Estate trustee compensation is taxable income. If the trustee receives compensation for their services, both the estate and the estate trustee have tax obligations they must comply with.
Trustee is sole beneficiary : no compensation
As a result, if the estate trustee is the sole beneficiary of the estate there is absolutely no reason to take any compensation. Claiming compensation will cost taxes and reduce the ultimate inheritance.
All beneficiaries are trustees: no compensation
If all of the beneficiaries are estate trustees and participate ‘equally’ in administration of the estate, then for the same reason it is very rare to claim any compensation. Usually, claiming compensation when all beneficiaries are trustees will just cause increased taxes and reduced inheritance.
When the compensation is claimed
If the estate trustee is an individual (not a business), the estate (done by the estate trustee, or their professional advisors) should –
- Establish an ’employer account’ with CRA,
- Withhold income tax from the gross compensation, and
- Remit the withheld tax directly to CRA.
- Close the employer account
If the estate truste is an individual, the estate trustee, on their personal tax return (not the estate tax return) should –
- Report the gross trustee compensation as income.
- Calculate their income tax on all income from all sources,
- Credit the amount remitted by the estate against their gross taxes due, and
- Ensure that they have paid all income tax due for that year.
These steps are easier for estate trustees who provide services through a business (like Miltons Estates), who simply invoice the fees + HST to the estate, and then report those fees as revenue of the business.
Do not fake a gift in lieu of compensation
Trustees frequently attempt to mask their taxable compensation as a non-taxable gift from the estate. This is often transparently tax evasion, and exposes the trustee and the estate to very significant risk.
The usual ‘strategy’ is something like this:
- there are several equal beneficiaries of the estate (either as per the Will, or in an intestacy)
- one beneficiary is the sole estate trustee
- the proposal is that the estate trustee receive more than their fair share of the estate as an inheritance or gift, but no taxable compensation. For instance, if there are three equal beneficiaries, instead of splitting the residue of the estate 1/3, 1/3, 1/3, they split it 50:25:25.
If the new distribution is not supported by the Will or the law, this is almost always obvious tax fraud. It is not a good idea. It exposes the estate and the trustee to various audits and penalties from CRA.