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Sunday, December 15, 2019

Can an executor distribute an estate before getting a Tax Clearance Certificate?

This post originally appeared on this blog in 2010. Since then, the original post has filled with comments beyond capacity and the system doesn't let me reply to them (who would have thought capacity for 200 comments wouldn't have been enough space?). I'm posting it again here, with several updates, so that readers can once again post on the thread.

An executor may wait 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. It protects the executor. Unfortunately, getting the Clearance Certificate takes months.

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.

If the interim distribution is just a small bit of the estate, the executor doesn't have to create an accounting or ask for a Release from the beneficiaries. However, if as is usually the case, the interim distribution is the bulk of the estate, then the executor will produce a legal accounting of the estate that details all of his or her financial transactions on behalf of the estate. The accounting 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. Remember that the taxes for a deceased in the year of death might not be the same as the last few years before death, depending on the assets. For example, there might be taxes on a RRIF to take into account in the year of death that wouldn't have been applicable in earlier years.

Executors approach interim distributions in different ways. Some don't see why they shouldn't make an interim distribution since their liability is covered by the amount held back. They would just as soon keep everyone happy and get rid of the responsibility of handling the assets. Then there are other executors who won't make an interim distribution. They have their reasons, I'm sure, but if the executor takes too long without good reason for not making an interim distribution (I'm talking years here, not months) then the beneficiaries may ask the court to force an interim distribution. I have noticed a number of cases in which the beneficiaries were successful in this application.


4 comments:

  1. Lynne,

    Excellent update. Am I correct, that Probate would have to be completed for all of this to come together? A beneficiary is withholding Estate Funds. Also, there is an Estate property that the beneficiary resides in. Lawyers have done everything to stop me from selling it. A lawyer indicated that I had a legal right to sell it. He ignored my instructions and deceived me in the process. The value of the property has increased during 15 years or so. I did make an Interim Payment in good faith. As it turns out, it did not help to resolve and settle my Estate matter. TBC.

    Webeye

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    Replies
    1. Your story continues to amaze me. What a mess.

      To answer your question, an estate does have to be wrapped up in order to get a final tax clearance certificate. However, when estate administration takes a number of years, there might be an interim clearance certificate issued for a specified period of time. In other words, CRA would confirm there were no more taxes owing for certain tax years.

      Most estates are wrapped up in a timely enough manner that only one clearance certificate is needed or requested. Your situation is another matter.

      Lynne

      Delete
  2. Good afternoon Lynne,

    My husband recently passed away and there is no will. He did have a personal line of credit issued only in his name and there is money owing on it with a different financial institution. Our primary financial institution has all accounts in joint names and any investments have me listed as the beneficiary or vice versa. The financial institution with his line of credit say I MUST open an Estate account with our primary institution. Am I required to do this since he has no assets in his name only and will i be responsible for the debt since it was in his name only? Thank you so much!

    ReplyDelete
  3. @ Savvy
    The following might not directly answer your question but it might be of help to you and others.
    What is a Wife Entitled to if her Husband Dies Without a Will?
    In Ontario, the Succession Law Reform Act and the Family Law Act intersect to create rights for the surviving spouse (husband or wife) of the deceased. https://www.ontario.ca/laws/statute/90s26

    The Family Law Act https://www.ontario.ca/laws/statute/90f03 defines a spouse as a married person, and the term spouse in this act does not include co-habiting parties or common law partners. Under this Act, a married spouse is entitled to receive one-half of the amount by which the deceased’s net family assets exceed the net family assets of the surviving spouse. This “equalization payment” ensures that the surviving spouse has the opportunity to share equally in any increase in the value of the property that the couple earned over their marriage. The surviving married spouse must elect to accept this payment OR to take what they are entitled to under Part II of the Succession Law Reform Act.

    Under the Family Law Act the married spouse also has the right to remain in possession of the matrimonial home for a period of 60 days following the death of their spouse, on a rent-free basis.

    On the other hand, the Succession Law Reform Act gives all spouses (married and common law) whose spouse dies without having made a valid will a preferential share, being the right to receive the first $200,000.00 of assets from their deceased spouse’s estate, and in addition they have the right to share in the balance of their deceased husband’s estate as set out below. The surviving spouse must choose between the entitlement to equalization and the property rights that they would receive under the Succession Law Reform Act.

    Webeye

    ReplyDelete

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