Executor Personal Liability for Unpaid Estate Taxes in Canada

Executors often worry that handing out the estate too early will leave them paying the deceased's tax bill from their own pocket. The worry is reasonable, because the Income Tax Act does give the CRA a route to the representative personally.

This article explains when that can happen, what limits the exposure, and the practical steps that reduce the risk. It is general information, and a lawyer or accountant can look at your specific estate.

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

The basic rule on liability

Under the Income Tax Act, a legal representative is jointly and severally liable with the taxpayer for unpaid amounts. That liability applies only to the extent the representative controls the taxpayer's or estate's property, and for obligations relating to the representative's responsibilities.

In plain words, the exposure is tied to the property you hold and to your duties as executor, not to your own unrelated finances.

Much of the tax bill comes from the deemed disposition on death. A taxpayer is deemed to have disposed of each capital property immediately before death for proceeds equal to its fair market value, and the final return, not an inheritance tax, carries this tax. The gain is reported by the deceased on the final return, not by the beneficiaries. Income the estate earns after death is reported on the estate's T3 return instead.

There are exceptions. When property is transferred or distributed as a consequence of death to a spouse or common-law partner resident in Canada, the property is generally deemed disposed of at its adjusted cost base rather than fair market value, and the spouse takes it at that same amount. The rollover also applies to a qualifying spouse trust created by the will, but only if the property vests indefeasibly in the spouse or trust within 36 months after death, or a longer period the Minister allows on written application. A non-resident spouse does not qualify. The legal representative may also elect in the final return, property by property, that the rollover not apply.

Distributing too early

The biggest trap is distributing before the CRA is satisfied. A legal representative must obtain a clearance certificate before distributing property under their control. Without it, the representative is personally liable for those amounts to the extent of the value of the property distributed, and can be assessed at any time.

The certificate is requested on Form TX19 and issued on Form TX21. Even with one, the CRA can still recover unpaid tax later from an estate or beneficiaries.

Form TX19 should not be filed until the notices of assessment have been received, unless an exception applies. It can be submitted by mail, fax or the Submit Document feature in CRA portals, with attachments such as the will and a proposed distribution statement. A new certificate is not required before each distribution as long as enough property is retained to cover any potential liability.

Other costs that add to the bill

The CRA may cancel penalties or interest for circumstances beyond your control. It is worth asking about this if illness or other real obstacles caused a delay.

Other items can also affect what is owed on the final return. For an unmatured RRSP, the annuitant is treated as receiving the plan's full fair market value just before death, included on the final return. A refund of premiums paid to a qualifying survivor reduces the deceased's income and is taxed to the survivor unless transferred. A TFSA holder is treated as receiving the fair market value of the TFSA property immediately before death, but no TFSA income is reported 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.

Ways to reduce the risk

• File the final return on time: April 30 of the following year for a death from January 1 to October 31, or 6 months after death for a death from November 1 to December 31.
• If the deceased or a spouse or common-law partner living with them carried on a business, filing is due June 15 of the following year for deaths from January 1 to December 15, but the payment date does not change.
• File the T3 for income the estate earns after death, due 90 days after the trust's year-end.
• To delay payment of tax on the final return, give the CRA acceptable security and complete Form T2075; interest still accrues.
• Retain enough property to cover any potential liability if you distribute in stages.

What to do next

• List every return that may be due: final, T3 and any optional returns.
• Pay attention to the payment dates, which can differ from filing dates.
• Wait for the notices of assessment before requesting a clearance certificate.
• Hold off on distributions until you have the certificate.
• Keep records of every step you take as representative.
• Speak to a lawyer if tax owing is unclear, if the estate is short of cash, or if beneficiaries are pressing for early payment.

Frequently asked questions