What Happens If a Deceased Person Owes Taxes in Canada?

Finding out that a family member owed money to the Canada Revenue Agency can be unsettling, especially while you are grieving. The first question is usually whether you now owe it personally.

This article explains how the debt is dealt with, where the legal representative's responsibility comes in, and what can happen if there is not enough in the estate. It is general information, and the answer for your family depends on the facts.

How the debt is dealt with

Tax owing at death is worked out through the deceased's returns. The legal representative files them, and a final T1 return must be filed for every person who dies. If the person did not file a T1 for any year before the year of death, those prior-year returns must also be filed.

The legal representative is the person who has to see that returns are filed and that tax is paid or secured before assets go out the door.

Are heirs or family members liable?

Whether a particular relative is personally responsible depends on the facts and is worth confirming with a lawyer. The clearest exposure described in the rules is for the legal representative. Before distributing property, a legal representative must obtain a clearance certificate from the Minister. If they distribute without one, they are personally liable for unpaid amounts up to the value of the property distributed, and the Minister may assess them at any time.

After a certificate is issued, liability for unpaid amounts rests with the estate or those who received the assets, and assets discovered later need another certificate. That is why beneficiaries are often asked to accept that a share may be held back until the CRA has finished.

How to get a clearance certificate

Request a clearance certificate only after returns are filed and assessed and taxes are paid or secured, and do not submit the request together with the returns. The CRA sends an acknowledgement within 45 days, and the assessment can take up to 120 days.

Build that wait into your timeline. It can feel long when beneficiaries are waiting, but distributing early is the riskier choice for the person in charge of the estate.

Penalties, interest and possible relief

Delays make the debt larger. The late-filing penalty on the final return is 5% of the balance owing plus 1% for each full month late, to a maximum of 12 months, and the CRA charges compound daily interest from the day after the due date until paid. Late T3 returns can attract an alternative penalty of $25 per day (minimum $100, maximum $2,500) even with no balance owing.

The CRA can cancel or waive penalties and interest, but not the tax itself, for extraordinary circumstances (including a death in the immediate family, serious illness or serious emotional or mental distress), CRA delays or errors, or financial hardship. Meeting the criteria does not guarantee relief. Relief covers penalties for years ending within the last 10 calendar years before the year of the request, and requests can be made on Form RC4288 or online. The CRA aims to decide within 180 calendar days.

If the estate is short, and what to do next

If the estate does not have enough to cover the tax and other debts, what happens next depends on the assets, the debts and the will. How competing creditors are ranked and what a legal representative should do in that situation are questions for a lawyer before any payments are made.

• Notify the CRA of the death as soon as possible, by phone or Form RC4111.
• Return any CPP and OAS payments issued after the month of death; ask the bank to return direct deposits or send a cheque to the Receiver General for Canada.
• Return benefit payments issued after death, such as the Canada Groceries and Essentials Benefit, as directed by the CRA.
• Find out whether all prior-year returns were filed.
• Do not distribute property until you have a clearance certificate.
• Get legal or accounting advice early if the numbers look larger than the estate.

Frequently asked questions