Executor Holdback for Estate Tax in Canada: How Much to Reserve

Once the assets are gathered, most executors want to pay beneficiaries something and keep the rest back until CRA clears the estate. The practical question is how much to keep.

No official figure answers that. What you can do is list the sources of tax that could still be owing, estimate each one, and add a cushion for interest, penalties and surprises. This article walks through that approach in plain terms.

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

Why there is no single number

CRA allows a representative to skip a certificate before each distribution if enough property remains to cover any liability. It does not set out a formula for what is enough. What it asks for in a clearance request is a statement of distribution to date and the proposed distribution of any holdback or residual.

So the amount is your judgement, ideally made with an accountant who knows the estate. Keep in mind the other side of the coin: if the estate cannot cover all tax, interest and penalties owing, the certificate is generally not issued. Under-reserving can leave you personally liable for distributed property, up to its value.

The building blocks of an estimate

Start with each return and account that could produce a balance, then add up your best estimate.

Whether payroll source deductions or other program accounts are covered is not clear from CRA's published guidance, so check with CRA if the deceased ran a business.

Allowing for the unknown

Estimates can be wrong. CRA may need to audit before it assesses a clearance request, and any reassessments you have asked for must be received before you apply. The right allowance for these uncertainties depends on the estate's facts, such as complex investments, business income or missing records, and is best discussed with a lawyer or accountant.

The holdback also has a time dimension. 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. A graduated rate estate can only exist for up to 36 months after death. A longer wait to clearance means more time for interest to build, so reserve with the likely timeline in mind.

If assets surface after clearance, you must obtain a further certificate before distributing them.

Alternatives to holding back cash

A certificate can also issue where the Minister has accepted security for payment, so unpaid tax can be secured instead of paid. The form and amount of acceptable security are not set out in the CRA guidance, so contact CRA first.

A legal representative may also elect to pay certain deferred tax, for example on deemed dispositions at death, in up to 10 equal annual instalments if acceptable security is given, with interest at the prescribed rate while payment is deferred. For a Return for Rights or Things, part of the tax may be deferred by filing Form T2075 and providing acceptable security. These choices change how much cash you need on hand, so get advice before electing.

What to do next

• List every return still to be filed or assessed, with due dates.
• Ask an accountant to estimate tax on each, including any tax triggered at death.
• Add estimated interest and any penalties that might apply.
• Check whether the deceased had a GST/HST number or a business.
• Decide whether security or instalments are worth raising with CRA.
• Write down your reasoning for the holdback so you can explain it to beneficiaries and include it in your request.

If the numbers are unclear, a lawyer or accountant can help you set the reserve before you pay anything out.

Frequently asked questions