Clearance Certificate and the Estate's T3 Return in Canada

If you are the executor of an estate that keeps earning income after death, such as interest, dividends or rent, you may have to file T3 trust returns for the estate. At the same time, you may be hearing that you need a CRA clearance certificate before you hand the assets to the beneficiaries. It is natural to wonder how the two fit together.

The short version is that the T3 returns come first and the certificate comes after. This article explains how the certificate treats the estate's T3 years, including a graduated rate estate, what you send, and where executors commonly run into delays.

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

What the certificate is and why T3 returns matter

A CRA clearance 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. Before distributing property in their possession or control, a legal representative must obtain a certificate from the Minister, applied for in the prescribed form.

A certificate is needed when trust or estate property will be distributed. Estate trusts that must file T3 returns apply using Form TX19 and must supply the will and an asset list. In practice, the T3 returns are part of the story the certificate depends on: the certificate is issued only when the required returns, which include the estate's T3 returns, are filed and assessed and the amounts are paid or secured.

How the graduated rate estate years affect timing

A graduated rate estate (GRE) can only be one for up to 36 months following the death, and it can have a non-calendar year-end. A testamentary trust that is not a GRE has a December 31 year-end instead.

The T3 return is due 90 days after the trust's tax year-end, or after the final distribution if the trust ceases to exist. If a GRE ceases to exist, its tax year ends on the date of the final distribution, and the final return and balance are due 90 days after that. Because CRA does not issue the certificate unless the required returns are filed and assessed, how the final return and the certificate request fit around your final distribution depends on the facts of the estate, so it is worth confirming with a lawyer or accountant.

How these dates line up with your own distribution plan depends on the facts of the estate, so it is worth confirming with a lawyer or accountant.

Income paid to beneficiaries versus distributing property

Trust income that is paid or allocated to beneficiaries is not a distribution of property, so no certificate is needed for it. That means an executor can generally deal with income allocations on the T3 without that step triggering the certificate requirement.

Distributing the underlying assets is different. Distribution occurs when the representative gives up control and transfers the property, and appropriating property for yourself also counts.

There is also a partial route. A representative need not obtain a certificate before each distribution if enough property remains to cover any liability. The request itself must include a statement of distribution to date and the proposed distribution of any holdback or residual.

What to send and when to apply

Do not submit the request with the tax returns, because that delays their assessment. CRA says to apply after the returns are filed and the notices of assessment are received, any requested reassessments are received, and all tax, CPP contributions, EI premiums, interest and penalties are paid or secured. The circular says not to file Form TX19 until the notices of assessment are received, subject to exceptions it lists.

For an estate, the Form TX19 package includes the following:

• The signed will with codicils, renunciations, disclaimers and probate documents, or the administrator appointment if there was no will
• Proof of your status as legal representative
• A detailed asset list at the date of death, including jointly held assets and RRSPs or RRIFs, with adjusted cost base and fair market value at distribution
• A statement of distribution to date and the proposed distribution of any holdback or residual
• Names, addresses and SINs of beneficiaries receiving non-cash property

If the deceased had a GST/HST number, Form GST352 is also needed.

Common problems and what to do next

A late T3 return may attract a separate penalty of $25 per day, with a minimum of $100 and a maximum of $2,500, even when no balance is owing. Filing on time also keeps the certificate process moving, since CRA does not issue the certificate unless the required returns are filed and assessed.

The certificate is generally not issued if the estate cannot cover all tax, interest and penalties owing. Also, a certificate covers only property controlled up to the request date, so if new assets are found later you must obtain another one before distributing them.

• Confirm which T3 years the estate must file and the year-end for each
• File the T3 returns and wait for the notices of assessment
• Pay or arrange security for all amounts owing
• Gather the will, proof of status and the asset list
• Submit Form TX19 (and GST352 if there is a GST/HST number)
• Hold back enough property until the certificate arrives

If the estate has several T3 years or a mix of income sources, a lawyer or accountant can help you sequence the filings and the request.

Frequently asked questions