24 May 1996 External T.I. 9526815 - executor's year passing beneficial ownership estate

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

1) How does the completion of the administration of the estate within the executor's year affect the period during which the estate reports its income?

2) How does the time at which the executor distributes or transfers legal title of the estate property to the beneficiaries affect the period during which income is reported by the estate?

3) What is the impact of the decision in Grayson on our position?

Position:

1) Where the administration of an estate is completed in less than 12 months, most executors will file a T3 return for the estate with a taxation year that ends on a chosen wind up date that is for a period less than twelve months. A designation under subsections 104(13.1) and (13.2) of the Act will permit the income and taxable capital gains for that period to be included in the estate's income rather than the beneficiaries' income.

2) It is a question of law whether beneficial ownership of the property of an estate is considered to have passed to the beneficiaries of the estate. At the point in time where the administration of an estate has been completed and there is no estate property held by the executor in that capacity, the taxation year of the estate would generally be considered to have ended.

3) The result of that decision is not inconsistent with our position.

Reasons:

1) Paragraph 6 of IT-286R2, paragraphs 5 and 6 of IT-282R and page 7 of the 1995 T3 Guide

2) Common law and jurisprudence

3) The estate of Grayson was completely administered prior to the end of the executor's year and assent by the executor to pass beneficial ownership of the residue to the sole beneficiary (the appellant) could be inferred by the transfer of the residue to a trust. Therefore, income earned by the estate during the period of administration appears to be correctly included in the appellant's income.

		         952681
XXXXXXXXXX	         C.R. Bowen

Attention: XXXXXXXXXX

May 24, 1996

Dear Sirs:

We are writing in reply to your letter dated October 3, 1995, wherein you requested our comments on 1) the reporting of income by an estate in the "executor's year" and 2) the court case William H. Grayson v. M.N.R., 90 DTC 1108, (T.C.C.). We apologize for the delay in responding to your letter.

While we are unable to provide specific comments on the actual fact situation outlined in your letter, we can offer the following general comments which may be of assistance to you.

Literature

The executor's year refers to the initial 12 month period following the death of an individual during which the executor of the deceased's estate is expected to complete the administration of the estate. In this regard, an article entitled Post Mortem Tax Planning by Mary Louise Dickson in the 1984 Conference Report has the following comments:

Under the common law, a personal representative of a deceased person's estate cannot be forced to pay any legacies within one year of the death of the deceased, even though legacies are expressly directed to be payable within the year (based on paragraph 1232 of Halsbury's Laws of England - stated below).... In Re Neeld ((1962) 2 All E.R. 335 (C.A.)), it was held that beneficiaries of specific devises and bequests obtain beneficial proprietary rights in estate assets from the death of the testator; however, no beneficiary, whether a specific legatee or residuary legatee, has any right to demand the payment or distribution of capital from an estate while it is being administered. (pages 412 and 413)

Halsbury's Laws of England, 4th edition, Volume 17, states, in part, that:

In general a personal representative is not bound to distribute the deceased's estate before the expiration of one year from the death. (cited as support is the Administration of Estates Act 1925, s.44 (England) which contains words specifically to that effect). (paragraph 1232 at page 632) (We note that the Estates Administration Act, R.S.O. 1990, c.E.22; S.O. 1994, c.27, s.43(2) (Ontario) does not deal with the timing of the distribution of property from an estate (other than an intestate estate in certain circumstances and real property not distributed within three years)).

The bequest of a legacy, whether general or specific, transfers only an inchoate property to the legatee: the executor's assent is necessary to render it complete and perfect. (paragraph 1345 at page 697)

An assent to the vesting of personal estate or of an equitable interest in real estate may be express or implied; it need not be in writing, nor need it be given in any particular form. Informal expressions, if sufficiently clear to indicate intention, may amount to assent. The assent may also be implied from the executor's conduct. (paragraph 1347 at page 698)

In the case of a gift to the executor assent (which may be express or implied) is equally necessary. If the executor in his manner of administering the property does any act which shows that he regards himself as owning it beneficially, that is to be taken as evidence of his assent; but if his acts are referable to his character of executor, they are not evidence of assent. (paragraph 1348 at page 698)

Comments on the executor's year are also provided in Canadian Income Taxation of Trusts by Lloyd F. Raphaël. "...(T)he beneficiaries of a trust of the residue of a testamentary estate have no proprietary interest in the estate...until the estate has been or ought in equity to have been fully administered and the residuary estate ascertained." (page 420) On the issue of filing the income tax return of an estate during the administration period: "...the estate itself would be taxable on the income of the estate for a year unless the distributable residue of the estate has been ascertained and appropriated to or vested in the heirs to whom the estate income is payable or paid in the year in terms of their entitlement thereto." (page 416)

The timing of when property of an estate vests in the beneficiaries and beneficial ownership thereof passes to them is discussed in depth on pages 1454 to 1463 of an article entitled The Transfer of Property on Death: Ownership, Control and Vesting by Catherine Brown published in the Canadian Tax Journal (1994), Volume 42, Issue Number 6. Certain comments from that article are as follows:

Case law suggests that the earliest point at which vesting would occur in the case of a specific bequest is at death - a vesting which is retroactive following the assent of the executor. In the interim it seems that the beneficiary's beneficial rights are subject to payment of the estate's debts. Further, the beneficiary has no right to demand vesting assent before the end of the executor's year.... Nonetheless, an executor's assent could occur at any time; "this he may do informally and the assent may be inferred from his conduct." Assent can, for example, be given shortly after the testator's death if it is readily apparent that a specific bequest will not be affected by the debts of the estate. Alternatively, assent can be delayed by the personal representative until administration is complete. (pages 1458 and 1459)

The matter is somewhat more complex in the case of the residue.... The residual beneficiaries could not demand that assent be given until after administration is complete, and probably not until after the executor's year. Nonetheless, it is arguable that assent may be implied at an early date after administration is complete on the basis of Solomon (Attenborough v. Solomon, (1913) A.C. 76 (HL)). It follows that beneficial ownership cannot be transferred until assent is given. (page 1459)

Paragraph 15 of IT-437R elaborates on the department's view of ownership by way of gift or inheritance. The date on which ownership is obtained is "the date he or she obtains a right to possess the property for his or her enjoyment."... When is the gift reduced to possession for a beneficiary's enjoyment? According to Diplock LJ in Solomon, this is the time at which the beneficiary is entitled to call for a vesting assent. It is at this time that the beneficial ownership vests in the possession of the beneficiary and the executor becomes trustee in relation to the property until the legal ownership is transferred to the beneficiary. (pages 1460 and 1461) If the executor has administered the estate, beneficial ownership has arguably passed;.... (page 1464)

Whether a gift is specific or forms part of the residue of an estate, the income generated by all assets becomes part of the estate for tax purposes for the estate (trust) period. This result is based on the premise that, until the estate is administered and the debts paid, legal and beneficial title remains with the personal representative. Therefore, any income generated by those assets arguably forms part of the estate and should be taxable to it.... Nonetheless, amounts paid or payable to a beneficiary may be deducted from the estate's income for tax purposes. (page 1463)

Comments on the period after an estate is administered are contained in an article entitled Case Study on Practical Issues for the Owner/Manager- Estate Administration Issues by Howard M. Carr contained in the 1994 Ontario Tax Conference v. 1, Tab 10.

It is during the period of the initial administration of the estate, often referred to as the executors' year, that the general estate is a separate tax entity. Once the estate is administered, in that the executors' functions are complete, the executors become functus officio and the trustees take on their duties. To the extent that the will creates testamentary trusts these trusts will also be separate taxable entities. However, once administered, it is not appropriate for the executors to continue to treat the estate as a separate entity from the beneficiaries. In essence the estate has become very much like a bare trust, assuming that the will otherwise provides for outright distributions, and the income then earned is the proper income of the beneficiaries. (page 3)

Maurice Cullity and Catherine Brown discuss the decision reached in Grayson in their book Taxation and Estate Planning (third edition):

The decision is inconsistent with the statements with respect to Revenue Canada's current assessing practice in the Interpretation Bulletin (IT-286R2) as far as the first taxation year of the estate is concerned and even if, as the report suggests, the estate was fully administered before the end of the executor's year, it would appear to be incorrect in law as far as the income of that year was concerned. (page 302)

The rule that executors cannot be compelled to pay legacies or distribute income or capital to beneficiaries in the year is quite firmly established and on that basis it could not be said that the taxpayer in his or her capacity as beneficiary was entitled in the first year to enforce payment of the interest income. The fact that the taxpayer was both the sole executor and beneficiary may well have contributed to the decision although, strictly, that fact should have been irrelevant. (page 302)

Similar comments are also found on page 1464 of Catherine Brown's above-noted article.

Jurisprudence

In the case Re Neeld, Diplock, L.J. said:

In the present case no vesting assent has been executed; the relevant question is, accordingly, whether Mr. Horne has yet become entitled to require the personal representatives to execute such an assent. Clearly, he was not entitled to do before the end of the executors' year: but expiry of the executors' year does not, of itself, impose an obligation on the personal representatives to execute a vesting assent without regard to the state of the general administration of the estate. (page 359) (The relevant statute in effect at the time this case was considered was the Administration of Estates Act 1925 (England).)

In Dushinsky Estate v. M.N.R., 1990 DTC 1390, (T.C.C.), the issue was whether cattle sold within a few months after the testator's death was transferred to the beneficiary of the estate prior to the sale. The court held that the executor's assent, whether express or implied, was necessary before there could be such a transfer. Support for that position was based on paragraphs 1345 and 1347 of Halsbury's Laws of England (noted above) and several statements in Solomon including the following one: "(t)he will becomes operative so far as its dispositions of personalty are concerned only if and when the executor assents to those dispositions."

The issue of whether income was to be reported by the beneficiary of an estate before the estate had been administered was addressed in

Marcel H. Roy v. M.N.R., 78 DTC 1123, (T.R.B.). However, in that case, the administration of the estate was not completed before the end of the executor's year. The court held that the income reported by the estate for a year after the executor's year could not be included in the beneficiary's income since the administration of the estate had not completed in that year.

Our Comments

A) Executor's year

The activities undertaken by an executor to administer an estate must be carried out in accordance with the rules contained in the relevant statutes and common law. While it is a question of fact whether the administration of an estate has been completed, it is our opinion that this is generally considered to have occurred when all the duties (other than the actual distribution of the properties) have been completed by the executor. These duties include ascertaining the beneficiaries, gathering all the assets of the estate, paying all debts and specific bequests, ascertaining the value of the residue and preparing, and having approved, the final passing of the estate's accounts.

Where the will of a testator provides that property of the estate is to be distributed to the beneficiaries (as opposed to being held in an ongoing trust), most executors will make that distribution on a timely basis once the administration of the estate is completed even though such distribution may occur before the end of the executor's year. In this regard, paragraph 6 of IT-286R2 states that: "(i)n any case where the trust (estate) has been wound-up and the final T-3 return is filed for a period which terminates before the end of the executor's year, the income of the trust (including taxable capital gains) earned for that period is considered to have been paid to the beneficiaries of the trust in the calendar year in which that period ends...." The taxation year of the estate would end on the date chosen by the executor (as discussed in paragraphs 5 and 6 of IT-282R) for the final distribution of the remaining property to the beneficiaries. The actual date of such distribution will often occur after the chosen date, since the final distribution would not normally take place prior to the executor filing the estate's final T3 return and receiving the clearance certificate from Revenue Canada.

Upon completion of the administration of an estate (which may occur either before or after the end of the executor's year), some executors may decide to delay distributing or transferring legal title of property of the estate to the beneficiaries (e.g., where the executor of an estate is also its sole beneficiary). The reason for doing so may be simply for the sake of convenience, to extend the period during which income from the property is reported by the estate or for other reasons.

Even though there has not been an actual distribution or transfer of legal title of property of an estate to the beneficiary, it is our opinion that it is a question of law as to whether, at any point in time, a) a beneficiary is entitled to enforce payment of the income or capital of the estate and b) beneficial ownership of the property is considered to have passed to the beneficiary. The executor's assent, relevant statutes, common law and jurisprudence should all be considered in making that determination. If the beneficial ownership of property of an estate is considered to have passed to the beneficiary, such property would generally be considered to be held a) by the individual (who formerly acted in the capacity as executor) as nominee or trustee for the beneficiary, or b) in an inter vivos trust. At the point in time when there is no property held by the executor in that capacity and the estate has been completely administered, the taxation year of the estate would generally be considered to have ended.

Where an estate is resident in Canada throughout its taxation year, subsections 104(13.1) and 104(13.2) of the Income Tax Act (the "Act") permit the income and taxable capital gains of the estate that have been paid or that became payable in the year to its beneficiaries to be retained in the estate's income (these provisions were introduced after the years in question in Grayson). The amounts so designated will not be included in the beneficiaries' income. These designations can be made by the estate in the taxation year in which it is wound up. However, as noted on page 37 of 1995 T3 Guide: "(y)ou have to make the trust's designation under subsections 104(13.1) and 104(13.2) when you file the T3 return. After you file a T3 return, the trust cannot make, change, or withdraw a designation under subsections 104(13.1) and 104(13.2)." Other information concerning these designations that may be of assistance to you appears on pages 36 to 38 of that guide.

B) Grayson

In Grayson, the sole executor of the estate was also the sole beneficiary of all property owned by the testator at the time of his death. That property was converted to cash shortly after the death of the testator. Although the will did not indicate that a trust was to be created, the executor choose to do so. It was Revenue Canada's position that in view of the terms of the will and the fact that the appellant was the sole beneficiary of the trust which he had created, the income earned by the estate and the trust was payable to the appellant.

The court choose not to deal with the issue of whether the appellant had the right to establish a trust. Instead, it held that the income reported on the T3 returns should be included in the appellant's income on the basis that he had a legal entitlement to enforce payment of the income in the subject years. The court noted on page 1110 that: "...the appellant was in the legal position, as the sole beneficiary, to enforce the wind-up and full distribution of the estate to him prior to the end of the estate's first fiscal year end as all administrative matters had apparently been completed before that time." That statement appears to support the position that the sole beneficiary of an estate that is completely administered before the end of the executor's year is entitled to demand payment of the income and capital of the estate upon completion of that administration. No reason was provided as to how there being only one beneficiary affected the decision.

As indicated above, certain authors disagree with the ratio decidendi of this case as, in their view, it appears contrary to common law. We are not aware that Grayson has been appealed, nor are we aware of another Canadian court case which deals with this specific issue. Unfortunately, this case has not been cited subsequently and it would be helpful to have additional jurisprudence on this matter in order to establish whether this case will become a precedent.

We note that the court did not deal with the issue of the executor's implied or express assent being necessary to transfer beneficial ownership of property of the estate to the beneficiary. When one applies that test, it could be argued that evidence of a) completion of the administration of the estate and b) the executor's implied assent to pass the beneficial ownership of the property to the beneficiary is provided by the fact that the residue of the estate was transferred to a trust created by the appellant prior to the end of the executor's year. Therefore, the inclusion of the income earned by the estate in the appellant's income appears to be consistent with our above-noted comments as well as those provided in the literature cited above.

Our comments are provided in accordance with paragraph 21 of Information Circular 70-6R2 dated September 28, 1990.

Yours truly,

for Director
Resources, Partnerships and
Trusts Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

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