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Tuesday, January 7, 2020

Court says that beneficiaries don't have to indemnify executor who pays them before paying taxes

What if you were the executor of an estate, and when it came time to distribute the estate, you held back what you thought was enough money to pay the deceased's tax, but it wasn't enough? What if you then paid all the extra tax yourself, and planned to get the beneficiaries who received the estate to repay you for their shares of the tax? Would they have to repay you?

This question was recently the subject of a court decision in Alberta. In the Muth Estate, the executor  distributed the estate to the beneficiaries before receiving a Tax Clearance Certificate. This is not an unusual situation at all. The executor took the very reasonable step of consulting an accountant for an estimate of how much to hold back from the estate for outstanding income tax. Based on that advice, she held back $25,000 and paid out the rest of the estate.

As it turns out, the outstanding tax was about $50,000. In order to avoid penalties and interest from CRA, the executor paid the whole tax bill herself from her personal funds. She then turned to the beneficiaries of the estate and asked them each to repay some of the money to cover the tax. They refused.

The executor then turned to the court, hoping to force the beneficiaries to pay their shares. She argued that they were obligated to indemnify her for their proportionate share of the taxes.

The court did not agree. The judge said that the payment of the estate without paying taxes first was a breach of the executor's duty as a trustee. A beneficiary is not required to indemnify the executor where the beneficiary didn't request or instigate the breach. The obligation is all on the executor.

Most executors know that they will run into trouble if they pay out an estate without paying taxes first (or getting a Tax Clearance Certificate from CRA). Most of the time, executors are under pressure by the beneficiaries to hurry up and pay them their money. The Muth Estate shows exactly what can happen if the executor makes a mistake. The beneficiaries can't be forced to repay an executor when they didn't cause the error. In this case, the outcome seems a bit unfair because the executor did consult an accountant and rely on his advice. Whether there will be a further lawsuit involving the accountant remains to be seen.

This case makes perfect sense to me and I cannot see how a court would reach a different conclusion. However, I expect that this case won't make it any easier for beneficiaries who are trying to persuade a reluctant executor to make an interim distribution. Executors should exercise caution when thinking about paying out the estate before that all-important Tax Clearance Certificate has arrived.

3 comments:

  1. Thanks for the reminder and highlighting this recent case!

    ReplyDelete
  2. Re-my ongoing Estate Matter

    I am in a situation where a beneficiary (sibling) is withholding Estate Funds where Probate Tax has yet to be paid. The lawyers involved know this, but they are trying to be'creative', if you get my drift.
    TBC at a higher level.

    Webeye

    ReplyDelete
  3. https://www.moneysense.ca/save/what-to-do-if-you-havent-filed-an-income-tax-return/

    I post this because I was in a health situation that prevented me from filing tax returns for several years. This occured for personal returns and also for an Estate returns. I had to pay penalties for both. Re the Estate Matter. The other side thought that they had a'gotcha moment' and thought that I had billed the Estate for the penalties. I quickly deflated their 'gottcha moment'. It is very important for Executors and even Benficiaries to look after all taxes owing. This includes Probate Tax.

    Webeye

    ReplyDelete

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