Personal Liability of Personal Representatives
The purpose of the personal liability provision is to encourage personal representatives to ensure that they do not overlook their obligations, such as to file tax returns on behalf of an estate and to provide the CRA with a direct source for the payment of tax. Taking into account such provisions of the ITA, a prudent personal representative looking to avoid personal liability should settle the deceased taxpayer’s estate after the assessment and audit process of the CRA. Due to this, significant delays can occur before the estate was fully distributed. It is very difficult to administer an estate on this basis.
As an alternative, many personal representatives assume the personal liability described above by making interim distributions and retain a reserve to meet and exceed anticipated taxes. They do not distribute the reserve until the clearance certificate is in hand. Otherwise, if the personal representative is on good terms with the beneficiaries (and considers them to be solvent), he or she may be prepared to distribute the entire estate prior to the receipt of a clearance certificate and to accept the undertaking of the beneficiaries to indemnify the personal representative to the extent that the personal representative is subsequently found to be liable for additional tax.
There is another reason to apply for a final clearance certificate. If there has been fraud or neglect, the CRA has the right to reassess a tax return at any time. Even without fraud or neglect, the CRA retains this right for three years after the expiry of the normal annual assessment period (ITA, s. 152(4)). Normally, a personal representative would like to distribute the estate before the expiry of the period during which reassessment is a possibility; but, especially when he or she is not a beneficiary, would not like to carry the contingent risk of personal liability that could arise from any such reassessment.
The final clearance certificate is a signal from the CRA to the personal representative that even if the deceased’s tax returns are reassessed in the future, no liability will attach to the personal representative from the reassessment. Normally, the issuance of a clearance certificate provides the beneficiaries with a strong indication that the deceased’s tax issues will not be reopened. However, according to jurisprudence, the issuance of a clearance certificate does not prevent the CRA from reassessing a return and seeking the taxes that are due from the beneficiaries.
It should not be concluded that it is either mandatory or appropriate in every case to obtain a final clearance certificate. Distribution of an estate can proceed without the certificate. As an example, a personal representative who happens to also be the sole beneficiary of an estate has no particular reason to seek a discharge from personal liability in his or her capacity as a personal representative, when he or she would remain personally liable in any event in his or her capacity as a beneficiary. In that situation, the only purpose for obtaining a clearance certificate would be to obtain a sort of “virtual certainty” that no reassessment of the deceased’s taxes would be conducted.
Almost all taxpayers are content to run the risk of future reassessment because they are satisfied that the deceased’s tax affairs are in good order. Furthermore, the request for a clearance certificate essentially means an invitation to the audit staff of the CRA to take a close look at the original assessment to find out if something has been left out. It is better to let a sleeping dog lie.
Don’t do anything before fully understanding your rights and obligations. For more information about the liability of trustees in estate administration or any other context, contact the lawyers at Levy Zavet PC (Levy Zavet) in Toronto, Ontario.