When a person passes away, he or she may leave behind unpaid tax debts. The estate tax clearance certificate is a document issued by the Canada Revenue Agency declaring that the deceased has satisfied all tax liability, including federal and provincial taxes, interests and penalties, he or she is reasonably believed to owe. The clearance certificate is issued pursuant to subsection 159(2) of the Income Tax Act.
What is the purpose of Estate Tax Clearance Certificates?
The clearance certificate serves two purposes. As mentioned previously, it declares that in the view of the Canada Revenue Agency, the tax liabilities of the deceased have been satisfied. Secondly, it provides tax liability protection to the legal representative of the estate. If the legal representative were to distribute the estate's property without obtaining the clearance certificate, the legal representative can be held personally liable for the unpaid taxes of the estate. Distribution is considered giving up control and transferring the assets of the estate to a person who is not the legal representative. This liability will be equal to the lesser of unpaid taxes of the estate and value of the assets distributed. The clearance certificate is not mandatory, but legal representatives should be cautious of the risks of failing to obtain one.
It may be desirable, or required, for the assets of the estate to be distributed prior to obtaining the clearance certificate. These distributions are called an interim distribution. However, the legal representative should endeavour to retain assets of sufficient value to pay any tax liabilities of the deceased or estate in order limit his or her potential risk of personal liability for the deceased's unpaid taxes.
Corporations and Tax Clearance Certificates
The dissolution of a corporation is treated as the death of the corporation. A corporation, therefore, is required to obtain a clearance certificate when it dissolves or is wound up. Failing to obtain the clearance certificate prior to distributing the assets of the corporation could lead to the legal representatives of the corporation being held personally liable for the corporation's unpaid taxes. Shareholders of a corporation who received a distribution from the corporation due to the corporation's dissolution, though not necessarily the legal representative of the corporation, can be found liable for the corporation's unpaid taxes. This liability cannot exceed the value of the distribution received by the shareholder. The clearance certificate therefore additionally provides shareholders with assurance they will not be assessed for the corporation's taxes by accepting the distribution.
The corporation can obtain a clearance certificate prior to dissolution. The Canada Revenue Agency is willing to issue partial clearance certificates if closure of the articles of dissolution is pending or there is intent to dissolve the corporation.1 The corporation also need not obtain a clearance certificate where it is being amalgamated with another corporation through a rollover under subsection 87(2) of Income Tax Act and no additional tax liability will arise from the amalgamation.
GST/HST Clearance Certificates
Where the deceased or dissolving taxpayer collected and remitted GST/HST, a separate second clearance certificate is required. Pursuant to section 270 of the Excise Tax Act, the taxpayer's legal representative or receiver must apply for and receive a clearance certificate stating the taxpayer has satisfied any outstanding GST/HST tax debt prior to distributing any of the taxpayer's assets under the receiver or legal representative's control.
Subsection 159(1) of the Income Tax Act and subsection 270(1) of the Excise Tax Act define who is considered the legal representative of a taxpayer. A legal representative is a person who administers, controls and deals with the property of the deceased or dissolved taxpayer. For example, a legal representative may be an heir, executor, corporate director or liquidator. Whether a certain person is a legal representative may be disputed and determined on the basis of the particular factual circumstances.
Tax Tips: Applying for a clearance certificate can give rise to other taxation concerns
Applying for a clearance certificate can give rise to unexpected taxation issues. The legal representative may discover errors or omissions with the previous tax reporting of the deceased or dissolved taxpayer. These errors may be correctable through the Canada Revenue Agency's Voluntary Disclosure Program. The application for a clearance certificate may additionally trigger an audit of the dissolved or deceased taxpayer's affairs. Contact our experienced Canadian tax lawyers for assistance with concerns and issues arising from the clearance certificate process.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.