An individual’s will simply provides for the executor to pay all debts, and distribute the estate in equal portions to the three adult children. All estate assets have not been fully distributed by the end of the “executor’s year”, such that the beneficiaries may possess the legal right to enforce payments from the estate. Is the income of the estate payable equally to the beneficiaries by virtue of their entitlement to an equal share of the residue and, if not, what is necessary to this end? Is the income earned in the executor’s year considered as not payable to beneficiaries, and does this depend on whether the estate fiscal year falls entirely within the executors’ year?
Respecting the first question, CRA stated:
Generally, the law provides the executor with a year (often referred to as the “executor's year”) to administer an estate, during which time the right to income of the estate is unenforceable by a beneficiary. After this time, it is a question of fact as to whether the executor is able to distribute property and whether the income of the estate is payable to the beneficiaries.
[Here] the entitlement to an equal share in the residue of the estate would not in and of itself result in the income of the estate being automatically payable to the beneficiaries.
Respecting the second question, CRA stated:
IT-286R2 [para. 6] notes that the CRA will consider the income of the trust for that year to be payable to the beneficiary or beneficiaries of the trust pursuant to subsection 104(24), where the sole reason for the rights of a beneficiary being unenforceable is the existence of an executor's year, the taxation year of a testamentary trust coincides with the executor’s year, and all of the beneficiaries agree to this treatment.
[Here] the executor has chosen the initial taxation year end of the estate to be a date that is prior to the end of the executor’s year; as a result, the executor’s year would extend into the second taxation year of the estate … the comments in paragraph 6 of IT-286R2 would also apply to the initial taxation year of the estate.
Where a portion of the executor’s year falls within the second taxation year of the estate, it is possible that income earned by the estate during that portion of the year may be subsequently paid or become payable to the beneficiary during the remainder of the estate’s taxation year. As a result, the income earned during the portion of the executor’s year which falls within the estate’s second taxation year may instead be taxable in the beneficiaries’ hands. This ultimately relies on whether an amount is paid or whether the beneficiary is entitled to enforce payment of the amount … .