A cautionary tale about executors and clearance certificates

The recent Federal Tax Court of Canada decision in Mingle vs. The Queen provides a cautionary tale for executors who distribute estate property without first obtaining a clearance certificate from the Canada Revenue Agency (CRA).

The facts are straightforward. Anthony Mingle died in May 1994 leaving an extensive estate. In his will he named his sons Samuel and James as executors.

However, Samuel was not a beneficiary. Since he had no monetary interest in the estate, Samuel decided to renounce his appointment as executor and wrote James a note dated July 27, 1994, which read; “Jim, everyone seems to still think I’m co-executor of Dad’s estate even though I told you and everyone else involved that I will not act in that role. Please do what you can to keep me out of it.”

Although Samuel was not a beneficiary, his daughter Alisa was. Following Samuel’s July 27 letter, Samuel and James as executors transferred a property from the estate to a company owned by James. The property was then mortgaged for $240,000 in favour of Alisa.

The complicating factor was that, at the time the transfer and mortgage were completed, the estate owed income tax, and the brothers had transferred the property without seeking a tax clearance certificate from the CRA.

A tax clearance certificate officially certifies that a deceased has paid all tax liabilities, both federal and provincial, including any interest and penalties that have been assessed. A clearance certificate is not issued automatically; the estate trustee must apply for it. Under section 159(3) of the Income Tax Act, an estate trustee can be held personally liable for an estate’s unpaid taxes, including interest and penalties, if the estate or a portion of it is distributed prior to obtaining a clearance certificate, up to the value of the property distributed.

Because Samuel and James did not obtain a clearance certificate, the CRA assessed Samuel personally for the taxes owing (James had since deceased). Samuel argued that he was not liable for the unpaid taxes because he had renounced his executorship two months after his father’s death. As for the documents he signed as executor when the mortgage was granted, he argued he did not read them nor did he obtain independent legal advice, so he was unaware he was purportedly signing documents in his capacity as executor.

In holding that Samuel was personally liable for the estate’s outstanding taxes, the Court provided several lessons:

• A clearance certificate is an important tool to ensure an executor does not attract personal liability.

Section 159(3) of the Income Tax Act is clear that if a legal representative of a taxpayer, most commonly an executor, distributes the taxpayer’s property without obtaining a tax clearance certificate, the representative is personally liable for any outstanding tax liability up to the value of the property distributed.

• Should an executor choose to renounce their appointment, they should be sure to leave formal documentary evidence, including evidence the renunciation was served to all other parties.

The ramifications of renouncing an executor appointment are set out in provincial legislation. In Mingle, the applicable statute is Ontario’s Trustee Act, which provides: “Where a person renounces probate of the will of which the person is appointed an executor, the person’s rights in respect of the executorship wholly cease, and the representation to the testator and the administration of the testator’s property, without any further renunciation, goes, devolves and is committed in like manner as if such person had not been appointed executor.”

Had the Court accepted Samuel’s letter to James as a proper renunciation, he would no longer be able to act and would not be subject to assessment. However, the Court did not accept that he had renounced his appointment. The court found no evidence that the letter was actually delivered to James in 1994 and held it therefore did not renounce his appointment.

Interestingly, the estate was administered without probate. Had the estate trustee (James) applied for probate, the Certificate of Estate Trustee would have removed all doubt as to whether Samuel had renounced or was an executor. The certificate would have clearly set out who was executor.

• When appointed as a co-executor, you are equally liable even if the other executor did most of the work.

The Court specifically stated that it was relatively clear that Samuel did not play a prominent role in the day-to-day administration of Anthony’s estate. However, this did not exonerate him from liability. He was just as responsible as he would have been had he taken every step in the administration personally.

• Be aware of limitation periods.

Samuel was assessed for the estate’s 2006 to 2010 tax liabilities. The relevant limitation period is set out in section 222(4) of the Income Tax Act and provides that if a notice of assessment is sent to the taxpayer, the limitation begins 90 days after that assessment is sent. The limitation period ends 10 years after it began, or 10 years and 90 days after the assessment is first sent. The initial limitation period for the 2006 taxation year expired in September 2017. However, a notice of assessment issued in May 2017 restarted the limitation period for a further 10 years.

In conclusion, clearance certificates are a prudent step in the administration of an estate. Should an executor choose to distribute from an estate without first applying and receiving the certificate, they do so at their own personal peril.

Keith Masterman, LLB, TEP, is vice-president, Tax, Retirement and Estate Planning with CI Global Asset Management. He can be reached at kmasterm@ci.com.

Keith Masterman

Tax & Estate

Keith Masterman, LLB, TEP, is vice-president, Tax, Retirement and Estate Planning at CI Global Asset Management. He can be reached at kmasterm@ci.com.