Can Beneficiaries Be Liable for a Deceased's Unpaid Taxes in Canada?

You received an inheritance, and now you wonder whether CRA could come back for the deceased's unpaid taxes. It is a fair worry, especially if you are not sure the estate's tax affairs were closed out.

This article explains who the law mainly holds responsible, where beneficiaries can come into the picture, and what you can ask the executor. It is general information only.

This article covers Canadian federal tax law, which applies in every province.

The executor is the first in line

Under the Income Tax Act, a legal representative must obtain a clearance certificate before distributing property in their possession or control. A representative who distributes without it is personally liable for the unpaid amounts, limited to the value of the property distributed, and the Minister may assess them at any time.

The representative is also jointly and severally liable with the taxpayer for unpaid amounts, to the extent of their control of the taxpayer's property. This is why careful executors wait for the certificate.

A legal representative is a person who administers, winds up, controls or otherwise deals with a property, business or estate, and whether someone qualifies depends on the facts. It is typically the executor named in the will, and in Quebec the person registered as liquidator.

Without a certificate, the representative is personally liable whether the amounts are assessed before or after the property is actually distributed. The liability is capped at the value of the property distributed, and interest accrues.

Where beneficiaries come in

When a certificate is issued, liability for any remaining tax rests on the estate, trust, corporation, beneficiaries or others who received the assets, rather than on the representative. That means a beneficiary is not treated as someone who is automatically in the clear.

Whether and how far CRA can recover from a particular beneficiary depends on the facts, such as what was received and when. A lawyer can confirm your position.

A certificate confirms that an estate, trust or corporation has paid all income tax, GST/HST, interest and penalties owed at the time it was issued, or that the Minister has accepted security for payment. It covers income taxes, interest, penalties, CPP contributions and EI premiums.

If the deceased had a GST/HST number, the estate also needs a GST/HST certificate before distributing, and the representative is personally liable up to the value distributed if they do not get one. Whether other accounts, such as payroll source deductions, are covered is worth confirming with CRA.

Situations that raise the risk

• The estate distributed assets without a certificate, so the executor may be personally liable for the unpaid amounts, up to the value of what was distributed.
• Property was discovered after the certificate was issued, since a certificate covers only property controlled up to the request date.
• The estate could not cover all its tax, interest and penalties, in which case the certificate is generally not issued.
• The executor appropriated property, which counts as a distribution.

Distribution happens when the representative gives up control and transfers the property, not when the beneficiary gains the right to it. A promised inheritance is therefore different from one actually paid out.

A certificate can also be issued where the Minister has accepted security for payment, so tax that is not yet paid can be secured instead. The acceptable form or amount of security is not something to guess at, so the executor should contact CRA first.

Income paid to you versus property

Trust income paid or allocated to beneficiaries is not a distribution of property, so no certificate is needed for it. Separately, an estate that is partway through distribution may hold back property: a representative need not obtain a certificate before each distribution if enough property remains to cover any liability.

What to do next

• Ask the executor whether the final return and any estate returns were filed and assessed.
• Ask whether a clearance certificate was requested or issued.
• Find out whether a holdback is in place for unpaid tax.
• Keep records of what you received and when.
• Speak with a lawyer or accountant before spending a large inheritance if tax issues are unresolved.

Executors can start by finding out what the estate owes. Requests are made on Form TX19, and the request is made after the returns are filed and assessed and amounts are paid or secured.

CRA acknowledges the request within 45 days, and assessment can take up to 120 days if all documents are provided, although an audit may be needed first. If the request is denied, the denial states what is missing or what action is required, and the representative can reapply once the issues are resolved.

Frequently asked questions