8 September 2010 External T.I. 2010-0376441E5 - Liability of Legal Representatives

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: Whether a legal representative may be liable as executor and trustee of an estate.

Position: Question of fact.

Reasons: All relevant documentation needs to be reviewed and all pertinent facts determined.

XXXXXXXXXX
									2010-037644
									Richard Aronoff
									613-941-7239
September 8, 2010

Dear XXXXXXXXXX :

Re: XXXXXXXXXX

This is in reply to your letters of April 27 and July 20, 2010 concerning questions about the possibility of you being held personally liable for unpaid income taxes as the sole executor and trustee of the above captioned estate. Your sister was named a co-executor in the will, but declined the appointment.

You state that you are the executor and trustee of the estate of your late mother and that the estate has a tax liability of approximately $XXXXXXXXXX . You further indicate that at the time of her death there were sufficient funds in various bank accounts and in a registered retirement income fund to pay the liability. However, two of the banks gave the funds on deposit to your sister purportedly pursuant to instructions from your mother, which instructions the banks had on file. The total withdrawals amounted to approximately $XXXXXXXXXX , which left the estate with approximately $XXXXXXXXXX .

Subsection 159(2) of the Income Tax Act requires a legal representative of a taxpayer who is responsible for administering, winding up, controlling, or otherwise dealing with the property, business, or estate of the taxpayer to obtain, prior to making a distribution of property over which that person has control, a clearance certificate. Such certificates verify that all amounts for which the taxpayer is liable, and for the payment of which that person is or may be liable in the capacity of responsible representative, have been paid or that acceptable security for payment has been provided. The definition of a "legal representative" is contained in subsection 248(1) and contemplates persons who are acting in a fiduciary or a representative capacity. Specifically included are trustees in bankruptcy, assignees, liquidators, curators, receivers of any kind, trustees, heirs, administrators, executors, committees, or any other like persons. It should be noted, however, that trustees in bankruptcy are excluded from the subsection 159(2) requirement to obtain a clearance certificate from the Minister prior to making a distribution.

Based on the facts you have presented, it is unclear whether the funds that were on deposit with the two banks were, in fact, part of the estate. Furthermore, even if the funds were the property of the estate, it is unclear whether you ever had control over those funds in your capacity as the legal representative. As stated earlier, you are personally liable for the unpaid tax debts of the estate, but only up to the value of the property you distribute. If the funds were never part of the estate or if they were, but were never within your control as executor, you would not be personally liable for the unpaid taxes of the estate.

It should be noted that, as stated earlier, in the definition of legal representative, the liability under subsection 159(3) extends to heirs. Moreover, a transfer of property, either directly or indirectly, by whatever means, may be caught under the provisions of section 160 of the Act with the result that the recipient of the property could be held jointly and severally liable to pay the taxes owing by the transferor.

As you are aware, where the last annuitant under a registered retirement income fund (RRIF) dies, the annuitant is deemed to have received, immediately before death, an amount under the fund equal to the fair market value of the property of the fund at the time of the death, pursuant to subsection 146.3(6). The amount received is included in computing the income of the annuitant for income tax purposes by operation of subsection 146.3(5). Where a taxpayer receives a benefit under a RRIF, as a consequence of the death of the annuitant, subsection 160.2(2) provides that the taxpayer is jointly and severally liable with the annuitant for the income tax attributable to the amount received.

The determination of the income tax treatment in the situation you have described involves a question of fact that can only be determined after reviewing all of the relevant documentation. This is a matter on which you may need to seek professional advice. Meanwhile should you have any queries or require additional information in regard to this issue, please do not hesitate to contact Richard Aronoff at the telephone number provided above.

Yours truly,

B.J. Skulski
Manager
Insolvency and Administrative Law Section
Income Tax Rulings Directorate