Estate Planning – Don’t Forget About the Tax Clearance Certificate!
If you are an executor of an estate, one of the last questions that you will need to consider is applying for a Tax Clearance Certificate.
What is a Tax Clearance Certificate?
A Tax Clearance Certificate issued by the Canada Revenue Agency (CRA) confirms that all amounts owing to the CRA by the deceased and the deceased’s estate have been paid. The executor is free to distribute all assets of the estate.
What happens if you don’t have a Tax Clearance Certificate?
If the executor distributes the estate assets to the beneficiaries without obtaining clearance, the CRA can hold the executor of an estate personally liable for any unpaid tax debts up to the amount distributed. This includes unknown taxes that come to light because of a future tax audit. For example, the CRA could decide to audit that unreported transfer of the family cottage to the next generation (which actually happened 15 years ago). If a clearance certificate has been issued then the executor is free and clear. If not, the CRA would then try to collect the unpaid taxes from the executor.
When should you ask for clearance?
When an estate is ready for final distribution. This means that all tax returns for the deceased and the deceased’s estate have been filed, (re)assessed, and that any outstanding tax balances owing have been paid in full. Only then should the final Tax Clearance Certificate be requested.
The final Tax Clearance Certificate covers the period up to the designated tax wind-up date (date of the final T3 estate tax return). A final Tax Clearance Certificate covers both the deceased’s T1 tax returns and the estate T3 tax returns.
If T3 estate tax returns were not required, then you can request and obtain a date of death Tax Clearance Certificate. As the name suggests, a date of death Tax Clearance Certificate covers the period up to the date of death. It may be desirable in some circumstances to obtain a date of death Tax Clearance Certificate or an “interim” Tax Clearance Certificate where the final distribution of estate assets will not occur for several years.
How do you request a Tax Clearance Certificate?
To request a Tax Clearance Certificate, complete Form TX19 – Asking for a Clearance Certificate and send it with the appropriate documentation to your local tax services office, “Attention: Audit – Clearance Certificates”. An authorized representative, such as a DJB accountant, can complete and file the TX19 on behalf of the executor(s).
As part of the TX19 submission, the following items are required by the CRA:
- a completed and signed copy of the taxpayer’s will, including any codicils, renunciations, disclaimers, and all probate documents if applicable. If the taxpayer died intestate (without a will), attach a copy of the document appointing an administrator;
- a detailed list of the assets that were owned by the deceased at the date of death, including all assets that were held jointly and all registered retirement savings plans and registered retirement income funds (including those with a named or designated beneficiary), their adjusted cost base (ACB) and fair market value (FMV);
- a copy of Schedule 3, Capital Gains or Losses from the final tax return of the deceased;
- a list of all assets transferred to a trust, including description, ACB and FMV;
- a detailed statement of distribution of the assets of the deceased’s estate to date;
- a statement of proposed distribution of any holdback or residual amount or property;
- the names, addresses, and social insurance numbers or account numbers of any beneficiaries of property other than cash; and
- a completed Form T1013, Authorizing or Cancelling a Representative, signed by all executors, authorizing a representative such as an accountant or notary to act on behalf of the executor(s) and/or if the executor(s) want the CRA to send the clearance certificate to a different address.
Choosing not to have a Tax Clearance Certificate
Even though in the majority of cases a Clearance Certificate is warranted, there are some situations where the executor(s) may be willing to live with the risk of not asking for clearance. After all, asking for clearance is inviting the CRA to review the tax filings. Where the executor is the sole beneficiary and confident that there are no potential tax issues, the executor may decide not to seek clearance. This is often the case when one spouse dies leaving their entire estate to the surviving spouse who also is the sole executor. There may be similar situations depending on the family dynamics and their tolerance for risk.
If you have any questions about this topic or any other estate matters, please do not hesitate to contact a DJB professional, we would be happy to answer your questions.