An individual may deal with the business, property or estate of another person as a representative. That business, property or estate may owe amounts to the Canada Revenue Agency (CRA). The amounts can include federal income taxes, provincial and territorial taxes administered by the CRA and outstanding Canada Pension Plan and Employment Insurance premiums, including any interest and penalties. If the legal representative distributes property of the represented person (or business or estate), the representative can be held liable for the unpaid amounts owing to the CRA under subsection 159(3) of the Income Tax Act. Subsection 159(2) requires that legal representatives obtain a clearance certificate from the CRA. A clearance certificate certifies that all amounts for which the taxpayer is, or can reasonably be expected to become, liable under the Income Tax Act before the time of distribution have been paid or that the CRA has accepted security for payment.
Perhaps the most common example of when a clearance certificate is necessary is by an estate executor before distributing any of the estate’s property pursuant to the deceased’s will. If the deceased owed personal income tax arrears and the estate executor distributed property without a clearance certificate, the estate executor may be held liable for the deceased’s unpaid taxes plus interest.
The CRA’s position, for the purposes of section 159, is that a legal representative is: an assignee, a liquidator, a curator, a receiver of any kind, a trustee (not including a bankruptcy trustee), an heir, an administrator, an executor, a liquidator of a succession, a committee or any like person, administering, winding up, controlling or otherwise dealing in a representative or fiduciary capacity with the property that belongs, or belonged to, or that is or was held for the benefit of, the taxpayer or the taxpayer’s estate. Any person performing any of these roles ought to apply to the CRA for a clearance certificate before distributing any property.
How to ask for a Clearance Certificate?
In order to obtain a clearance certificate, you must complete Form TX19, “Asking for a Clearance Certificate” and send it to your regional tax services office. The CRA aims to respond to 80 percent of clearance certificate requests within 120 days.
If a legal representative does not get a clearance certificate prior to distributing property of a taxpayer and that taxpayer owed amounts to the CRA, the legal representative may be held personally liable for the amounts owing to the extent of the property transferred (ie, you cannot be assessed for an amount greater than the property transferred). The CRA can assess the legal representative at any time after the transfer; there is no time limit.
If you require a clearance certificate or believe you may require a clearance certificate, please contact one of our tax lawyers.