When you appoint non-resident executors and guardians, does it create problems? The short answer is, yes – appointing a non-resident executor or a non-resident guardian creates both administrative and tax complications for your estate.
An executor is the person you appoint to carry out the terms of your Will. This includes doing things, such as applying for the grant of probate, liquidating bank accounts and investments, selling real estate and holding the estate in Trust.
Naming a non-resident of Canada as your executor creates administrative issues, understandably. The non-resident will need to travel to BC to deal first with applying for the grant of probate, and second to deal with your assets. During the recent pandemic, the travel ban has created even more complications for non-resident executors.
The Income Tax Act (Canada) (the “ITA”) deems an estate to be a trust for tax purposes. Although Canadian taxation is based on residency, some countries base their taxation on citizenship, not residency.
There are four main tax consequences that arise when a non-resident is appointed as executor:
- the estate loses the preferred tax treatment for capital gains and Canadian sourced dividends;
- the estate may lose the ability to split the tax burden between the estate and its beneficiaries;
- at the point the estate becomes a non-resident trust, there will be a deemed disposition on its assets for their fair market value, which may create capital gains issues for the estate; and
- the estate may also be taxed in the country where the executor resides.
In Fundy Settlement v. Canada (2012) SCC 14, the Supreme Court of Canada held that the residence of a trust for income tax purposes is where the central management and control of the trust actually takes place.
The Canada Revenue Agency Interpretation Bulletin IT-447 (Residence of a Trust or Estate) states that the trustee who has management and control of the trust is the person with most, or all, of the following:
- control over changes in the trust’s investment portfolio;
- responsibility for the management of any business or property owned by the trust;
- responsibility for any banking, financing of the trust;
- control over any trust assets;
- ultimately responsible or reporting to beneficiaries; and
- power to contract and deal with trust advisors (such as lawyers).
If your executor is a US-resident, then your estate will be deemed a non-resident trust for the purposes of the ITA. It will also likely be subject to US taxes.
If you would like to appoint a non-resident executor, it might be advisable to appoint a Canadian resident or corporate trustee as a co-executor, to take on a majority of the duties outlined above. It should be noted that having a Canadian resident co-executor is not 100% determinative and your estate may still be subject to adverse tax consequences. The best strategy for your estate is to appoint a Canadian resident executor.
A guardian is the person you appoint to make the day-to-day decisions for your minor children, including decisions about their healthcare, living arrangements, education and upbringing.
When choosing someone to be the guardian of your children, it should be someone you wholeheartedly trust to take care of your little ones.
The move away from their home, school and friends may have an impact on your children and could be traumatic, especially after having lost a parent. There may also be significant cultural and linguistic changes which could have an effect on them.
There are also tax implications of appointing a non-resident guardian. If the trust fund for the children remains in Canada, any distributions will be subject to a 25% withholding tax (subject to reduction by tax treaty). The children may also be taxed on their inheritance in their new jurisdiction, as some countries tax beneficiaries on the inheritance they receive, thus creating unintended tax consequences for your children.
What happens when the only people you would trust to raise your children are non-residents of Canada? We would still recommend appointing them.
If you do not appoint anyone to become guardian of your minor children, the Public Guardian and Trustee becomes the guardian for the child’s estate, and the Ministry of Child and Family Development becomes their guardian – and this is not an ideal situation for your children.
While a move to a new country may be traumatic for your children, being with close family will likely ease the burden, at least by a small amount. Additionally, future tax planning could be done to prevent any significant and unintended tax consequences for your children.
Disclaimer: Paperclip Law does not practice tax, nor are we experts in tax. If you have specific tax questions, please consult your accountant – and we can work with them to find the best solution for your estate planning!
This post was researched and written by lawyer, Jennifer Schreurs.