The personal representative (ITA, s. 150(3)) carries the responsibility of addressing the tax consequence of a taxpayer’s death. But the ITA (Income Tax Act) does not merely create a role for the personal representatives; it also imposes personal liability on them for failing to discharge their duty. This is an important consideration for a personal representative and therefore requires close examination.
According to provincial common law and statute, a creditor, including a creditor such as the Canada Revenue Agency (CRA), can pursue its claim against a beneficiary who has received funds from an estate, since the right of a creditor to be paid in full takes priority over the right of a beneficiary to receive a gift. Just like other creditors, the CRA is free to seek payment from beneficiaries to the extent that they have benefited from the estate in preference to creditors. Also, under Ontario Provincial law, a personal representative can be held personally liable for creditors’ claims if he or she has distributed property to beneficiaries when he or she knew or ought to have known of creditors’ claims. There is a provision (Trustee Act, s. 53, Advertising for Creditors) for the personal representative to follow if he or she wishes to avoid such a personal liability and a further provision for establishing priorities among creditors.
In addition, the ITA gives the CRA a very substantial additional protection. A clause in the Act states that a personal representative, before distributing any property under his or her control, must send an application to obtain a certificate stating that taxes, interest, and penalties have been paid in respect of the taxation year in which the distribution is made, in respect of a preceding taxation year and of a payment to the CRA for which the personal representative can “reasonably be expected to become liable” (ITA, s. 159(2)). Although failure to obtain this clearance certificate is not a punishable offence, there is an inherent risk involved. If a personal representative distributes property without obtaining the clearance certificate, the personal representative becomes “personally liable for the payment of those amounts to the extent of the value of the property distributed” (ITA, s. 159(3)). After all of the required tax returns for the period to be covered by the certificate have been assessed, a final clearance certificate ought to be applied for by the personal representative.
The clearance certificate is obtained before the final winding up of an estate and the distribution of all remaining assets to the beneficiaries (except for settling tax matters). The personal representative calculates income earned to a past date and undertakes to distribute the estate promptly upon receipt of that certificate. During the interim period, income earned by the estate is regarded for tax purposes as earned by the personal representative as agent for the beneficiaries.
Read more about Taxation at Death and Personal Tax Planning.
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