16 June 2010 Internal T.I. 2009-0344351I7 - Clearance Certificates

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: Highlights of the legislation regarding clearance certificates not covered in the audit manual.

								June 16, 2010

	Kitchener/Waterloo Tax Services Office	HEADQUARTERS
								Income Tax Rulings
								  Directorate
	Attention: Michelle A. Meyer			Lindsay Frank
	Team Leader, Audit Division			(613) 948-2227

								2009-034435

Clearance Certificates

This is in reply to your email in which you are seeking an interpretation with respect to clearance certificates.

It should be noted that chapter 16 of the Audit Manual contains comprehensive information on policy, legislation, and procedures pertaining to clearance certificates. This reply does not purport to offer any comment on the policy provisions of that document, and as such is restricted to the interpretation of the relevant provisions of the Income Tax Act ("ITA"), the Canada Pension Plan ("CPP"), the Employment Insurance Act ("EIA"), and the Excise Tax Act ("ETA").

Under these statutes, a taxpayer's representative, who is administering, winding up, controlling, or otherwise dealing in a representative capacity with the property that belongs or belonged to, or that is or was held for the benefit of the taxpayer or the taxpayer's estate, prior to distributing such property, must obtain a clearance certificate verifying that all amounts for which the taxpayer is liable have been paid or secured. Under the ITA and the CPP, such a person is considered to be the taxpayer's legal representative, while under the EIA and the ETA, that person is referred to as the taxpayer's responsible representative.

Subsection 248(1) of the ITA defines a legal representative to mean a trustee in bankruptcy, an assignee, a liquidator, a curator, a trustee, an heir, a receiver of any kind, an administrator, an executor, a liquidator of a succession, a committee, or any like person. However, a trustee in bankruptcy is specifically excluded under subsection 159(2). Under the EIA and the ETA, such persons are considered to be the taxpayer's responsible representative. Subsection 86(7) of the EIA and 270(4) of the ETA each exclude a trustee in bankruptcy from the definition of a responsible person.

Where a legal representative or responsible person distributes the taxpayer's assets without first obtaining a clearance certificate, subsection 159(3) of the ITA, 86(4) of the EIA, and 270(4) of the ETA provide that the Minister may assess the representative personally for the amount of the taxpayer's tax debts. Under the ITA, there is no longer a time limitation to raise that assessment; rather, the Minister may assess at any time. However, under the ETA, the Minister is bound by paragraph 298(1)(c), which imposes a four-year limitation period to assess the representative.

Likewise, pursuant to subsection 85(3) of the EIA, an assessment is statute-barred if more than three years have elapsed since such an amount became payable.

If a legal representative acquires or otherwise appropriates instead of distributing property, subsection 159(3.1) deems that a distribution has taken place for purposes of subsection 159(2) and (3). In that regard, the legal representative must obtain a clearance certificate to avoid personal liability under subsection 159(3). The objective of subsection 159(3.1) is to ensure that the operation of subsections 159(2) and (3) are not frustrated where, for example, assets are transferred to a related person in the course of a voluntary wind-up.

With respect to a liability under the CPP, section 36 provides that Divisions I and J of the ITA apply with respect to, among others, assessments, payment of tax, objections to assessments, appeals, interest and penalties. Section 159 is contained in Division I; therefore, a legal representative who distributes or appropriates property before obtaining a clearance certificate, attesting that the taxpayer's liability for Canada pension plans has been paid or secured, may be assessed at any time. In short, the rules in section 159 of the ITA apply to amounts owing under the CPP.

Should you have any questions or require additional information, please contact Michel Laroche at (613) 941-9711.

Yours truly,

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

c.c. Michel Laroche
Manager
Office Audit Section
Small Business Audit Division
Compliance Programs Branch