Legal & Tax Implications of Out of Province Estate Trustees
When a testator is preparing their estate plan, specifically their last will and testament, one of the most important decisions is who will be responsible for the administration of the estate, namely who will be the executor. In considering such an important selection the testator should be picking someone who the testator trusts, someone who is good with money, someone who is organized, someone who is reliable, and someone who is willing and able to commit their time and energy. Another important factor to consider is the residency of the executor.
The residency of the executor has both practical implications as well as legal and tax implications. An executor who resides in a different province or country to where the assets of the estate are held will need to devote more time and, likely, more in terms of expenses in order to administer the estate. As a matter of practicality, being in close vicinity to the assets can be beneficial.
It is important to note that where an executor has been appointed under the will and resides in Ontario there is no need to post a bond during the administration of the estate. However, there are statutory requirements, especially under the Estates Act, RSO 1990, C.E.21, for the posting of a bond. This Act states that letters probate shall not be granted to a person who is a non-resident of Ontario or elsewhere in the Commonwealth unless the person has given security, as is required from an administrator in case of intestacy.
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The purpose of a bond is to protect the estate and the beneficiaries while the executor pays the debts of the deceased and distributes the estate to the beneficiaries. In particular, it is protection against the negligence or the misappropriation on the part of the executor. The value of a bond is typically double the value of the estate. A bond is obtained from an insurance company that offers fidelity bonds, which can be difficult to find, especially outside of Canada. The executor would have to pay, from the estate, annual premiums for such a bond.
The Government of Ontario, any ministry or any provincial commission or board are exempt from having to post a bond. Also the Estates Act also dispenses with the need for a bond where the administration on intestacy is granted to the surviving spouse of the deceased and the net value of the estate does not exceed the preferential share of $200,000 presently prescribed under the Succession Law Reform Act, RSO 1990 c. S.26.
It is possible to dispense with the bond or to reduce the amount of the bond required, as legislation gives the Court discretion to stray from the general requirement and either reduces the amount required for the bond or dispense with it entirely. The Estates Act does not state when a bond can be dispensed, as legislation has left it up to the judiciary. The executor can make a motion to the Court to order that the bond not be required or for it to be reduced. Such a motion requires all of the following to be filed with the Court:
- consents from all of the beneficiaries, who must all be adults;
- an affidavit stating that all debts have been paid;
- and a draft order waiving or reducing the bond.
If the Court is satisfied with the above material, the Court may issue the order.
In conjunction with the legal implications, there are also tax implications.The Income Tax Act, RSC 1985 c.1 (5th Supp.) considers the residency of a trust and/or estate in Canada to be determined on a case-by-case basis. The Court has held that the residence of a trust and/or estate for income tax purposes is where its central management and control actually take place. Where trustees meet and make their decisions and where and how they manage trust assets among other factors are relevant. When a trust or estate is found to be a non-resident of Canada, there are certain tax holdbacks that are required until receipt of the Canada Revenue Agency clearance certificate.
In order to avoid the requirement of posting a bond, there are several tactics that can be used. One such tactic is to name joint executors, where at least one executor is a resident of Ontario or where one executor is a trust company, as a trust company is not required to post a bond.
As a result of the foregoing, applications or motions are routinely made to the Court to dispense with a bond which, in turn, delays the administration of an estate and significantly increases the administration costs, including legal costs.