As legal representative of an estate, the estate trustee’s obligations are varied. One of their duties is to bring the deceased’s taxes up to date and to file all estate tax returns before the estate is wound up. To exonerate their potential liability to outstanding tax issues pursuant to subsection 159(3)(a) of the Income Tax Act, RSC 1985, c 1 (5th Supp), the estate trustee should obtain a tax clearance certificate.
What is a tax clearance certificate?
A tax clearance certificate is a written confirmation issued by the Canada Revenue Agency (CRA) that all amounts owing by the deceased and/or the deceased’s estate to the CRA up to a certain date have been paid. An estate trustee can apply for a tax clearance certificate for the following tax debts:
- Income taxes
- Penalties and interest
- GST/HST credits
- CPP contributions and EI premiums
How to apply for a tax clearance certificate?
To request a tax clearance certificate, the estate trustee must fill out Form TX19 – Asking for a Clearance Certificate and file it with the appropriate supporting documents. Supporting documents include a copy of the will (if any), a statement of estate assets with adjusted cost base, and proof that the estate trustee is the legal representative.
When should the estate trustee apply for a tax clearance certificate?
The estate trustee should apply for a tax clearance certificate after filling the tax returns for the deceased and the estate and after receiving the notices of (re)assessed, but before making a final distribution to the estate beneficiaries.
The CRA will send the estate trustee an acknowledgement letter within 30 days of receiving the request for a tax clearance certificate. The CRA’s assessment can take up to 120 days, assuming the estate trustee provided all of the necessary supporting documents along with their application. However, if the application materials are incomplete, made at the inappropriate time, or if the file is sent for a more thorough audit review, it may take significantly longer to process the request.
Why seek a tax clearance certificate?
A tax clearance certificate allows the estate trustee to distribute the estate’s assets without fear that the CRA will pursue them personally for taxes owing by the deceased or the estate. As a result, it is usually recommended that an estate trustee holdback enough funds in the estate to pay for any outstanding taxes until a tax clearance certificate is issued.
While it is usually recommended, a tax clearance certificate is not required in every case. Some situations where the estate trustee may not apply for a tax clearance certificate include where:
- the estate or trust is ongoing and pays the net income earned in a year to the beneficiaries; or
- enough funds remain in the estate to pay any amounts owing to the CRA (i.e. the estate trustee maintains a holdback for taxes).
In cases where the estate trustee is also the sole beneficiary of the estate, the estate trustee may choose to take funds from the estate without applying for a tax clearance certificate. However, the estate trustee should understand the risks of doing so: they may be held personally responsible for the deceased’s taxes. There may be tax liabilities from the past of which the estate trustee is unaware. For instance, the CRA could decide to audit an unreported transfer of the family cottage which happened 10 years ago or there may be old tax debts (with accruing interest) for 30 plus years. In cases where the estate trustee has waited for the tax clearance certificate to be issued to make the final distribution and the CRA did not flag those past tax liabilities, the CRA could not pursue the estate trustee for payment – having made the distribution after receiving the clearance certificate, they are absolved of any personal liability for the late-discovered tax debt.
For an estate composed of a cottage property, the estate trustee will first liquidate the estate’s asset by selling the cottage property. They will then bring the taxes up to date, by paying any outstanding tax amounts and filing all tax returns. Then, they will apply for a tax clearance certificate. Before receiving the tax clearance certificate, they should consult an accountant as to the amount that should be held back from the initial distribution to the beneficiaries. The estate trustee will then distribute the asset of the estate minus the suggested holdback amount. If the CRA’s assessment finds an additional $5,000 in taxes is owing, the estate trustee should pay this amount and finally distribute the remaining holdback amount, if any.
For further information, CRA provides a helpful step-by-step guide to tax clearance certificates.