As I mentioned in a recent post about tax clearance certificates (click here to read it), an executor usually waits for Canada Revenue Agency to send him or her a Tax Clearance Certificate before giving the beneficiaries their shares of the estate. This procedure arises from the fact that an executor is required by law to pay all debts and taxes before giving money to beneficiaries, and the Clearance Certificate is proof that there are no more taxes owing by the estate.
However, there is a process for an executor to give the beneficiaries most of their inheritance before getting the Clearance Certificate, a process known as an interim distribution.
Before an executor takes this step, consider the fact that if he or she pays the beneficiaries before paying Canada Revenue Agency, that executor will have to come up with the tax money, even if it is out of his or her own money. Once you've given the money out to the beneficiaries, it's pretty hard to get some of it back again to pay taxes.
To boil down a detailed process into a simple description, the idea of an interim distribution is to hold back enough money in the estate to pay future taxes, future expenses and any legal or accounting fees, and to distribute the rest to the beneficiaries. The executor will produce a legal accounting of the estate that details all of his or her financial transactions on behalf of the estate. It will also include a Statement of Proposed Distribution that shows how much of the estate the executor proposes to give out to the beneficiaries now, and how much is being held back for taxes and other expenses. The financial documents are given to the beneficiaries along with a Release document. If all beneficiaries agree and sign their Releases, then the executor can go ahead with the interim distribution.
How do you know how much to hold back for taxes? Obviously you must get this number correct. I have never proceeded with an interim distribution without working with a tax accountant who can estimate better than I can what taxes might be owing by the estate.
Most of the time, beneficiaries will pressure executors to make an interim distribution because it takes months to get a Tax Clearance Certificate. However, beneficiaries should understand that they cannot force an executor to make an interim distribution because it means the executor is assuming risk for the payment of estate taxes.
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