Benjamin Franklin once famously remarked, “In this world, nothing can be said to be certain except death and taxes.” This statement also holds true in Canada – taxes are payable on income received up until the day of death, and even on income earned by an estate post-mortem.
Once all of the taxes owed by an estate have been paid, a tax clearance certificate can be issued by the Canada Revenue Agency (the “CRA”). This instrument officially certifies that the deceased has satisfied all of his or her tax liabilities, including federal and provincial taxes, interest and penalties owed, plus any outstanding contributions for CPP and EI premiums. The CRA does not issue clearance certificates automatically though. The estate’s legal representative, typically the estate trustee, must apply for one under subsection 159(2) of the Income Tax Act.
Caution should be exercised if any part of an estate is distributed before a clearance certificate is issued. Under subsection 159(3) of the Income Tax Act, an estate trustee can be held personally liable for the estate’s unpaid taxes, including interest and penalties, if the estate is distributed without a certificate. In Mingle v The Queen, 2022 TCC 34, the Tax Court of Canada explained how section 159 of the Act works:
… a trustee/executor is liable for the estate’s tax, interest, and penalties that are unpaid before and while the person is trustee/executor. Before distributing the estate’s property, the trustee/executor must obtain a clearance certificate from the Minister certifying that there are no outstanding amounts. If the trustee/executor distributes the property without obtaining the certificate, then they are personally liable for the unpaid amounts (up to the value of the property distributed) and can be assessed as though it is their own tax debt.
The consequence of failing to obtain a tax clearance certificate is aptly demonstrated by the outcome in Mingle. In this case, a mortgage was granted to one of the beneficiaries against property owned by the estate. However, no one applied for a clearance certificate before the mortgage funds were distributed to the beneficiary. (Even if they had applied, a certificate probably would not have been granted, since the estate was in arrears for unpaid taxes.) The Minister of National Revenue subsequently assessed Mr. Mingle, one of the estate trustees, personally for the estate’s tax debt up until the time the mortgage funds were distributed.
Mr. Mingle appealed, claiming that he could not be held liable for the estate’s tax debt because he had renounced his executorship shortly after the testator’s death. Mr. Mingle argued that only his brother, who passed away in 2016, had acted as estate trustee. To prove his renunciation, Mr. Mingle put a letter to his brother into evidence that he claimed he had sent in 1994.
Justice Wong rejected Mr. Mingle’s claim, finding on the balance of probabilities that the letter was not written and/or delivered in 1994. In reaching this conclusion, the court noted that there was no logical explanation for a handwritten notation on the letter indicating that it was provided on the advice of Mr. Mingle’s lawyer.
The evidence also established that both Mr. Mingle and his brother completed paperwork in their capacity as estate trustees to obtain the mortgage. The court found that Mr. Mingle must have understood that he was signing the paperwork as a representative of the estate, even if he did not understand all of the implications of the documents he signed.
Accordingly, the court found that Mr. Mingle was the estate’s legal representative for the purposes of the Income Tax Act, even though he “did not play a prominent role in the day-to-day administration” of the estate. Since Mr. Mingle’s appeal was dismissed, he remained liable for the estate’s outstanding taxes.
If you’d like to learn more about tax clearance certificates, consider reading the CRA’s Income Tax Information Circular.
Thank you for reading, and have a great day!