True personal anecdote
- A few years ago, I agreed to act as Estate Trustee During Litigation. I was appointed on a Wednesday. Late that Friday afternoon (just before a long weekend), I received a call from a Canada Revenue Agency collection officer. She advised me that the estate owed more than $1 million in taxes and warned that distributing estate assets before resolving the tax debt could expose me to personal liability. Fortunately, I already knew about the tax obligation, and the estate had sufficient assets to pay it once the assets were sold.
I share the above experience because it illustrates an important point: before agreeing to act as an executor, it is essential to understand both the responsibilities of the role and the circumstances in which an executor may become personally liable.
Who is the Legal Representative
For tax purposes, a “legal representative”[1] is someone who administers, controls, or otherwise deals with another person’s property in a representative or fiduciary capacity. In the context of an estate, this will generally include the executor or estate administrator.
One of the legal representative’s most important duties is to ensure that the deceased’s and the estate’s tax obligations are properly addressed before estate property is fully distributed to beneficiaries. If the executor distributes any estate property in its possession to a beneficiary without first obtaining a clearance certificate, the executor is personally liable for the taxes payable by the deceased or the estate (to the extent of the value of the property distributed).[2] Personal liability generally relates to property that was in the legal representative’s possession or control. If an asset passes directly to another person,[3] the executor may not have controlled that asset. However, whether an executor had control depends on the particular facts, and the executor may need to establish that the property never came under their authority.
Depending on the circumstances, the legal representative should also consider whether amounts are owing under the GST/HST rules and whether the applicable GST/HST clearance certificate[4] should be obtained.
Insolvent Estate
Any income tax owed by a deceased person for the year of death generally becomes a debt of the estate. In some cases, the estate may not have enough money or other assets to pay all its creditors, including amounts owing to the Canada Revenue Agency (CRA). The estate is then considered insolvent.
An executor will generally not be personally responsible for the estate’s unpaid taxes if the insolvency rules are followed. However, it is important to note that certain CRA claims may receive priority over those of other creditors.[5] Therefore, executors should obtain professional legal and tax advice at an early stage, before paying creditors or distributing estate assets, to help reduce the risk of personal liability.
Beware of Partial Payment to Beneficiaries
Beneficiaries are often impatient to receive their inheritance. This is a challenging situation for executors who must balance the beneficiaries’ expectations with their legal duty to ensure all outstanding obligations are paid. In some cases, an executor holds back an amount for the estate’s expected income tax liability and distributes the remaining assets to the beneficiaries. While this approach may allow for an earlier distribution, it could expose the executor to personal risk if the amount reserved is not sufficient.
The decision in Muth Estate illustrates this risk. The executor retained funds to cover the estate’s anticipated taxes and distributed the remainder to the beneficiaries. The amount held back was ultimately insufficient to pay the full tax debt owed to the CRA. The executor asked the beneficiaries to return part of their distributions, but the Court found that they were not required to be reimbursed for the additional tax and penalties arising from the distribution made before a clearance certificate had been obtained. As a result, the executor was personally responsible for the unpaid tax liability.
Conclusion
Serving as an executor is an important role that carries significant responsibilities. Before accepting the appointment, an individual or professional trustee should take the time to understand the estate’s assets and debts, review the deceased person’s tax-filing history, and obtain appropriate legal and tax advice. The executor should also keep enough money in the estate to cover known or potential obligations and request a clearance certificate before making the final distribution to beneficiaries. With careful planning and professional guidance, an executor can help protect both the estate and themselves from personal liability.
NB: For cross-border estates, the executor should also be aware of the executor’s liability under the U.S. Tax Code.
[1] Defined in subsection 248(1) of the Income Tax Act.
[2] See subsection 159(3) of the Income Tax Act.
[3] For example, under a valid beneficiary designation for a registered account of the deceased.
[4] See section 270 of the Excise Tax Act.
[5] Commonly referred to as CRA’s “super priority.”
