Distributing House Sale Proceeds in Ontario: Is a CRA Clearance Certificate Needed?

The house has sold, the money is sitting in the estate account, and the beneficiaries want their shares. As the estate trustee, it is natural to want to close things out. But paying out too early can leave you personally liable for unpaid tax, and the protection for unknown creditors applies only if you advertise for creditors' claims before you distribute and had no notice of the claim at the time of distribution.

This article explains the main tax and legal checks to make before you distribute house sale proceeds in Ontario. It is general information, not advice for your situation. Every estate is different, so a lawyer or accountant can confirm how this applies to you.

Why the house sale can create a tax problem

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. The inclusion rate for capital gains is one-half.

Where 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. Only page 1 of the form is needed if the property was the principal residence for every year owned, or every year but one.

If the owner was not a resident of Canada for the whole time they owned the property, the period of non-residence may reduce or eliminate the exemption, and CRA asks them to contact it.

The spousal rollover exception

If the property passes to a spouse or common-law partner, or to a spousal trust, the gain is deferred as long as the property becomes locked in for them no later than 36 months after the date of death. Tax is then postponed until the survivor sells or is deemed to sell.

• The legal representative can elect out of the automatic rollover on the final return, property by property. If they do, the cost to the spouse, common-law partner or spousal trust is the fair market value at death.
• When the principal residence passes to a spouse or common-law partner, no principal residence designation for the period before death is required on the final return.

Whether the rollover applies, or whether electing out makes sense, depends on the facts. An accountant can run the numbers.

What a clearance certificate is and how to ask for one

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

The reason it matters is personal exposure. 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. That means your own money could be on the line, not just the estate's.

Other limits on paying out the proceeds

A dependant's support application generally cannot be made more than six months after the grant of the certificate, but the court may allow a later application for any part of the estate still undistributed.

Separately, the Estate Information Return must be filed within 180 calendar days after the certificate is issued. If new assets turn up or an estimated value proves wrong, an amended return is due within 60 calendar days.

Protections for trustees

If you advertise for creditors' claims and then distribute, you are not liable to a creditor whose claim you had no notice of at the time of distribution. This protects you against unknown creditors, but it does not replace the CRA clearance certificate.

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 discretionary remedy after the fact, so it is not something to rely on in advance.

A practical approach: hold back, then pay out

• Confirm who is entitled to the proceeds and whether any waiting period applies to this estate.
• Have the final return prepared, reporting the home on Schedule 3 and Form T1255 where it applies.
• Ask CRA for the clearance certificate on Form TX19, with GST352 if the deceased had a GST/HST number.
• Advertise for creditors and keep a record of the notice.
• Check whether any spouse or dependant may bring a claim.
• Diarize the Estate Information Return deadline.
• Consider an interim payment of only part of the proceeds, keeping a reserve until the certificate arrives.
• Keep clear accounts of every payment made.

How large a reserve to keep, and whether an interim payment is wise, depends on the estate. A lawyer or accountant can help you decide before you pay anyone.

Frequently asked questions