Did you know that as the liquidator of an estate you have a certain amount of liability, such as legal possession of all the deceased’s property AND responsibility for the payment of all debts to the date of death, notably income tax?
Once you have filed the final tax returns for the deceased what’s your next step?
Unless the estate is complex and will continue for some time, you will want to distribute the balance of the estate assets to the beneficiaries to complete your obligation. But what happens if you’ve distributed the property and either or both tax departments contact you and claim additional income tax for the final year or any previous year that is still open for reassessment (generally the last three years)?
Unfortunately, as the liquidator, you are responsible for these additional taxes unless you have applied for and received a clearance certificate from both the federal and Quebec tax departments. A clearance certificate is a confirmation from the federal and Quebec governments that the deceased has paid all taxes up to the date the certificate is issued. The issuance of the certificate does not guarantee additional income tax will not be assessed at some time but justifiably transfers any such liability to the beneficiaries who now have the property.
Applying for a clearance certificate is a relatively easy procedure for most estates. Simply complete the prescribed forms (federal form TX19 and Quebec form MR-14) and attach a copy of the will, will search, death certificate and a schedule reconciling the property at death with the property to be distributed. As soon as the clearance certificate is issued, you may distribute the balance of the estate without any concerns over personal liability.
It can take up to six months or longer for the tax departments to issue the certificates and once issued, it covers all assets not distributed prior to the date of the certificate.
Often, two clearance certificates are requested, one for the period to the date of death and one for the period of administration. This protects the liquidator from any tax liability for the period prior to death as well as the period while he or she is administering the estate.
Clearance certificates are not required by law but as noted, protect the liquidator. The question often arises whether it is advisable in every circumstance. Generally, if the liquidator and the beneficiary are the same person, it may not be necessary since the certificate does not relieve that person from liability. It just shifts the liability from that person in his capacity of liquidator to his capacity as a beneficiary.
Other than this clear-cut situation, whether to apply for a clearance certificate is often a judgement call by the liquidator, after taking into account the complexity of the estate and who the beneficiaries are.
As an alternative to applying for clearance, the liquidator may choose to hold back enough assets to guarantee the payment of any future assessments. Only after the period of reassessment expires would the remaining assets be distributed.
WE ARE HERE TO HELP
Putting your team together? Having to decide if to accept the position of liquidator? Please contact one of our Estates and Trusts specialists for more information about filing for a clearance certificate or any other concerning matter.