TaxMatters@EY – March 2020

As the 2019 personal income tax return filing deadline quickly approaches, it’s time to reflect on the year that ended and complete your tax return. That means it’s also time for EY’s annual list of tax filing tips and reminders that may save you time and money.

Personal tax filing tips for 2019 tax returns

Familiarize yourself with the redesigned 2019 return: The CRA has redesigned the personal income tax return (T1 return) for 2019. The key changes include a renumbering of many of the line numbers on the T1 return (and other forms) from three or four digits to five digits, and the elimination of Schedule 1 and the worksheet for Schedule 1. The calculation of federal non-refundable tax credits and federal tax payable, which was previously included on Schedule 1, has now been incorporated into Step 5 of the T1 jacket.

No matter what, file on time: Generally, your personal income tax return has to be filed on or before 30 April. If you, or your spouse or common-law partner, are self-employed, your return deadline is 15 June, but any taxes owing must be paid by the 30 April deadline.

Failure to file a return on time can result in penalties and interest charges. Even if you are not able to pay your balance by the deadline, you should still file your return on time to avoid penalties. And even if you expect a refund, you should still file on time in case a future change or assessment results in a tax liability for the year. Remember, if you wait more than three years after the end of the year to file a return claiming a refund, your right to the refund expires and will be subject to the Canada Revenue Agency’s (CRA’s) discretion.¹

Review your 2018 return: Reviewing your 2018 return and notice of assessment is a great starting point before you complete and file your return. Determine if you have any carryforward balances that may be used as deductions or credits in your 2019 return.

Carryforward amounts could include unused registered retirement savings plan (RRSP) contributions, unused tuition, education and textbook amounts,² interest on student loans, capital losses or other losses of prior years, resource pool balances and investment tax credits.

Tax on split income:  Legislative amendments, effective for 2018 and later taxation years, have expanded the tax on split income rules to limit income splitting opportunities with certain adult family members for income derived directly or indirectly from a private corporation. Income that is subject to tax on split income is taxed at the highest marginal personal income tax rate and is calculated on Form T1206, Tax on Split Income. For more information on the revised rules, see the February 2018 and February 2020 issues of TaxMatters@EY.

Principal residence sale — reporting required, even if all gains are exempt: Capital gains realized on the sale of your residence may be exempt from tax if the residence qualifies as, and is designated as, your principal residence. No tax is owed, for example, if your residence is designated as your principal residence for each year that you owned it. However, you are required to report the disposition of a principal residence on your income tax return, whether the gain is fully sheltered or not.

The sale of your principal residence must be reported, along with the principal residence designation, on Schedule 3, Capital Gains (or Losses), of your income tax return. In addition, you must also complete Form T2091, Designation of a property as a principal residence by an individual (other than a personal trust). The year of acquisition, proceeds of disposition and a description of the property must be included on the form.

If the gain is fully sheltered, you only need to complete the first page of Form T2091 and no gain needs to be reported on Schedule 3. However, the appropriate box (box 1) still needs to be ticked in the principal residence designation section on page 2 of Schedule 3. If the gain is not fully sheltered, then any capital gain remaining after applying any available principal residence exemption (as calculated on Form T2091) must be reported on Schedule 3.

There is generally a time limit for the CRA to reassess an income tax return. The normal reassessment period for an individual taxpayer generally ends three years from the date the CRA issues its initial notice of assessment. However, if you do not report the sale of your principal residence (or any other disposition of real property) in your tax return for the year in which the sale occurred, the CRA will be able to reassess your return for the real property disposition beyond the normal reassessment period.

T1135 — remember your foreign reporting: If at any time in the year you own certain specified foreign property with a total cost of more than CDN$100,000, you are required to file Form T1135, Foreign Income Verification Statement. This form may be filed electronically. Failure to report foreign property on the required information return may result in a penalty. Failure to file Form T1135 on time may result in a penalty equal to $25 for each day the failure continues, for a maximum of 100 days ($2,500), or $100, whichever amount is greater. More significant penalties may apply if a person knowingly, or under circumstances amounting to gross negligence, fails to file the form. In addition, if Form T1135 is not filed on time or includes incorrect or incomplete information, the CRA can reassess your income tax return for up to three years beyond the normal reassessment period.

Reportable property generally includes amounts in foreign bank accounts and shares or debts of foreign companies, as well as other property situated outside Canada. It does not include property used in an active business, shares or debt of a foreign affiliate or personal-use property.

Capital losses: Capital losses realized in the year may only be applied against capital gains. Net capital losses may be carried back three years, and losses that cannot be carried back can be carried forward indefinitely.

Where capital losses are incurred on certain shares or debt of a small business corporation, they may qualify as business investment losses that may be claimed against any income in the year, not just capital gains.

Pension income splitting: If you received pension income in 2019 that is eligible for the pension income credit, up to half of this income can be reported on your spouse’s or common-law partner’s tax return. Note that recent amendments, applicable retroactively to 2015 and later years, include amounts received out of a retirement income security benefit (RISB) as pension income eligible for the pension income credit and eligible for pension income-splitting purposes, in certain circumstances.

You’ll reap the greatest benefits when one member of the couple earns significant pension income while the other has little or no income. In some cases, transferring income from a lower-income pension recipient to a higher-income spouse can carry a tax benefit.³

Home buyers plan:  The home buyers’ plan (HBP) permits first-time home buyers⁴ to withdraw amounts from an RRSP on a tax-free basis, to finance the purchase of a qualifying home. The withdrawal limit was increased from $25,000 to $35,000 for 2019 and later years in respect of amounts withdrawn after March 19, 2019. More than one withdrawal may be made, as long as the total amount of all withdrawals does not exceed $35,000. Generally, all withdrawals must be made in the same calendar year, and the withdrawn funds must be repaid to your RRSP over a period not exceeding 15 years.

Climate action incentive credit: This refundable tax credit is available for 2018 and later taxation years. For the 2019 taxation year, the credit is available to eligible individuals 18 years of age or older who are resident in Alberta, Ontario, Manitoba or Saskatchewan on the last day of the taxation year. For more information, see the “Spotlight on personal tax deductions and credits” section of this article.

File returns for children: Although often unnecessary, in many cases there are benefits to filing tax returns for children. If your children had part-time jobs during the year or have been paid for various small jobs, such as babysitting, snow removal or lawn care, by filing a tax return they report earned income and thus establish contribution room for purposes of making RRSP contributions in the future.

Another advantage of filing a return for teenagers is the availability of refundable tax credits. Several provinces offer such credits to low- or no-income individuals. When there is no provincial tax to be reduced, the credit is paid out to the taxpayer. There is also a GST/HST credit available for low- or no-income individuals over age 18.

Claim all your deductions and credits: Remember to take advantage of the various family-related tax credits that might apply to you. See “Spotlight on personal tax deductions and credits” for details.

…or not: You may be able to increase the tax benefit of certain discretionary deductions if you defer them to a later date:

• Discretionary deductions that may be deferred include RRSP contributions and capital cost allowance.
• Similarly, consider accumulating donations over a few years and claiming them all in one year to increase your benefit from the high-rate donation credit which is available for donations made within the five preceding years.
• Deferring deductions and certain credits makes sense if you are unable to use all applicable non-refundable tax credits in 2019 (and they cannot be transferred), or if you expect to earn higher income in the future.

Capital cost allowance claims: If you are a self-employed individual earning unincorporated business or professional income, you are required to report your income and deductible expenses on Form T2125, Statement of Business or Professional Activities. Likewise, if you earn income from a rental property, your rental income and deductible expenses are reported on Form T776, Statement of Real Estate Rentals. Capital cost allowance (CCA) on depreciable capital property owned may be deducted and claimed on Form T2125 or T776 if the property is available for use to earn business, professional or rental income.

Recent amendments significantly accelerate CCA for such properties until, and including, 2027. Certain properties such as manufacturing and processing machinery and equipment are eligible for full expensing in the year of acquisition, on a temporary basis (up to and including 2023). The accelerated CCA rules apply to eligible property acquired and available for use after November 20, 2018, subject to certain restrictions.

New rules provide for full expensing of “zero emission” vehicles for eligible vehicles that are purchased and become available for use in a business or profession on or after March 19, 2019, and before 2024, subject to certain restrictions such as a cap on the cost of passenger vehicles.⁵ Eligible vehicles include electric battery, plug-in hybrid (with a battery capacity of at least 7 kWh) or hydrogen fuel cell vehicles, including light-, medium- and heavy-duty vehicles purchased by a business. Accelerated CCA deductions will be available for zero-emission vehicles that become available for use between 2024 and the end of 2027.

For further details on these new rules, see EY Tax Alert 2018 Issue No. 40, Federal Fall Economic Statement announces significant acceleration of CCA for most capital investments, and EY Tax Alert 2019 Issue No. 27, CCA acceleration measures enacted as part of 2019 budget implementation bill.

Get a head start on 2020 savings

Early in 2020 is a great time to think of ways to save on your 2020 taxes. Here are some ideas to help you increase your savings in April 2021:

• Contribute early to your RRSP or RESP to increase tax-deferred growth, and to your TFSA to increase tax-free growth. The 2020 TFSA contribution limit is $6,000, and the 2020 RRSP contribution limit is equal to the lesser of 18% of earned income for 2019 and a maximum amount of $27,230.
• Consider tax deferral opportunities using corporations (such as revisiting your salary/dividend/remuneration needs) or other planning opportunities involving corporations. However, keep in mind that recent amendments, effective in 2018, limit income splitting opportunities with certain adult family members for income derived directly or indirectly from a private corporation. For more information, see the February 2018 and February 2020 issues of TaxMatters@EY.
• In addition, recent amendments limit a private corporation’s ability to benefit from the small business deduction if the private corporation earns too much passive incomefor taxation years beginning after 2018.⁶ For more information, see the May 2018 issue of TaxMatters@EY.
• Consider income-splitting opportunities such as prescribed-rate loans or reasonable salaries to a spouse or child for services provided to your business.⁷
• If you’re planning on selling an investment or earning income from a new source in the year, consider opportunities to realize and use losses to offset that income.
• Consider converting non-deductible interest into deductible interest by using available cash (perhaps a tax refund) to pay down personal loans, and then borrowing for investment or business purposes.
• If you expect to have substantial tax deductions in 2020, consider requesting CRA authorization to decrease tax withheld from your salary.
• There are a number of new personal income tax measures that take effect in 2020 or later years, including a temporary non-refundable tax credit for digital news subscriptions, changes to the stock option deduction rules (with further details coming in the 2020 federal budget) and two new types of annuities for certain registered plans. Consult with your tax advisor for details.

Make time for tax planning

When your return is done, you can step back and reflect on your progress toward your financial goals in the year that just ended. It’s a great primer for a meaningful conversation about tax and estate planning.

An estate plan is an arrangement of your financial affairs designed to accomplish several essential financial objectives, both during your lifetime and on your death. The plan should: provide tax-efficient income during your lifetime, provide tax-efficient dependant support after your death, provide tax-efficient transfer of your wealth and protect your assets.

Make time to review and update your will(s) and estate plan to reflect changes in your family status and financial situation as well as changes in the law. For example, recent amendments effective in 2018 may limit income splitting opportunities with certain adult family members in the context of an estate freeze.

Don’t underestimate the benefits of financial spring cleaning. Tax season is a time when many focus a little more closely on their financial affairs. So this really is a good time to at least take a new look at the components of your financial and estate plan that could most impact your financial future and those who depend on you.

Spotlight on personal tax deductions and credits

A good way to save tax is by understanding the deductions and credits that are available to you. To enhance the benefit of tax deductions and credits, consider these tips and reminders while you’re preparing your tax return.

Family-related and other special tax credits: Claim all credits that apply, including the adoption expense credit, tuition credit (including transfers from a child), credit for the costs of exams or accreditation as a professional, volunteer firefighting or search-and-rescue credits, Canada caregiver amount, homebuyers’ amount, and the home accessibility credit.

In the July 2018 issue of TaxMatters@EY we reported on the new trust reporting requirements proposed in the 2018 federal budget. Since 2021 will be the first reporting year, it’s time to start thinking about what you’ll need to do to comply, particularly because it may take time to gather the required information from various parties.

Draft Income Tax Regulation 204.2(1), released July 27, 2018 provides that this additional information includes the name, address, date of birth (in the case of an individual other than a trust), jurisdiction of residence and tax identification number (TIN). A TIN includes a social insurance number, a business number, an account number issued to a trust and, for a jurisdiction other than Canada, a TIN used in that jurisdiction to identify an individual or entity.

Background

The Income Tax Act (Canada) (the Act) requires a trust to file an annual income tax return, the T3 Trust Income Tax and Information Return (T3 return), within 90 days of the end of its taxation year. However, there are a number of statutory and administrative exceptions to this filing requirement.

Generally, a trust only has to file a T3 return for a taxation year if it meets any of the following criteria:

• It earns taxable income and it has income tax payable
• It has disposed of capital property
• It has realized a taxable capital gain
• It makes a distribution of all or part of its income, gains or capital to one or more of its beneficiaries ¹

A trust that is nonresident throughout the year also has to file a T3 return if it has disposed of taxable Canadian property². For a list of circumstances in which a trust is currently required to file a T3 return, please see page 15 of the Canada Revenue Agency’s (CRA’s) T4013, T3 Trust Guide.

Additional reporting requirements

Effective for taxation years ending after December 30, 2021, additional information reporting will be required on an annual basis for express trusts (trusts that are created with the settlor’s express written intent, as opposed to other trusts arising by the operation of law)³  that are either resident in Canada or non-resident trusts if they are currently required to file a T3 return. Therefore, these proposals will create an annual T3 return filing requirement for most trusts which are currently not required to file one.

As trusts other than graduated rate estates (GREs) have calendar year ends, 2021 will generally be the first year these additional reporting requirements will apply.

Trusts subject to the proposed reporting requirements will have to report the identity of all trustees, beneficiaries and settlors of the trust, as well as the identity of each person who has the ability, as a result of the trust terms or a related agreement, to exert control over trustee decisions regarding the allocation of trust income or capital (e.g., a protector). This additional information will be required to be included on a new beneficial ownership schedule that will be added to the T3 return. Details from the applicable draft regulation are listed above. Further information about this new schedule will be provided by the CRA on its website when it becomes available.

Certain types of trusts will be excluded from these proposed additional reporting requirements, including:

• Mutual fund trusts, segregated funds and master trusts
• Trusts governed by registered plans⁴ 
• Lawyers' general trust accounts
• Employee life and health trusts
• Graduated rate estates and qualified disability trusts
• Trusts that qualify as non-profit organizations or registered charities
• Trusts that have been in existence for less than three months at the end of the taxation year or that hold $50,000 or less in assets throughout the taxation year (with the assets confined to deposits, government debt obligations and listed securities⁵).

Failure to comply with the new T3 reporting requirements, effective for 2021 and later taxation years, may result in the application of existing penalties (i.e., late-filing penalty and repeated failure to report income penalty). In addition, a new penalty has been introduced. Specifically, if the failure to file the return was made knowingly or due to gross negligence, an additional penalty will apply equal to 5% of the maximum fair market value of the property held by the trust during the taxation year, with a minimum penalty of $2,500.

Conclusion

The proposed trust reporting requirements will constitute an additional compliance burden on many trusts. Trusts that are currently not required to file a T3 return but would be required to do so under the proposed rules should start planning now and budget for the costs involved in the preparation and filing of this return.

It’s time for employers in BC to think about payroll taxes, because the deadline for BC employers to file their first employer health tax (EHT) return is March 31, 2020.

Background

The EHT came into effect on January 1, 2019.

It’s an employer-paid tax that applies on remuneration paid¹  to employees who report to a permanent establishment (PE) of their BC employer.

When does a company have a PE in BC?

The liability for EHT rests with an employer that has a PE in BC. Under the BC Employer Health Tax Act (EHT Act), a PE can exist on a factual or a deemed basis.

A factual PE means having a fixed place of business, such as an agency, branch, factory, office, warehouse or workshop that is physically located in BC.

A deemed PE can exist in many forms. The EHT Act includes a very broad, non-exhaustive definition of a deemed PE, including:

• The place designated by a corporation’s charter or bylaws as its head or registered office
• A place where business is carried on through an employee or agent who has general authority to contract for the employer
• A place where an employer has a stock of merchandise and an employee or agent fills orders from the employer's merchandise
• A place where an employer uses substantial machinery or equipment
• If the employer has no fixed place of business, the principal place where the employer conducts business and each place where the employer carries on or transacts a substantial portion of the business.²

Employers who are unsure of whether they have a PE in BC may apply for a ruling or interpretation with the BC Ministry of Finance, which administers the EHT Act.

What payments are subject to EHT?

EHT applies to remuneration paid, or deemed to be paid,³  by a BC employer to employees who report to work at the employer’s PE in BC, and to employees who do not report to work at a PE of the employer but are paid from or through a PE in BC.

The EHT Act includes a notion of “attachment to a permanent establishment” in the scope of employees who report to work at a PE in BC. An employee reports to work at a BC employer’s PE if the employee physically attends work at the PE. An employee would also be considered to report to a BC employer’s PE if the employee meets one of the following criteria:

• The employee is reasonably considered to be attached to the PE.⁴
• The employee provides services for the benefit of the BC employer and certain other conditions are met.⁵

Employers with employees who report to a PE in BC for any part of the year should exercise caution. Except in situations where the employee reported to work at a PE of their employer outside BC for all or substantially all of the year, the entire amount of remuneration paid to such an employee would be subject to EHT.

With a limited exception,⁶  all remuneration paid to an employee who reports to work at an employer’s PE in BC at any time during the year would be included in BC remuneration.⁷

How much is owed?

If the BC remuneration in a taxation year does not exceed $500,000 (exemption amount),⁸  the BC employer does not owe any EHT. The amount of BC remuneration in excess of the exemption amount would be subject to EHT at the following rates:

• 2.925% on payroll between $500,001 and $1,500,000
• 1.95% on payroll over $1,500,000

*Separate rates apply to charitable or nonprofit employers.

The BC Ministry of Finance website has a calculator that BC employers may use to calculate their EHT liability.

In situations where two or more BC Employers are associated,⁹  the employers must share the exemption amount. Where the combined BC remuneration of the associated employers exceeds $1,500,000, no exemption amount is available. BC employers are required to complete an allocation agreement to distribute the exemption amount between the associated employers.¹⁰ The allocation agreement does not need to be filed with the EHT return but should be retained by each employer, since the Ministry of Finance can request it at any time. As EHT is a deductible expense,¹¹  the associated employers may wish to consider their profitability and tax liability in allocating the exemption amount between each other.

When is EHT due? Instalment payments on account vs. final EHT

EHT is due either in instalment payments payable throughout the taxation year or all at once with the EHT final return filed by March 31 following the taxation year. The required payment schedule depends on the amount of EHT payable in the previous taxation year. For the purposes of 2019, the criteria for instalment payments was based on whether the EHT would have been payable if the EHT tax had been in effect for 2018.

A significant number for EHT instalment payments is the prescribed amount of $2,925.¹²  A BC employer with BC remuneration equal to or less than $600,000 would not owe more than $2,925 in EHT.¹³

If an employer’s EHT owed in the previous taxation year is equal to or less than $2,925, the employer does not have an obligation to pay EHT in instalments and would pay the full EHT owed with the return on March 31.

If the amount of EHT owed in the previous taxation year was greater than $2,925, the BC employer must make four quarterly EHT instalment payments. The first three instalments are due on June 15, September 15 and December 15, respectively. The amount owed for each will be the lesser of 25% of the previous year’s tax and 25% of the estimated tax for the current year (minimum instalment payments). By March 31, when a BC employer submits their return, their fourth instalment payment will reconcile any differences between the previous three instalments and the total amount actually owed in annual EHT.

If the BC employer does not remit EHT by the due date, the EHT Act imposes interest on unpaid EHT tax calculated at the prescribed rates ¹⁴  from the date the tax was payable until the date of payment. For instalment payments, the interest would accrue from the instalment due date until the payment date or the date the BC employer is required to file a tax return, whichever is earlier. BC employers that had an obligation to make instalment payments in 2019 should consider filing the EHT final return and remitting the unpaid EHT as soon as possible to reduce the accrual of interest on the minimum instalment payments.

The BC Ministry of Finance may reassess the EHT returns within six calendar years after the date the notice of assessment is received.

Registering for EHT

Before a BC Employer can pay EHT, it must register for an EHT account online through eTaxBC.

According to the BC Ministry of Finance’s website:

• For employers who are subject to instalment payments, the deadline to register was May 15, 2019.
• For employers who owe EHT but are not required to make instalment payments, the deadline to register was December 31, 2019.

Common issues

As EHT is a new tax, it remains to be seen how the BC Ministry of Finance will interpret the legislation. However, given the similarity of the BC EHT Act to the Ontario Employer Health Tax (Ontario EHT), it is likely that similar audit issues will arise in BC that have been seen in Ontario.

A non-exhaustive list of some of the common Ontario EHT audit issues are as follows:

Misclassification of independent contractors: The payment of remuneration to employees is subject to EHT. In contrast, the payment of a fee for services to an independent contractor is not subject to EHT. While the determination of whether a worker is an employee or independent contractor is beyond the scope of this article, note that for Ontario EHT purposes, the common law tests are generally adopted to determine whether a worker is an employee or in business for themselves. The courts have held that the substance of the relationship must be examined to determine the parties’ true relationship.

Taxable benefits: EHT is required to be paid on “remuneration,” which is defined to include all payments, benefits or allowances received or deemed to be received by an individual that are required to be included under sections 5, 6 or 7 of the Income Tax Act, or would be required to be included if the employee was a resident of Canada. In determining the base on which EHT is required to be contributed, it is important that all fringe benefits are included. While the CRA’s Business Compliance Directorate regularly conducts audits to determine whether all fringe benefits were included in employees’ income, this item is frequently encountered as part of Ontario EHT audits.

“Attached” to a PE: The question of whether employees who do not physically report to a PE are still attached to that PE is another frequent audit issue in Ontario. For Ontario EHT purposes, factors such as the location of the employee’s supervisor, the place from which the employee was hired, and the place to which the employee submits attendance records and expense claims are often considered in making this determination.

Associated employers (as defined in Section 256 of the Income Tax Act, with some exceptions): As noted, associated employers are required to share the EHT exemption. The question of whether employers are considered to be associated is a frequent item encountered on Ontario EHT audits.

Employers with Canada-wide operations: A common issue in EHT audits in Ontario occurs when the Ontario Ministry of Finance takes the position that all employees of a company with PEs across Canada report solely to the Ontario PE. In these situations, employers need to prove the existence of PEs outside Ontario. A simple way of doing so is to provide any leases the company has for premises in the years subject to audit.

by Winnie Szeto, Toronto

In this application for summary judgment,¹ , the Alberta Court of Queen’s Bench concluded that the beneficiaries under an estate were not obligated to indemnify the executor for any income tax or penalties imposed on her as a result of her failure to obtain a clearance certificate before distributing the estate.

Facts

In 2011, a mediated settlement was reached between Ms. A. and the respondents²  to this application whereby Ms. A. would apply for probate of her ex-husband’s estate and the estate would be divided 55% to her and 45% to the respondents. Ms. A. was the executor of the estate.

In December 2011, Ms. A. retained an accountant to prepare the final income tax return for the estate. The accountant advised that a holdback of $25,000 was sufficient to satisfy the estate’s income tax liability. Based on that information, Ms. A. distributed the remaining balance of the estate in accordance with the proportion agreed to in the settlement. However, for reasons unknown, the estate’s final return was not filed at that time.

In November 2012, a second accountant was retained to file the estate’s final income tax return. The second accountant determined that the $25,000 holdback was inadequate. Ms. A. paid the shortfall, as well as the second accountant’s bill for services, and then sought reimbursement from the respondents for 45% of those amounts. The respondents refused to reimburse Ms. A. for these amounts, and as a result she applied to the Alberta Court of Queen’s Bench for a summary judgment against the respondents.

The court’s decision

After concluding that this case was eligible for summary judgment, the court considered whether the respondents were required to indemnify Ms. A. for the income tax deficiency.

Ms. A. first argued that the word “net” should be read into the settlement agreement, which meant “net of taxes.” In other words, the respondents should pay their percentage of the taxes due; otherwise, they would have received more than their entitlement. The court did not accept this argument.

Ms. A. then relied on several cases³ to support her position that the respondents were obligated to indemnify the executor for income tax liability. Again, the court did not agree with her.

The respondents argued that section 159 of the Income Tax Act ⁴ supports their position that only the executor is liable for unpaid taxes. Specifically, subsection 159(3) imposes a personal liability on the legal representative of an estate for distributing the estate's assets without first obtaining a clearance certificate. While the respondents cited a number of cases⁵ where section 159 was used to impose personal liability on an executor, the court noted that those cases did not deal with whether an executor is entitled to be indemnified by the beneficiaries. The court noted that while there is some support for the respondents’ argument that only the executor is personally liable and not the beneficiaries, it did not find that to be determinative.

The court stated:

Parliament was concerned with imposing a duty on executors to ensure the payment of tax and a consequence for not doing so but did not take the next step of allocating responsibility among beneficiaries for an executor’s breach of that duty.

After noting that neither the Alberta nor Saskatchewan estate administration legislation dealt with the indemnity of an executor by a beneficiary, the court turned its focus to trust principles and, in particular, the term “breach of trust.”

Typically, it is the beneficiaries who are seeking relief from a trustee for breach of trust. The court referred to Oosterhoff,⁶ which notes that beneficiaries have several remedies for breach of trust, including the trustee being personally liable to pay for any losses resulting from the breach.

The court then questioned whether a trustee is entitled to indemnity from the beneficiaries where the trustee, as opposed to a beneficiary, is seeking relief. It is noted that the Trustee Act⁷ provides that a trustee is entitled to indemnity by a beneficiary who instigated or requested the breach of trust.

The court then stated:

[63] The natural corollary of that principle is that if the beneficiaries did not instigate or request the breach, they cannot be obligated to indemnify the trustee. In a fiduciary relationship such as that between a trustee and a beneficiary, the logic of that corollary is that as between the two parties, one who had the obligation to perform a duty and failed and one who had neither the obligation nor the means to satisfy it, it is the former who should bear the consequences of the action or inaction.

The court was of the view that the relationship between Ms. A., as executor, and the respondents was in effect a trust relationship, and the resultant rights and obligations followed.

Based on this assumption, the court concluded that the respondents were not obligated to indemnify Ms. A. for any income tax liability or penalties imposed as a result of her failure to obtain a clearance certificate before distributing the estate.

As a result, Ms. A.’s application for summary judgment was denied. This would ordinarily mean that the parties would go ahead with a full trial, before a different judge, that would examine the indemnification issue in more detail. However, the court in this case warned Ms. A. against continuing with the lawsuit by suggesting that if she did so, she might face a significant costs award if another judge came to the same conclusion.

Lessons learned

This case serves as a clear reminder that it is always prudent for an executor to seek legal advice before the distribution of an estate.

An executor who fails to obtain a clearance certificate beforehand may be personally liable for any income tax liability of the estate, and indemnity by beneficiaries may not be available.