Can an Executor Make a Partial Distribution Before Clearance in Canada?

Beneficiaries often want their share soon after the funeral. As executor, you may feel pressure to pay something out early, particularly when the estate looks like it has plenty of assets.

The difficulty is that the tax rules put personal responsibility on you if the estate owes tax and you have already paid property out. This article explains how interim payments fit with a CRA clearance certificate, what a holdback is, and what to check before you pay anyone.

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

Why the certificate rule matters to you personally

A CRA clearance certificate confirms that an estate 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 that certificate, applied for in the prescribed form.

If you distribute without it, you are personally liable for the unpaid amounts, limited to the value of the property you distributed, and the Minister may assess you for that amount at any time. CRA also says the liability applies whether the assessment comes before or after the actual distribution, and that interest accrues.

A legal representative is typically the executor named in the will. In Quebec it is the person registered as liquidator, and where there is no will or executor it may be an administrator appointed under provincial or territorial law. Whether someone counts as a legal representative depends on the facts.

When a partial distribution can work

CRA says a representative does not need to obtain a certificate before each distribution if enough property remains to cover any liability. That is the basis for a partial distribution with a holdback: you pay out part of the estate and keep enough back to cover what could still be owed.

Two cautions apply. First, size does not remove the rule: the statute applies to any legal representative who distributes property, and a small estate is not automatically exempt. Second, if the estate cannot cover all the tax, interest and penalties owing, CRA generally does not issue the certificate. An interim payment that leaves the estate short can therefore leave you exposed and block clearance.

There is no set formula for how much to keep back. It is a judgement based on the facts of the estate, and it is worth working through with a lawyer or accountant before you pay anything.

What counts as a distribution

People often assume a distribution happens when a beneficiary becomes entitled under the will. That is not the test.

What your clearance request should show

For an estate, the request is made on Form TX19, with Form GST352 as well if there is a GST/HST number. If you are planning a holdback, the paperwork needs to reflect it. These are among the items CRA lists:

• The signed will with any codicils, renunciations, disclaimers and probate documents, or the administrator appointment if there is no will.
• Proof that you are the 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 of non-cash property.

Timing matters. CRA does not issue the certificate unless the required returns are filed and assessed and all amounts are paid or secured, and the request should not be submitted with the tax returns because that delays their assessment. Processing can take time: CRA aims to acknowledge the request within 45 days, and assessment can take up to 120 days if all documents are provided.

A certificate covers only property you controlled up to the request date. If new assets turn up later, you must obtain another certificate before distributing them.

What to do next

If beneficiaries are pressing for money, a clear plan usually calms things more than a quick payment does.

• Confirm in writing who the legal representative is, and have your proof of status ready.
• List every return that must be filed, including the final return and estate T3 returns, and note the due dates.
• Estimate what could still be owed, and keep enough in the estate to cover it before any interim payment.
• Get advice from a lawyer or accountant on the holdback amount before you pay anyone.
• Explain to beneficiaries that you are personally exposed until clearance, and that any interim payment is a partial one.
• Keep a record of every payment and the date you gave up control of the property.

Frequently asked questions