Sold the Estate House? Get a CRA Clearance Certificate First in Ontario

The house has sold and the money is in the estate account. The beneficiaries are asking when they will be paid, and you are the person who has to decide. It is tempting to split the proceeds right away, but doing so too early can leave you carrying a tax bill that belongs to the estate.

This article explains why the Canada Revenue Agency (CRA) clearance certificate matters, how the tax on the home works, and the situations where Ontario law says you must wait before paying anyone out.

Who has authority over the home and the sale money

In Ontario, only an estate trustee has legal authority to manage or distribute an estate, which includes selling the home or clearing it out. A deceased person's property, including the home and its contents, vests in the personal representative, who holds it as trustee.

That means the sale proceeds are not yours personally, and they are not yet the beneficiaries' money in a practical sense. You hold them as trustee, and the responsibility for debts and taxes comes with that role.

How tax applies to the house at death

For income tax purposes, a person is treated as having sold all their property just before death. This deemed disposition can create a capital gain or loss on the home. Only one-half of a capital gain is included in income.

If the home goes to someone other than a spouse or common-law partner, the deemed disposition is reported on Schedule 3 of the final return. All or part of the gain may be exempt as a principal residence, designated on Form T1255. Where the property was the principal residence for every year owned, or every year but one, only page 1 of the form is needed.

• Spouse, common-law partner or spousal trust: the gain is deferred if the property is locked in for them no later than 36 months after death, and tax is postponed until the survivor sells or is deemed to sell.
• The legal representative can elect out of the automatic spousal rollover on the final return, property by property. If so, the spouse's cost is the fair market value at death.
• Principal residence passing to a spouse or common-law partner: no designation for the period before death is required on the final return.
• Owner not a resident of Canada for the whole time they owned the home: the period of non-residence may reduce or eliminate the exemption, and CRA asks them to contact it.

CRA forms and instructions change, so confirm the current versions of Schedule 3, T1255 and T2091 on canada.ca or with an accountant before filing.

What a clearance certificate does

A CRA clearance certificate confirms that the estate's income tax, GST/HST, interest and penalties owing up to the date it is issued have been paid or secured. You request it on Form TX19, Asking for a Clearance Certificate. If the deceased had a GST/HST number, Form GST352 is also needed.

The risk of skipping it is real. A legal representative who distributes assets, such as house sale proceeds, without first getting a clearance certificate can be personally liable for unpaid tax, up to the value of the assets distributed.

Creditors and relief if something goes wrong

Taxes are not the only debts. A personal representative who advertises for creditors' claims and then distributes is not liable to a creditor whose claim they had no notice of at the time of distribution. Note that this protection is about creditors you did not know of. It does not replace the clearance certificate for CRA.

If a mistake does happen, a court may relieve a trustee from personal liability for a breach of trust if the trustee acted honestly and reasonably and ought fairly to be excused. That is a decision for a judge, not something to count on in advance.

When you must wait to distribute, and what to do next

• Surviving spouse: no distribution may be made from a deceased spouse's estate within six months of the death. After notice of an equalization application, no distribution may be made unless the applicant consents in writing or the court authorizes it.
• No will: no distribution may be made until one year after the death, subject to s. 53 of the Trustee Act.
• Dependant's support claim: once you are served with notice of an application, you must not distribute until the court disposes of it, unless all persons entitled to apply consent or the court orders otherwise.

• Confirm who the beneficiaries are and whether any waiting period applies.
• Have the final return prepared, reporting the home on Schedule 3 where required.
• Ask your accountant whether the principal residence exemption applies on Form T1255.
• Request the clearance certificate on Form TX19, with Form GST352 if needed.
• Consider advertising for creditors before you distribute.
• Before paying anyone out, remember that distributing without a clearance certificate can leave you personally liable for unpaid tax, up to the value of the assets distributed. Speak with a lawyer if any claim or dispute appears.

Frequently asked questions