. These considerations are explained in point form in this document. Some or all may be taken to apply in advance, during, and after the period of the Trust, dependent on the circumstances.

In the case of trusts for deceased or infirm adults, one may say that the majority of trusts, are managed by financial institutions. Many other trusts are managed by solicitors, by accountants, or frequently, by one of these in conjunction with the other. The remainder of trusts are undertaken by related individuals, couples, or children.

For newcomers to this subject, and you are expecting to take on the important tasks of POA or Executor, or both, please consider the following.

In taking on the responsibility, be sure you are up for it, and that you have, up-front, strong comfort in the lawyer and accountant you will need rely upon for support, clarification, and direction! This applies not only “in advance” but also throughout the entire period of your empowerment.

The majority of individuals may take on the role of POA or Executor role only once or twice in their lifetime. For these individuals, I recommend that, at the very earliest moment, one asks some serious questions of the professionals you engage, to enlighten yourself in the “requisite” skills, steps, risks involved, etc. An added dimension occurs where siblings are appointed as co-executors, and each of whom may not be 100% compatible with the other.The enhanced Estate Administration Tax Act of Ontario requires a large commitment from the Executor within 90 days of death, including an “inventory and valuation of assets”, and the Estate tax thereon. This submission is subject to audit;

An application for a Certificate of Appointment of Estate Trustee, by the Court is also an early-stage requirement.

If there are third-party beneficiaries, such as siblings or cousins, be sure to realize that their opportunity for a stake or entitlement in the Estate will be well-protected by the Law, but also by their natural sense of entitlement, whether biased or not! The point I am making is that the need for even-handed discipline throughout is necessary.

During the period of the POA or Estate, due care must be taken to ensure individual outlays and income items are duly processed, documented and justified relative to the liquidation of assets and discharge of debts of the Estate. You should fully consider and understand the importance of these:

i) All outlays need be justified as “on behalf of the deceased person”, and one needs provide clear explanations for the outlays, for the beneficiaries;ii) Keep all receipts, codified and legible.

iii) There is a standard method of documenting transactions.  Because memories are often short, I recommend that, ideally, the documenting activity should start from Day 0ne to minimize possibly a downside when the Accounts are presented to beneficiaries;

d) Executor or POA fees justified under a POA arrangement need be approved in advance of payment by    Thus such fees would be paid in the final stage of the duties.

e) Clear thinking and even-handiness is a must, in making distributions to beneficiaries.

i) A formal release must be obtained in exchange for each proportial distribution to be made to each beneficiary;

ii) Such proportional distributions should be made as early as practical, and are made recognizing due care for Estate liabilities;

iii) However, the Executor carefully manage and retain funds to cover all taxes and fees to lawyer and accountant. Refer to d) above for executor or POA fees

f) There is little latitude within the Trust so far as duties. Discuss any doubts with the solicitor, and request a written confirmation.

There is an additional responsibility in taking instructions under a POA from a living person, so long as the person is medically determined to be of sound mind. I recommend that such empowerment is documented in writing and signed by the grantor of the POA.

g) Professionals may utilize software such as “Do Process”, which simplifies the accumulation of data respecting Estate receipts and outlays incurred on an ongoing basis. Frequently, an accountant skilled in excel may make aggregating more readily, in suitable circumstances, such as data being greatly fragmented, or located in a patch-work way! A time factor may also be a determinate issue

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