Last month, we discussed some of the considerations that the executor or administrator of an estate (also known as the “personal representative” of the estate) must attend to in dealing with creditors of the estate. This month we will focus on a related topic – dealing with taxes on behalf of a deceased person’s estate.
The personal representative of an estate must file a terminal tax return for the deceased (a T1 Return) in addition to any outstanding tax returns not filed by the deceased before death. There are deadlines for filing these tax returns. We encourage all personal representatives to promptly retain a Chartered Professional Accountant (“CPA”) who is experienced in dealing with the taxation of estates to advise regarding these returns and assist with filing them.
A CPA with the appropriate experience can also advise regarding various measures that may be available to achieve tax efficiencies for the estate. For example, for 36 months after the date of death, an estate may be able to qualify as a Graduated Rate Estate (“GRE”). A GRE may be taxed at a rate lower than the flat rate generally applicable to trusts.
Other topics to discuss with a CPA include whether it would be advantageous to file more than one income tax return and whether other applicable elections should be made on behalf of the estate to achieve tax efficiency.
If any RRSPs or RRIFs are named to beneficiaries other than the estate, a personal representative should also ask a CPA about addressing any tax burden that might arise, including the possibility of a tax-deferred rollover if one is available.
The Income Tax Act requires that a personal representative of an estate must not distribute any property from the estate to any beneficiaries until the personal representative has obtained a clearance certificate from Canada Revenue Agency (the “CRA”).
The CRA issues clearance certificates to certify that all tax and other such liabilities (interest, penalties, outstanding CPP contributions, UI premiums) have been paid or sufficiently secured. A personal representative of an estate who distributes estate assets before obtaining a clearance certificate can be personally liable for any outstanding taxes, interest, or penalties owed by the estate.
Non-Resident Beneficiaries and S.116 Clearance Certificates
If a beneficiary of an estate is a non-resident of Canada, the personal representative of the estate should consult with a Chartered Professional Accountant about that fact before making a distribution to that beneficiary.
It is important for the personal representative to ensure compliance with all the requirements of the Income Tax Act. The personal representative making a distribution to a non-resident beneficiary may be required to report any distribution to such a beneficiary within 10 days from the date the distribution is made. The personal representative may also be required to withhold and remit a percentage of the gross distribution or obtain a clearance certificate in accordance with Section 116 of the Income Tax Act. Failure to do so when required can result in significant penalties.
It is also a personal representative’s responsibility to find out if the deceased or the estate is liable for any tax in any other jurisdictions. If there is a possibility that the deceased or the estate may have such liabilities, the personal representative should retain appropriate legal and tax advice in the relevant jurisdictions.
As we have discussed, a failure by a personal representative of an estate to properly address taxes and tax reporting can result in personal liability for the personal representative. Obtaining the guidance and assistance of a CPA experienced in working with estates can be extremely valuable in helping the personal representative successfully navigate the tax landscape. By doing so personal representatives can provide protection for both themselves and the estates they act for.
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