A simple Will typically directs the Executor to pay the debts and expenses of the deceased, makes specific bequests of property and finally specifies what is to be done with the residue. Where during the administration of an estate that arose after 2015, taxable income is generated yet all debts and specific bequests have been paid, can the Executor pay or make payable this taxable income to the residual beneficiaries, such that the amount of this taxable income would be considered payable, under s. 104(24), for the purposes of ss. 104(6) and 104(13)? CRA responded:
Where there is no indication in the Will from which assets the gift is to be paid, generally the Executor can make the payment as they wish as long as they act impartially (the evenhand rule), they follow the classification of gifts (and...they have paid the liabilities of the...estate). The residue of the Estate can include income and the residue of an estate is not necessarily comprised only of after tax amounts. Accordingly...the income of the estate may be paid or made payable to a residual beneficiary, and a deduction pursuant to subsection 104(6) may be taken by the estate....
However, depending on the wording of the Will, after the debts and specific bequests of the estate have been paid, the Executor may be required to pay the taxes owing on the income generated by the Estate and distribute the after tax “residue” to the residual beneficiaries. In such cases distributions to residual beneficiaries could not be considered to be income payable to a beneficiary for purposes of subsections 104(6) and 104(13).
Accordingly, the estate would be precluded from claiming a deduction... . Instead, the income would be taxed in the estate, and the residual beneficiaries would receive capital distributions, comprised of after tax paid capital of the estate.