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
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
This is in addition to any “income” otherwise earned during the year, of course.
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
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%.
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.
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
To the readers, as a blogger, I am likely not well-known to you , since this is an early foray into the online community! However it may seem, I have logged many hours as a tax practitioner in Mississauga Ontario, and believe I may inform you, or provide you new insights, and attune you to the subject, of Canada income taxes, as we go-forward. I have often thought of writing an article, a story or a volume on the subject, which I know very well, having accumulated experiences in this place, during many years of business life. In doing this article, I trust I may enrich you, the readers. I hope to create interest through extending knowledge or creating interest in the particular topics. I have known authors who have written a novel, a history book, or who have chosen to write about varied serious matters that reaches the front pages of newspapers.
However, I come from a different bent, as a bit of an authority on income tax matters, the result of a career in the “space” serving to interact as a “go-between” for clients from a broad spectrum, and the Canada Revenue Agency. This role is one of satisfying the folks who set the income tax rules and various other CRA departments, and laying to rest clients’ fears, doubts, acrimony, and for many, assisting in setting debts to the Receiver General. (I do not know his/her name, but the person is obviously top-dog!).
One might say, generally, in my clients’ lives, I play the small, but not inconsequential, role of keeping the Canada Revenue Agency (CRA) at bay for another year or so. I am not making a guarantee that this “paper” will answer “everything” that needs be said about CRA! However, I do believe I comment, herein, upon a substantial number of worthwhile, interesting, income tax experiences. I trust these will give readers interesting and insightful matters and comments, that I truly think have value! Should interest warrant it, I will present additional, similar data.
We have become seasoned players in the annual rituals with, and reporting to, CRA, throughout the years of our practice. The alternative would have been to drown in the mass of data, and be less than dependable to our clients.
Of course, we are all Taxpayers (as CRA cares to identify us!), whether we are individuals, corporations, small businesses, or trusts in many forms, such as the Estates trust.
CRA and the Receiver General are very sizable organizations, comprising a milieu of civil servants, supported by an ever-growing system of laws, networks and communication to manage their mandate. We should be proud to work within this structure, which requires Canadians as well as other residents and certain non-residents, reporting their earnings to CRA and collecting the various taxes due. For the moment, I will paint the landscape as it affects the income taxes that I know, of Individuals and corporations, many of whom are small or large businesses, and for the trusts.
As with many of us, but on a very large scale, the CRA utilizes big computers to manage data on millions of “taxpayers” each with their many individual facets. These facets, uniquely tor each of us, encompass many years of History and many identifying income or deductions. This is could be called Big Data managed by a Big team.
Accountants, solicitors and tax preparers are the intermediaries in the tax process, the “go- between parties”, with CRA on the one hand, and taxpayers, on the other hand. That would suggest that relatively few of us directly and individually communicate with the CRA, with many big corporate businesses the other exception.
How does this affect the majority of us? The following are my thoughts, for your consideration:
If you have a business with a CRA Business Number, you may authorize CRA to permit your accountant to access your electronic business statement, via My Business Account. Otherwise, form RC59, when prepared manually and submitted, also allows your representative access to CRA T2 or T2125 data;
Needless to say, that although life can be complex enough, when CRA determines it will audited a person or entity, both the taxpayer and the tax preparer have a challenge on their hands! Here are some recent experiences with CRA:
The above is not meant to deny that many CRA audits are very necessary to maintain integrity of the tax system.
One’s obligation as a taxpayer is to maintain complete records, including supporting documents (think receipts, statements) at your place of business, sufficient to calculate tax owed. If one uses software, be sure back-ups are available. If your business uses the Internet, be sure to maintain the online transactions and print hard copies frequently.
As part of our particular tax practice, in the normal course, we need to focus, somwhat, on the risk/reward equation of preparing a tax return, an appeal or responding to an audit. We have built a matrix for estimating fees, by matching time, difficulty and risk. We rank situations on a scale based upon difficulty of 1 to 15, which assists us in quoting a fee we need bill. Many tax situations are time consuming, time-sensitive, as well as challenging to get it right. A potentail client needs to consider these matters:
-the state of his/her affairs and the amount of paperwork being submitted;
-the amount of time the tax professional needs to absorb your data, organize it, double check it, make copies, meet with the taxpayer for signature, and the overheads involves in office, software, billing and several other matters;
-Finally, the likelihood of CRA audit. Professional accountants understand both the risk and seriousness of audit, and the risk of error, in its many variations;
A view, a rough guestimate, of the TAX Preparer Map is:
The interested party to all of A-D above is CRA. In theory, CRA casts a broad net and catches ”both small or big fish”, using tests for possible improprieties, and hopefully “all fish” before the net is lifted. The next later step, post assessment date, is a look back phase.
It is obvious that should a tax preparer get over his/her head so far as tax filing, he/she will be in trouble with CRA as well the taxpayer, and both suffer penalties and more. This implies error. More serious problems exists may well exist in any tax year. There are elements of cheating out there and the tax preparers who are party to these cheats are dealt with severely. But not every cheater is caught, by far. Think of underworld types, and new strategies to beat the law. Several points should be made in this regard:
Cheating on taxes by some is a reality in Canada! From CRA literature and from other resources, we understand the breadth of various situations, which I hazard to guess are “as varied as there are sea shells in the ocean”. Large numbers of these tax cheats are reported by the CRA annually, such as the following:
That we may have a nation of many cheats leads to the following possible synopsis. CRA may get bogged down in the cases it investigates as likely tax-cheaters, leaving the vast ocean of others who don’t get caught, perhaps “never”. I am told by others that, in reality, the process of prosecuting tax cheats through the legal system is so onerous and time-staking that CRA resources can only go so far in a given year. This leads to an ultimate backlog, perpetuated by new leads each year.
I am told by experienced parties that tax cheats get emboldened to continue their evading tactics, in the knowledge they can afford high priced help to pay to defend themselves;, if necessary they are able to afford the advice of others who are, in any event, perhaps, steering them wrongly. As an example, the offshore assets issue (which we read about in the news), is, on its own, a highly complex subject. It is possible that the Minister of Revenue may not be able to invoke broad enough legislation to trap all the possible structures set up to “hide” income from Canada. It follows that advisors and errant taxpayers will take their chances until the loop-holes are firmly cut!
The offshore topic is just one of so many wrinkles in the system. It seems that there are enough tax cheats to fill any void in the CRA’s system.
CRA has a program which presently is called ILP, “Informant Leads Program” to help it locate tax cheats, aka tax evaders! In 2014, CRA also created a program called Offshore Tax Informant Program, (OTIP)
These programs permit anyone to report tax cheats by internet, fax mail or phone. The OTIP provides financial rewards. Otherwise there are no other “perks”.
Evasion, apparently or potentially, includes any falsified data on a tax return such as marital status or children falsely reported. CRA implies evasion also exists in cases of failure to remit source deductions.
As taxpayers, we will only learn the success of these programs, by chance, or on CRA and Legal websites, such as CCH. Regardless, the informer is protected. Additionally, an informer needs to be comfortable with the process, as inherently, he or she could be at risk.
The CRA also says the Informant Leads Program can be used to disclose to CRA persons not reporting Real Estate transactions. It sheds light on this initiative, summed as follows:
A false statement on a tax return re-assessed by CRA will result in a 50% surcharge on the additional tax CRA demands.
It is no wonder that recently CRA announced that, from 2016, all sales of property need be reported, as a disposition on Schedule 3, inclusive of sale of the principal residences.
To be clear, tax minimizing is a different matter from cheating on taxes, and is a keystone in a democratic country. To many, it may appear that the domain of minimizing and cheating each tend to overlap. This may be factual, sometimes, since there are so many into the game. The tax law needs always to be keeping up with our ever changing economy. The tax professionals mandate is to figure the least taxes that need be paid on behalf of their clients. Thus, tax minimization is always a very large business for the professionals. Getting tax minimizing right and getting CRA to accept a new tax position is often a battle. Tax litigation is a large part of the legal gambit, to wring a correct assessment notice for a particular tax filing which initially is not accepted by CRA. Alternately, CRA may reach-back up to a fixed period, and Re-assess a taxpayer based on its believe the taxpayer erred. Again tax litigation ensues.
Needless to say, CRA does not limit its look-back rule when there is a suggestion of gross negligence or fraud.
The Canada Income Tax system is substantial and complex, and to use it properly, unless for a very basic need, one needs professional help to walk through the “mine fields or searchlights” of CRA auditors. The tools and software provided by CRA and your accountant, makes for greater efficiency of CRA and yourself, but the tax preparer maintains a substantial middle-man role, however, and justifiably.
If you are interested in the content of this blog, please let me know and I will continue to increase the content!
Selling a Principal Residence- New Reporting to Canada Revenue Agency “CRA”.
A recent change in the CRA’s administrative position means that, if you sell your principal residence (“PR”) in 2016, or in later years, you must report: a) the sale (i.e. the date of acquisition, the proceeds of disposition and a description of the property), and b) the principal residence designation, on your income tax return to claim the full principal residence exemption.
CRA plans to modify Schedule 3, “Capital Gains (or Losses),” to handle the new required information. If the property was your principal residence for all years of ownership, the designation can be made on Schedule 3. Otherwise, a separate prescribed form needs be completed in addition to the Schedule 3 reporting. This latter indication applies to any time in the hold period where a change of use, such as for rental purposes, was in effect.
In the past, CRA previously said that no reporting was required on the sale when the home was your principal residence for each year of ownership..in spite of the Income Tax Act. After 2015, if you do not report the sale of the principal residence and its designation as PR in the year of sale, you can request the CRA to amend your income tax return at a later date, however a Penalty may apply.
For 2016 reporting, there is an apparent grace period where an otherwise penalty amount would apply.
Some consideration must be given to joint or co-ownership!
Often, such as for older taxpayers, an additional person, such as a child of the owner, is added to title on the PR. This is a transfer of ownership and suggests the possibility that a reporting may need be done for the year of the transfer.
For the many people owning a second or third property, the mechanics of PR are substantially more complex as a whole, in that the designation through the hold periods needs be carefully determined.
The above are general comments in nature and not to be acted upon without consulting an expert.
For further information call or email the writer!