Tag: voluntary disclosure program
If you are asked to be someone’s estate trustee/executor, you may wonder what liability you are assuming. That is on top of the regular workload, as settling the testator’s financial affairs and distributing the remaining assets to their beneficiaries usually takes a year, involving visits to banks, lawyers and other relevant parties. Much can happen in that time, and beneficiaries may be pressuring you to quickly pass along their share of the estate.
Here are some important points to keep in mind with personal liability.
Many Last Wills and Testaments contain phrasing meant to protect loved ones as they carry out their executor duties, usually along the lines of: “No trustee acting in good faith shall be held liable for any loss, except for loss caused by his or her own dishonesty, gross negligence or a wilful breach of trust.”
That type of clause is important, but there is still some liability that comes with the position.
First, let’s make it clear that an executor does not incur personal liability for the debts and liabilities of the deceased. However, it is the executor’s duty to ensure that financial obligations are paid from the estate before any money goes to beneficiaries.
The potential liability here is particularly significant with respect to taxes. Most estates will have taxes owing, so it is the executor’s duty to ensure that all outstanding tax matters are resolved. Section 159 of the Income Tax Act requires executors to obtain a clearance certificate. This document confirms that the taxes of the deceased have been paid in full. If the executor does not obtain this certificate and the funds from the estate have already been distributed, they will be personally liable for taxes owed.
There is always a chance that an executor could discover the testator was not meeting their tax obligations to the Canada Revenue Agency (CRA). There are a number of reasons this may arise, ranging from simple carelessness to deliberate tax evasion. No matter the situation, the executor is responsible for rectifying that shortcoming using the estate’s funds, before money is given out to beneficiaries.
The CRA has created a Voluntary Disclosure Program that allows executors to come forward and voluntarily correct any errors or omissions without being subject to penalties or prosecution.
Personal liability for executors also arises if they spend money on professionals to help with the administration of the estate. That could include such people as lawyers, accountants, investment advisors, real estate agents, or art appraisers. Estates can be complex, so it is well within the scope of diligent executors to seek professional guidance. Accordingly, the cost for these services will be borne by the estate, not by the executor.
Detailed records must be kept of any money spent, as executors have a duty to account to the beneficiaries. These records must show all expenses paid by the estate and what money the estate received, from insurance benefits, banks or other sources.
In most cases, beneficiaries of an estate will approve, or consent to, the accounts as kept by the estate trustee. But if they feel finances were not properly managed, they can ask for court approval of the records, known as a “passing of accounts.”
Since executors have a duty to maximize the recovery, and value, of estate assets, they are personally liable for any losses they cause. That could include being reckless with the assets, which causes a loss in monetary value. Examples of this would be if an estate has to pay penalties on a tax return that the executor filed extremely late for no good reason, or if a home was sold for much less than market value.
The good news is that if an executor performs their duty diligently and honestly, any financial liability they assume will be paid by the estate.
Be safe, and have a great day.
Last year I blogged about some possible changes to the CRA’s Voluntary Disclosure Program (“VDP”). The new VDP rules came into effect March 1, 2018.
One of the concerns that had been raised in relation to the VDP changes in advance of them coming into effect, is that it seemed the CRA was attempting to make the VDP less accessible for taxpayers. For example, the changes created a “tiered” system for VDP applications, meaning that applications would fall under either the “general program” (for more minor non-compliance) and the “limited program” (for major non-compliance). Another example is the apparent elimination of the “No-Name” method for submitting disclosure (which allows the taxpayer to gain some understanding of how their situation may be treated by CRA in advance of officially submitting his or her application).
According to this article, in July and August 2018, the CRA responded to the first round of disclosure applications that had been filed under the new rules. The CRA’s approach in practice was troubling to the article’s authors.
In particular, the CRA appears to be taking the position that it will be rejecting VDP applications if the relevant tax returns aren’t enclosed. This seems to be contrary to the guidelines set out in CRA’s Information Circular IC00-1R6. While CRA takes the position that it will reject applications that do not enclose tax returns, the Information Circular seems to indicate that a taxpayer may submit additional information or documentation to complete the VDP application up to 90 days from the day that the CRA receives the application. The article’s authors are of the view that the language of the Information Circular in this regard would include the relevant tax returns, as these are clearly documents required to complete the disclosure. The position taken by CRA provided confirmation to the authors that CRA was seeking to make the VDP inaccessible for taxpayers.
As we previously set out in this blog, the VDP can be relevant to an Estate Trustee if the deceased was not in compliance with his or her obligations to the CRA, such as failure to file income tax returns, or reporting of inaccurate information. The VDP may allow an Estate Trustee to voluntarily disclose such non-compliance and avoid penalties. Unfortunately, with the new VDP rules in effect, and the apparent uncertainty regarding how the CRA will apply its guidelines, it may be tricky for Estate Trustees to make effective use of the VDP. It will be interesting to see how the new VDP rules develop, and any further feedback to their practical application.
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Submissions from the Joint Committee on Taxation Regarding Proposed Changes to Voluntary Disclosure Program
Last month, I blogged about some changes proposed by the CRA to the Voluntary Disclosure Program. It was noted that the CRA would be accepting comments with respect to the proposed changes until August 8, 2017.
The Joint Committee on Taxation of The Canadian Bar Association and Chartered Professional Accountants of Canada (the “Joint Committee”) made submissions in this regard in a letter to the Minister of National Revenue dated August 8, 2017.
In their letter, the Joint Committee recommends that the Minister reconsider a number of points, including, among other things, the introduction of a multi-tier system including the “general program” and the “limited program”. The Joint Committee states that part of the success of the Voluntary Disclosure Program is due to the fact that taxpayers applying to the Program are able, to a certain extent, to predict the consequences of initiating a voluntary disclosure. This allows non-compliant taxpayers to assess the benefits of the Program as opposed to the ongoing uncertainty of non-compliance and the risk of assessment and/or prosecution. The Joint Committee submits that the proposed changes may lead to uncertainty, and therefore, may encourage non-compliance, which would be inconsistent with the objectives of the Voluntary Disclosure Program and with encouraging non-compliant taxpayers to become compliant.
The submissions from the Joint Committee also comment that the draft Information Circular setting out the proposed changes apparently provides that the No-Name method of disclosure, wherein certain information may be provided to a Voluntary Disclosure Program officer without identifying the taxpayer, in order to obtain a better understanding of how the taxpayer’s disclosure may be addressed, will no longer be available for disclosures commencing after December 31, 2017. In the Joint Committee’s experience, non-compliant taxpayers are more likely to proceed with a voluntary disclosure if the process is perceived as transparent and predictable. If they are correct and the Minister of Revenue proposes to eliminate the No-Name disclosure method, the Joint Committee urges the Minister of Revenue to reconsider this proposed change.
The letter from the Joint Committee makes a number of other submissions that are beyond the scope of this blog, but can be read in full here.
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