A clearance certificate is a document from Canada Revenue Agency (CRA) stating that the deceased owes no taxes under the Income Tax Act and assures the executor that the taxman will not pursue the estate for unpaid taxes.
Anyone acting in the capacity of executor or trustee would be wise to consider getting one of these certificates in order to protect themselves from personal liability.
If an executor distributes assets to the beneficiaries of an estate without having one, the executor may be personally responsible for any unpaid taxes of the deceased, including interest.
If CRA deems that the deceased person owes taxes, the agency will send the bill to the executor or trustee, who will then be on the hook for those taxes.
The executor or trustee then must go back to the beneficiaries and ask for the money back in order to pay off CRA. The beneficiaries can ignore the request because they are not liable.
All executors and trustees need to be aware of all assets owned by the deceased.
Let’s say the deceased had a RRIF worth $300,000 at death. Now suppose that the executor or trustee did not know about it and the proceeds of the RRIF were paid to a designated beneficiary.
If the estate was the designated beneficiary, all is fine. If the designated beneficiary was a person, they would have received the proceeds and would not be responsible for the $100,000 plus taxes owing to CRA; the executor would be.
It can also help in cases where the heirs are siblings who don’t get along.
For example, an adult child who is both executor and beneficiary might distribute assets among his siblings, then find out taxes are due. He or she might have difficulty recovering monies from estranged siblings and thus be personally liable for the unpaid taxes.
It’s difficult for an executor to know for sure if all the assets of the deceased are clearly spelled out in the will and that there aren’t other, unknown assets associated with the deceased.
Registered financial products are a good example. RRSP’s and RRIF’s are subject to tax when they are paid out. The executor may have assumed that any registered product would automatically go to the estate which is often the case.
They can also be paid to a named beneficiary. CRA only considers the estate to be responsible for all taxes and the executor may remain unaware of the situation until the tax bill arrives.
Insurance policy pay outs and tax free savings accounts, of course, are not a problem because no tax is due on these.
One way for the executor or trustee to find out if there are any taxes owing on the estate is to apply for a Clearance Certificate. To obtain one, you must apply to CRA. The application is provided online click here......Clearance Certificate
Obtaining a certificate does not cost anything but getting processed and returned could take anywhere from 6 to 18 months.
Make sure that all of the necessary tax returns have been filed and that the deceased’s final notice of assessment has been received before applying.
with all matters financial it’s best to seek guidance from a financial adviser