2014-0524971I7 Distributing Estate Property When Estate is Liable

Principal Issues: Whether an executor should pay the estate's liability under the Act before distributing property to the beneficiary of the estate?

Position: Yes.

Reasons: Subsection 159(2) requires a legal representative (an executor) to pay, or provide security for, an estate’s, and the executor’s liability incurred as a legal representative before distributing estate property. Failure to do so results in the executor being personally liable.

Author: Frank, Lindsay
Section: S. 159(2) & (3).

                                                                                                                                   August 8, 2014

      London-Windsor Tax Services Office                                                                   HEADQUARTERS
                                                                                                                                   Income Tax Rulings
                                                                                                                                   Directorate
      Attention: Laura Harris                                                                                         Lindsay Frank
                      Taxpayer Services Section                                                                   (613) 960-7919

                                                                                                                                   2014-052497

      Distributing Estate Property When Estate has a Tax Liability

We are replying to your inquiry concerning the consequences that an executor of an estate might face, when distributing the estate’s property while the estate is indebted for amounts under the Income Tax Act (the “Act”). 

In the letter that you forwarded to us, the executor of an estate indicated that the estate’s property consists solely of a registered education savings plan (“RESP”), which has been transferred to the estate for distribution to the estate’s beneficiary.  The letter also stated that the estate is indebted for amounts under the Act and has no other assets with which to pay the liability.  The executor has asked you what the effect would be, if he were to distribute the funds in the RESP to the beneficiary, without paying the estate’s income tax liability.  

Subsection 159(2) of the Act requires a legal representative, which includes an executor, to obtain a clearance certificate before distributing any property under the legal representative’s control.  The certificate will attest that all amounts, payable by the taxpayer and the legal representative, acting in that capacity, have either been paid or the Minister has accepted security for the payment of such amounts.  In the context of an executor, subsection 159(3) provides that an executor is personally liable for these amounts if the executor distributes the estate’s property, without first obtaining a clearance certificate.  If the liability exceeds the value of the property distributed, the executor’s liability is limited to the value of the property distributed. 

To summarize, the executor is required to pay the estate’s income tax liability before distributing any of the estate’s property under his control.  Accordingly, if the executor distributes the property in the RESP without first obtaining a clearance certificate, subsection 159(3) would hold the executor personally liable for the payment of the tax liability, to the extent of the value of the funds in the RESP.

Should you have any questions or require additional information, please do not hesitate to contact Lindsay Frank at the number provided above.

Terry Young, CPA, CA
Manager, Administrative Law Section
International Division
Income Tax Rulings Directorate

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