Executor Personal Liability for the Deceased's Tax Debt in Canada

Being named executor can bring an unwelcome worry: could you end up paying the deceased's tax bill from your own pocket? In Canada the answer depends largely on what you do with the estate's property.

This article explains where personal liability to the CRA comes from and the steps that commonly reduce the risk. It is general information, and a lawyer or accountant can confirm how it applies to your estate.

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

Where the liability comes from

Under s. 159(1) of the Income Tax Act, a legal representative is jointly and severally liable with the taxpayer for unpaid amounts, but only to the extent the representative controls the taxpayer's or estate's property, and for obligations relating to the representative's responsibilities.

So liability is tied to control of property. An executor who holds estate assets has more exposure than one who has properly paid the tax and passed assets on with the CRA's confirmation.

It also helps to know who reports what. The CRA treats the deceased as having sold all property just before death, and any resulting gain is reported by the deceased on the final return, not by the beneficiaries. As the person handling the estate, you are the one who needs to make sure that return is dealt with before assets are handed out.

The distribution trap

A legal representative must obtain a clearance certificate from the Minister before distributing property under their control, confirming amounts have been paid or security accepted. If you distribute without it, you are personally liable for those amounts up to the value of property distributed, and can be assessed at any time.

A certificate does not stop the CRA recovering unpaid tax later from an estate or beneficiaries. A new certificate is not needed before each distribution if enough property is retained to cover any potential liability.

Where tax bills come from on a death

• On death, the deceased is deemed to have disposed of capital property at fair market value, and the resulting tax is carried on the final return, not by an inheritance tax.
• An unmatured RRSP is generally included in full on the final return.
• A TFSA is treated as received at fair market value just before death, but no TFSA income is reported on the final return. If a surviving spouse or common-law partner is named successor holder, they become the holder and the deceased is not considered to have received an amount from the TFSA.
• Income the estate earns after death, and gains on property the estate sells, are reported on the estate's T3 return rather than the final return.
• A spouse or common-law partner rollover can defer tax on property passing to them, if conditions such as vesting within 36 months are met.

There are exceptions to these general rules. The rollover only applies to a spouse or common-law partner who was resident in Canada immediately before death, so a non-resident spouse does not qualify. The legal representative may also elect, property by property, that the rollover not apply, which can be useful to use the deceased's losses or lower rates on the final return. A gain on the deceased's home may be fully or partly exempt, but it must still be reported on Schedule 3 and designated on Form T1255.

These items can produce a large balance owing on the final return, which is why executors should understand them before assets leave the estate.

Penalties and interest

For a final return with a balance owing, the late-filing penalty is 5% of the balance plus 1% for each full month late, up to 12 months, and unpaid balances bear compound daily interest. The CRA may cancel penalties or interest for circumstances beyond your control.

A late T3 return can attract an alternative penalty of $25 per day (minimum $100, maximum $2,500) even with no balance owing. To delay payment on the final return, you must give the CRA acceptable security and complete Form T2075, and interest still accrues.

The legal representative may also file optional T1 returns, such as a Return for Rights or Things, which may reduce tax by allowing certain credits to be claimed more than once. They are not required.

What to do next

• Note the final return deadline: April 30 of the following year for a death from January 1 to October 31, or six months after death for a death from November 1 to December 31.
• Check for a business. The filing date can then be June 15 of the following year for a death from January 1 to December 15, or six months after death for a death from December 16 to December 31, and the payment date does not change.
• File the T3 return within 90 days of the trust's year-end.
• Request a clearance certificate on Form TX19 once the notices of assessment have been received, unless an exception applies, and do not distribute until it is issued on Form TX21. A new certificate is not needed before each distribution if enough property is retained to cover any potential liability.
• Keep records of values and decisions, including the fair market value of property on the date of death.
• Get advice before distributing if the estate is complex, since how these rules apply depends on your situation.

Frequently asked questions