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Tax Clearance Certificate – The 5 W’s (Who, what, where, when, & why?)

I considered answering the 5 W’s in the order we are used to saying them, but it is the “why” that is going to grab your attention.  So, I am going to start there.  Unless otherwise stated, the term Executor includes any words or phrases used to describe the legal representative of the Estate.

Why

Without a Tax Clearance Certificate, Canada Revenue Agency (CRA) can hold the Executor of an Estate personally liable for any unpaid tax debts up to the amount s/he distributes.  Where the Executor is the sole beneficiary and confident there are no potential tax issues, the Executor may decide not to get a Tax Clearance Certificate. A Tax Clearance Certificate is not mandatory, but it is important to understand the risks of not obtaining one.

The Estate can have exposure to tax liabilities from the past of which the Executor is unaware.  CRA could decide to audit that unreported transfer of the family cottage to the next generation which happened 15 years ago or there may be old, dormant tax debts (accruing interest) for 30 plus years.  These situations may be rare, but they have happened to honest and unsuspecting Executors.  I could go on and on to tell you horror stories of why a tax clearance certificate is a good idea, but I think you get the picture.

What

A Tax Clearance Certificate issued by Canada Revenue Agency confirms that all amounts owing to Canada Revenue Agency by the deceased and/or the deceased’s Estate have been paid.  With a Tax Clearance Certificate, the Executor can be certain CRA will not be able to hold the Executor personally liable for any unpaid taxes.  A Tax Clearance Certificate covers a period of time up to a specified date and includes the following tax debts:

-          Income taxes of the deceased and/or the deceased’s Estate

-          Penalties and Interest payable by the deceased and/or the deceased’s Estate

-          GST/HST Credits

-          CPP contributions and EI premiums

When

When an Estate is ready for final distribution and all tax returns for the deceased and the deceased’s Estate have been filed, (re)assessed, and any tax balances owing paid, the final Tax Clearance Certificate can then 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).

There is a lot of confusion even among accounting and legal professionals over which tax years a final Tax Clearance covers, but here is the real deal:   A final Tax Clearance Certificate covers both the deceased’s T1 tax returns and the Estate T3 tax returns. If final distribution of the Estate assets will likely occur within a one to two years of the date of death, a date of death Tax Clearance Certificate is redundant and CRA actually prefers only one (final) Tax Clearance Certificate be requested.

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.

On average, a Tax Clearance Certificate for an Estate in British Columbia will be issued within 3 months of the initial request.  However, if the Tax Clearance Certificate request was incomplete, made at the inappropriate time, or if the file is sent for a more thorough audit review, then issuance of the Tax Clearance Certificate can be significantly delayed.

Who

The Executor, Trustee or Administrator of the Estate can request a Tax Clearance Certificate.  In British Columbia, the term Executor and Trustee refers to the person named in the deceased’s Will or Trust document.  An Administrator is appointed by the court where the deceased died without a Will or the Executor named in the Will is unable or unwilling to act.

An authorized representative can also request a Tax Clearance Certificate on behalf of the Executor/Trustee/Administrator.  To authorize a representative such as an accountant or lawyer, the Executor/Trustee/Administrator will need to sign a form called T1013 – Authorizing or Cancelling a Representative.  One form should be completed for the deceased (Social Insurance Number) and, if applicable, a separate form for the deceased’s Estate (Trust Account Number).

Where (and How)

To request a Tax Clearance Certificate, complete Form TX19 – Asking for a Clearance Certificate and send it with the appropriate documentation (listed at the top of the form) to your local tax services office, Attention: Assistant Director, Audit.

For more detailed information or if you have a specific situation you would like to discuss, go to our firm website to view our contact information.  You can also check out CRA’s website http://www.cra-arc.gc.ca/tx/ndvdls/lf-vnts/dth/clrnc-eng.html and Information Circular IC82-6R8 – Clearance Certificate.

Until next time,

Heather

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