Tax Clearance Certificates: Canadian Tax Lawyer Guidance

Introduction: What is a Tax Clearance Certificate?

David J Rotfleisch, CPA, JD is the founding tax lawyer of Taxpage.com and Rotfleisch & Samulovitch P.C., a Toronto-based boutique tax law corporate law firm.

A tax clearance certificate is a document that the Canada Revenue Agency issues to the legal representative of a taxpayer, including a person, estate, trust or corporation, declaring that the income tax owing by the taxpayer and applicable interest and penalties have been paid. A tax clearance certificate is issued by the CRA pursuant to subsection 159(2) of the Income Tax Act.

For the purpose of subsection 159(2) of the Income Tax Act, a legal representative of a taxpayer means a "trustee in bankruptcy, an assignee, or liquidator [..] a trustee, an heir, an administrator, an executor [..] or any other like person, administering, winding up, controlling or otherwise dealing in a representative or fiduciary capacity with the property that belongs to [..] the taxpayer or the taxpayer's estate" (Income Tax Act, Subsection 248(1)). In context of an estate, where the deceased person has a Will, the legal representative is generally referred to as the executor or estate trustee. However, where the deceased person died intestate — that is, without a Will — the legal representative is referred to as the administrator of the estate.

What is the Purpose of a Tax Clearance Certificate?

A clearance certificate serves various purposes. First, a tax clearance certificate confirms the amounts for which the deceased taxpayer is liable, at or before the time of distribution of the tax clearance certificate, have been paid. Second, a tax clearance certificate provides the legal representative with protection from potential tax liability that may arise during his or her capacity as a legal representative. In this context, a legal representative could potentially become liable for the deceased taxpayer's unpaid amounts including income tax, interest, penalties, outstanding Canada Pension Plan contributions and employment insurance premium. Third, a tax clearance certificate allows the legal representative of the estate to distribute assets to the listed beneficiaries while reliving the legal representative of liability for amounts owed by the deceased and/or his or her estate to the Canada Revenue Agency. However, a tax clearance certificate does not prevent the Canada Revenue Agency from issuing a notice of reassessment against the deceased person and his or her estate after the assets have been distributed.

Determining if and When a Tax Clearance Certificate is Required

Under subsection 159(2) of the Income Tax Act a legal representative must obtain a tax clearance certificate from the Canada Revenue Agency prior to distributing "any property in the possession or control of the legal representative". Where a legal representative of an estate distributes assets of an estate without having obtained a tax clearance certificate and where it is subsequently determined that the estate and/or the deceased person have an income tax debt, the legal representative may be held personally liable to repay that debt, to the extent of the value of the estate assets that were distributed.

However, a legal representative may distribute assets of the estate without obtaining a tax clearance certificate where the estate continues to exist to pay income to the beneficiaries. In addition, a legal representative may distribute assets, without obtaining a tax clearance certificate, where a corporation's assets and liabilities are rolled over into another corporation. Further, a legal representative does not need to obtain a tax clearance certificate to distribute assets where there are sufficient funds remaining in the estate or corporation to pay all income tax liability, including interest and penalties, owing to the CRA.

Before applying for a tax clearance certificate, a legal representative should (1) notify the CRA of the death of the individual; (2) ensure that the income tax returns for the deceased individual and the estate are filed; (3) obtain the applicable notices of tax assessment and notices of reassessment; and (4) ensure that all amounts owing including income tax, interest and penalties are paid to the Canada Revenue Agency.

An Interim Tax Clearance Certificate and/or A Final Tax Clearance Certificate

A legal representative may apply for an interim tax clearance certificate (to the taxpayer's date of death) and/or a final tax clearance certificate (to the date of asset distribution).

Legal representatives who distribute assets, prior to receiving the final tax clearance certificate, should retain a reserve of sufficient value to pay the tax liabilities of the deceased person and his or her estate and to minimize any assumed personal liability for making interim distributions.

Where the legal representative is ready to carry out the winding up of the corporation and the distribution of the remaining assets to the estate beneficiaries, he or she (the legal representative) must calculate the income earned and distribute the remaining assets promptly upon receipt of the final tax clearance certificate. Income earned by the estate between the date indicated on the tax clearance certificate application and the time when the tax clearance certificate is received by the legal representative is considered, for income tax purposes, as income earned by the legal representative in her or her capacity as agent of the estate beneficiaries.

How to Obtain a Tax Clearance Certificate?

For an individual or a trust, the legal representative must provide the Canada Revenue Agency with the following:

• A complete "TX19, Asking for a Clearance Certificate" form;
• A complete "AUT-01, Authorize a Representative for Access by Phone and Mail" form;
• A detailed list of the assets that the deceased owned on the date of his or her death;
• A copy of one of the following documents: (1) the deceased person's Will; (2) where the deceased has died intestate - that is, without a Will - a copy of the documents appointing the legal representative as administrator of the estate; and (3) a copy of a trust agreement or document, in context of a living trust; and
• Any of the following information and documents, where applicable:
  • Documents confirming the legal representative of the estate or trust;
  • Schedule 3, showing the capital gains or losses from the final income tax returns of the deceased person;
  • A complete list of all the assets transferred to the trust including, the adjusted cost base and the fair market value of those assets;
  • A statement of how the legal representative intends to distribute any residual amounts or property; and
  • The names, addresses, social insurance numbers or account numbers of any beneficiaries of property other than cash.

In context of a corporation, the legal representative must provide the CRA with the following:

• A complete "TX19, Asking for a Clearance Certificate" form;
• A complete "AUT-01, Authorize a Representative for Access by Phone and Mail" form;
• A list of the resolutions of the directors and resolutions of the shareholders confirming the intention to dissolve the corporation and the expected date of dissolution;
• A list of all the assets distributed prior to the date appearing on the clearance certificate application, the adjusted cost base and the fair market value of those assets; and
• A statement explaining how the corporation's remaining assets will be distributed on the expected date of dissolution.

A completed "TX19, Asking for a Clearance Certificate" or "GST352, Application for Clearance Certificate" form may be forwarded to the Canada Revenue Agency by mail, fax or online through the taxpayer's My Account or the corporation's My Business Account.

The Goods and Services Tax/Harmonized Sales Tax (GST/HST) Clearance Certificate

Where a deceased or dissolved taxpayer collected and remitted GST/HST, an additional GST/HST clearance certificate is required. Pursuant to section 270 of the Excise Tax Act, a legal representative of an estate or a corporation must apply for a GST/HST clearance certificate declaring that all GST/HST outstanding debt has been satisfied prior to the distribution of the taxpayer's assets. According to the Canada Revenue Agency's Information Circular IC82-6R11, a complete "GST352, Application for Clearance Certificate" form must be provided to the Canada Revenue Agency before a GST/HST clearance certificate is issued.

Issuing a Tax Clearance Certificate

Pursuant to the Canada Revenue Agency's Information Circular IC82-6R11, a tax clearance certificate will be issued on "Form TX21, Clearance Certificate" where (a) the applicable income tax returns have been filed and assessed, and (b) amounts for which the taxpayer is liable for have been received or secured.

The Canada Revenue Agency may decide to not issue a tax clearance certificate where any of the above-listed information or documents are not provided and if the applicable taxes, for which the estate or trust is liable, are not filed and/or remains unpaid. According to the Canada Revenue Agency's Information Circular IC82-6R11, a tax clearance certificate may not be issued where there is "an indication that the actual distribution will not take place as soon as possible" once the Canada Revenue Agency issues the clearance certificate.

A tax clearance certificate ensures that the legal representative does not overlook his or her obligations to file the income tax returns on behalf of the estate. However, a tax clearance certificate application may trigger the CRA to conduct a tax audit of the estate or the corporation's tax affairs before issuing the tax clearance certificate. In addition, a tax clearance certificate application may shed light on errors and/or omissions in past filings of the deceased or dissolved taxpayer. Such errors and/or omissions may be corrected through the CRA's Voluntary Disclosure Program (VDP).

David J Rotfleisch, CPA, JD is the founding tax lawyer of Taxpage.com and Rotfleisch & Samulovitch P.C., a Toronto-based boutique tax law corporate law firm and is a Certified Specialist in Taxation Law who has completed the CICA in-depth tax planning course. He appears regularly in print, radio and TV and blogs extensively.

With over 30 years of experience as both a lawyer and chartered professional accountant, he has helped start-up businesses, cryptocurrency traders, resident and non-resident business owners and corporations with their tax planning, with will and estate planning, voluntary disclosures and tax dispute resolution including tax audit representation and tax litigation. Visit www.Taxpage.com and email David at david@taxpage.com. This article is an abridged version published on Mondaq.com.