Engaging the personal liability of an Estate Trustee is always a concern when administering an estate. In particular, Estate Trustees must be cautious to ensure that the deceased’s debts have been paid and that there are sufficient funds to pay any final taxes before any distributions are made.
In some cases, Estate Trustees may inadvertently find themselves in a situation where the deceased was not meeting their tax obligations to the Canada Revenue Agency (“CRA”). This may be the result of simple carelessness resulting in failure to file previous returns, incomplete information, errors and omissions, or it could also be as serious as deliberate tax evasion. Either way, the Estate Trustees must tread carefully because if they choose to ignore these past discrepancies and distribute the funds, they may be held personally liable for the penalties and interest incurred.
Fortunately, CRA has created the Voluntary Disclosure Program which can be especially useful for Estate Trustees in this type of situation. The Voluntary Disclosure Program allows the taxpayer (or Estate Trustee) to come forward and voluntarily correct any errors or omissions without being subject to penalties (or prosecution) that would normally apply. According to subsection 220(3.1) of the Income Tax Act (“ITA”), CRA may also waive a portion of the applicable interest with regard to assessments from the preceding ten years.
In order to benefit from the penalty and interest exemptions, the disclosure must meet the following four criteria to be considered valid. The exemptions are not automatic and are subject to the review of each request on its own merits:
- The disclosure must be voluntary. This means that it must be made prior to becoming aware of any compliance actions being taken;
- A penalty would apply;
- The disclosure must be complete; and
- The information being disclosed must be at least one year past due.
It is also important to note that disclosure can be made anonymously (commonly referred to as no-name disclosure). No-name disclosure is often preferred as it provides the Estate Trustee (or taxpayer) the opportunity to discuss the facts and tax issues with CRA while remaining protected. However, it should be kept in mind that it is not possible to reach any binding agreement under the no-name process. The Estate Trustee (or taxpayer) is given 90 days to release the name which would result in a further extension to submit any materials.
Under a named disclosure, the taxpayer is identified immediately, which prompts CRA to allow for 90 days to submit any additional materials without the limitation clock starting to run.
The Voluntary Disclosure Program can sometimes be a delicate process. As a result, before starting this process, professional legal or tax advice is always recommended.
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