Should the personal representative of your estate reside in Canada?

When you hire a lawyer or notary to draft your will, they will ask you to appoint a personal representative of your estate. Among other things, your personal representative will be responsible for:

• locating and securing your assets;
• identifying and paying your debts from those assets; and
• distributing the remainder of your assets to the persons entitled to inherit them in accordance with either – the terms of your will, if you die with a valid will (“testate”), or – the intestate succession laws of the province or territory where you were living when you died, if you die without a will (“intestate”).

While you can appoint any willing and mentally capable adult or any licensed trust company you wish as your personal representative, we recommend that if you are appointing an individual, you appoint one who lives in the same country as you, and ideally the same province or territory. If you have someone local in mind, but you consider it likely that the person might in the future move to another jurisdiction, then you may wish to indicate that their appointment is conditional on them still being resident in Canada (or your province or territory) at the time of your death and remaining resident throughout the administration of your estate. Going local can make your personal representative’s job easier and may result in the smoother administration of your estate.?

In most of Canada, the personal representative of an estate is called the executor or administrator. In Quebec, the legal term is liquidator. In Ontario, the term is estate trustee. While executor remains a very commonly used term across the country (other than Quebec), for simplicity, personal representative is used in this report.?

Probate/homologation

Probate is the process in which a court recognizes the will of the testator and confirms the personal representative’s status. The term “probate” does not apply in Quebec. If you die without a will, then instead of applying for probate, someone will apply to the courts for “administration” and be recognized as your administrator.

In Quebec, a homologation procedure is only necessary with respect to wills in front of witnesses or holograph wills; it is not required with respect to notarial wills. Moreover, in Quebec, those who inherit an intestate estate designate a personal estate representative for the estate. In Canada, personal representatives will typically require proof of probate (or, in Quebec, a notarial will or a homologated will) before they can gain full control of estate assets such as accounts with financial institutions and real estate. Assets flowing outside the estate because they were held in joint tenancy2 or subject to valid direct beneficiary designations3 or held within certain types of trusts will not require proof of probate applicable in common law provinces/territories but will also not come under the control of your personal representative and will not be distributed by your will.

Hiring a lawyer to apply for probate

If probate will be necessary to administer your estate, then the application is generally made to a court in the province or territory where you were resident. Typically, your personal representative will hire a lawyer to make the application to the court, and if your personal representative lives locally, it will be relatively easy to find a lawyer for this job. If your personal representative lives far away, then hiring a lawyer (or trying to do it without a lawyer) can present some challenges.

Cost of posting bond In some provinces and territories, when someone who is not a resident of Canada (or in some cases, not a resident of a “Commonwealth country”) applies for probate, the court may require the personal representative to give security, including by way of a bond.

The bond is intended to cover financial losses to the estate due to dishonest or improper acts by the personal representative. Where a personal representative is appointed in a will and is a resident in Canada, it would be rare for the courts to require security.

The cost of acquiring the bond will be an added cost to the estate administration. In your will, you can express a wish that your personal representative not be required to post bond, but it is usually up to the courts to decide if the requirement will be waived.

In Quebec, the liquidator is not bound to take out insurance or provide any other form of security guaranteeing the performance of their obligations, unless the will or the majority of the heirs require it, or the court orders it on the application of an interested party who establishes the need for it. If the liquidator fails or refuses to provide required security, they forfeit their role, unless the court relieves them of their default.

Securities restrictions and instructing investment advisors

If you and your personal representative reside in different provinces or territories, it could lead to complications when you die and your personal representative needs to instruct your financial advisor, as your advisor will need to be licensed where your personal representative resides to carry out the personal representative’s instructions.

If they are not licensed, your advisor may be required to turn your account over to an advisor who is. If you reside in Canada but your personal representative resides in another country, your financial advisor may be limited or restricted from accepting instructions for contributions or switches from them, depending on the country.

However, your advisor will usually be able to accept instructions for redemptions. If both you and your personal representative reside in the same province or territory in Canada, then your financial advisor will not need to be changed, or face restrictions, in settling your estate.?

Convenience

Being the personal representative of an estate can be a difficult job. The internet makes many of these tasks more portable, but some of them remain easier to do in person.

Clearing out the home of a deceased person, for example, is something that really should be done in person by the personal representative, or at least with the supervision of the personal representative.

If the personal representative must travel great distances to get to your home, they may have to take time off work and incur significant travel expenses.

f your personal representative lives far away, then hiring a lawyer (or trying to do it without a lawyer) can present some challenges.?

Income tax: Where will your estate be resident for tax purposes?

In Canada, your estate is considered a separate taxpayer and is taxed as a trust. The personal representative of that estate will be considered the trustee of that trust. With some exceptions for “deemed resident trusts”, a trust is resident for tax purposes where its trustee is resident.

If an estate is a non-resident of Canada for tax purposes, then although the administration of the estate will still need to be done in accordance with the laws of the province/territory where you were resident, the income tax rules of the country where the trustee resides will need to be applied to the estate income.

If you want a non-resident to be involved in the administration of your estate, but want your estate to be considered resident in Canada, then there may be a workaround. For example, you could appoint up to three personal representatives and require them to act together. So long as at least two of the three are residents of Canada, the estate will likely be considered?resident in Canada, but it’s possible a court might find “central management and control” rests with the non-resident individual if he or she is the primary decision maker.

Furthermore, having so many personal representatives may make the administration of your estate more complex — and if you already have two persons resident in Canada that you trust to do a good job, it may make more sense to just appoint one or both of those residents.

What about deemed resident trusts?

Even if the personal representative of the estate is a non-resident of Canada, and the central management and control of the estate is exercised outside of Canada, the estate could be deemed a resident trust pursuant to Section 94 of the federal Income Tax Act.

This section can deem certain non-resident trusts to be resident trusts, under one of two tests:

1. the “resident contributor” test, and
2. the “resident beneficiary” test.

The “resident contributor” test likely does not apply in the context of an estate being administered by a non-resident, as the only contributor to an estate will be the deceased testator, and because the testator is no longer alive, the contributor will not have been a resident of Canada at the end of any taxation year of the estate.

The “resident beneficiary” test generally requires that a beneficiary of the trust be resident in Canada at the end of its taxation year and that there be a “connected contributor” to the trust. The CRA has commented that if the deceased was a resident of Canada immediately before death or within 18 months of death, then the deceased will most likely be a connected contributor.

Accordingly, the estate of a deceased who resided in Canada immediately before death or within 18 months of death, which has beneficiaries who are resident in Canada, could be deemed to be a resident of Canada under Section 94 of the Income Tax Act even if the executor is a non-resident.

The rules with respect to deemed resident trusts are very complex, and professional advice should be sought to see if they will apply in a particular case. Similar rules apply in Quebec

Why does it matter where your estate is resident for tax purposes?

Let’s assume that when you died, you were a resident of Canada, but your personal representative is a resident of the fictional country of Happyland, exercising management and control over the trust from there. In that case:

Tax filing obligations in both countries (instead of just one):?

• Your income from January 1 to the date of your death is subject to the taxation and tax filing requirements of Canada; your personal representative must file a final tax return for that period in accordance with Canadian income tax rules. However, the income of your estate from the date of your death onwards may be subject to the taxation and tax filing requirements of Happyland. If, under Canadian tax rules, your estate is considered a deemed resident trust in Canada, then the income of your estate will also be subject to the taxation and tax filing requirements of Canada — there will be a requirement to file in both countries.
• If you owned significant assets in Canada, and especially if you owned Canadian real estate, then even if your estate is not resident in Canada, there may also be some filing obligations with Canada.
• Your personal representative and their tax advisors will need to familiarize themselves with the income tax rules of both Canada and Happyland. The added level of complexity may mean that your personal representative must hire accountants in both countries to ensure compliance.

To the extent that you have assets in Canada:

• Those assets may be considered “foreign property” by Happyland and may trigger foreign property reporting obligations in Happyland.
• Your personal representative can “roll” non-registered capital property you held at death to either your surviving spouse or a trust for your surviving spouse. This means that you will not have a deemed disposition of that property at your death, and you will not realize the capital gains accrued during your lifetime on your final tax return. This rollover to a trust for your spouse is only permitted if the trust is a resident of Canada for tax purposes among other criteria. This means that if you choose a non-resident of Canada as your personal representative, and your estate and the trusts in your will are not considered deemed resident trusts of Canada, then there may be a tax liability sooner than you anticipated.
• Your Canadian financial institutions may be required to start withholding non-resident taxes at source on distributions received from your investments, and issue NR4s instead of T3s or T5s with respect to those distributions. These income sources may also be taxable to your estate in accordance with Happyland rules (and Canadian rules if your estate is a deemed a resident trust), but in most cases, the estate will be able to claim a credit on the Happyland tax return for the taxes withheld in Canada, reducing and hopefully eliminating “double tax”.
• If your estate is not considered a deemed resident trust in Canada and it sells “taxable Canadian property” such as Canadian real estate, then the purchaser will be required to withhold 25% of the gross purchase price and remit this amount to the Canada Revenue Agency (CRA), unless your personal representative has obtained a “compliance certificate” from the CRA. The CRA will generally require the estate to remit at least 25% of the estimated capital gains before they will issue the compliance certificate. This may also be an issue even if your estate is resident in Canada, but a beneficiary of the estate is a non-resident of Canada. Similar rules apply in Quebec regarding the sale of “taxable Quebec property.” However, the withholding rate applicable to the gross purchase price is 12.875%.
• If your estate is considered a resident of Happyland under Happyland rules and it distributes income or capital to Canadian resident beneficiaries of that estate, then Happyland rules may require that the estate withhold taxes at source on those distributions, and the personal representative may need to file certain reports with Happyland, disclosing the interest of these Canadian resident persons in that estate. Your personal representative will need to seek professional advice in Happyland as to the tax and legal obligations in Happyland.

A Canadian resident beneficiary of a non-resident trust may need to file with the CRA one or more of a T1142, “Information return in respect of distributions from and indebtedness to a non-resident trust” and/or T1141, “Information return in respect of transfers or loans to a non-resident trust” regarding the beneficiary’s interest in this “non-resident trust”. The T1142 makes an exception for “an estate” that arose due to death in its first year of administration, but a testamentary trust created in a person’s will to benefit a Canadian resident beneficiary is not an estate and not eligible for that exception.

As you can see, appointing a non-resident of Canada as personal representative of your estate can add to the level of complexity of your estate administration.

American “FBARs”

All U.S. citizens and residents (which generally include U.S. green card holders) are required to file annual tax returns reporting 100% of their worldwide income, even if they don’t reside in the U.S. In addition, they are required to file annual reports with the IRS regarding any “foreign” financial accounts over which they have signing authority, using U.S. Treasury Department FinCEN Form 114, “Report of Foreign Bank and Financial Accounts”. This form is commonly referred to as an “FBAR”.

If you appoint as your personal representative someone who is a U.S. citizen or resident (or both), then from the moment of your death, your personal representative is considered by the U.S. to have signing authority over your accounts and must include your accounts in their FBARs. This is so even if the Canadian financial institutions are not necessarily able to take all types of instructions from the U.S. personal representative, either because your personal representative’s authority hasn’t yet been confirmed by the probate courts, or because of securities restrictions, discussed above.

Failing to file FBARs when required can lead to substantial penalties if discovered. As a result, we strongly recommend that before you appoint someone as the personal representative of your estate, you seek their consent, and you inform them that if they are a U.S. citizen or resident, then upon your death, they should talk to their U.S. tax advisor about their U.S. tax filing obligations with respect to your estate.

Language barriers

If you used to live in a foreign country and then immigrated to Canada, you may be inclined to appoint close family members or friends who still live in your country of origin as your personal representatives. If those persons are not fluent in English or French, they may have a tough time dealing with all the various Canadian bureaucracies to settle your estate.

What if you have foreign assets?

If you have significant assets located in a foreign country, especially real estate, then talk to your lawyer or notary about whether it would be suitable to have multiple wills — one for your assets in the foreign country and one for your Canadian assets. If you use multiple wills, it may be appropriate to appoint someone who resides in the foreign country as the personal representative of that will, while you appoint someone who resides in Canada as the personal representative of the Canadian will. Drafting multiple wills so that they can work together properly is a complex task and requires specialized legal advice.??

If you hire different lawyers or notaries in more than one jurisdiction to draft your wills, be sure that they co-ordinate the advice they are giving, and perhaps even coordinate the wills. For example, they will need to ensure that the will drafted in one jurisdiction does not inadvertently revoke a will written in a different jurisdiction.

What if you don’t have any close family or friends who live locally?

If you don’t have any suitable family members or friends who live locally to serve as your personal representative, you may want to consider appointing a licensed trust company to administer your estate.

Written and published by IG Wealth Management as a general source of information only, believed to be accurate as of the date of publishing. Not intended as a solicitation to buy or sell specific investments, or to provide tax, legal or investment advice. Seek advice on up to date withholding rules and rates and on your specific circumstances from an IG Consultant. Trademarks, including IG Wealth Management and IG Private Wealth Management are owned by IGM Financial Inc. and licensed to its subsidiary corporations. ? Investors Group Inc. 2022 EST2221MA_E (12/2022)

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