14 March 2011 External T.I. 2010-0390311E5 - Section 159 of the Income Tax Act

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 the administrator of an estate could be held personally liable for using estate assets to defray expenses without first obtaining a clearance certificate?

Position: Yes.

Reasons: Subsection 159(3) imposes a personal liability on the legal representative of an estate for distributing the estate's assets without first obtaining a clearance certificate. Were the derivative liability under subsection 159(3) to be assessed, the administrator could challenge the underlying assessment.

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									2010-039031
									Minguy Choi
									613-957-2062
Attention: XXXXXXXXXX 

March 14, 2011

Dear XXXXXXXXXX :

Re: Section 159 of the Income Tax Act

This is in reply to your letter of December 15, 2010, wherein you requested an interpretation on the application of section 159 of the Income Tax Act (the "Act"). At issue is whether an executor of an estate could be held personally liable for using estate assets to defray certain expenses without first obtaining a clearance certificate.

The circumstances you described in your letter involve a deceased taxpayer, who had failed to file income tax returns for any recent year. Following the death of the taxpayer, assessments under subsection 152(7) of the Act were raised in respect of the taxation years for which returns had not been filed, which resulted in a substantial sum of tax that remains unpaid. The taxpayer died intestate, and his father, who is the administrator of the estate, disputes the amount of the assessments and has filed notices of objection thereto. He would like to use the assets of the estate to fund the services of an accountant to prepare income tax returns for those years. As it stands, the estate assets are greatly insufficient to meet the outstanding tax debt, and would be diminished by 20% if the services of the accountant were funded in the manner proposed.

Subsection 159(3) of the Act provides that where a clearance certificate under subsection 159(2) has not been obtained, the legal representative of a taxpayer is personally liable for the payment of amounts owing by a taxpayer under the Act to the extent of the value of the assets distributed. Subsection 248(1) defines a legal representative to include an administrator or executor. In short, an estate is first required to pay any tax liability before assets can be distributed. However, allowance can be made for the payment of reasonable funeral, testamentary, and administration costs.

The size of the tax liability, the extent of assets in the estate, and the disinclination of the deceased to comply with the Act, are factors, which are not conducive to agreement to allow estate assets to be used to dispute the assessments. At the very least the decision to dispute the assessments should be made objectively, which rules out anyone who stands to profit or gain from the outcome. Accordingly, the estate has three options: the estate could make an assignment into bankruptcy; the administrator could personally fund the services of an accountant; or the administrator could use estate assets to fund services of an accountant, but would do so at the risk of being held liable under subsection 159(3). Needless to say, there are pros and cons associated with each of the options.

Should the estate opt for the bankruptcy option, the trustee in bankruptcy would be able to provide an arm's length analysis of the estate's affairs and the cost-benefit of preparing the tax returns. While the definition of legal representative in subsection 248(1) includes a trustee in bankruptcy, such a trustee is expressly excluded from the provisions of subsections 159(2) and (3). On the other hand, the administration costs, including the expenses and fees of the trustee would be borne by the estate.

Should the administrator choose to personally fund the cost of the services of an accountant to prepare income tax returns, consideration could be given to permitting the fees to be paid out of the assets of the estate in the event that there were to be a decrease in tax payable. Any agreement in this respect would need to be negotiated prior to the engagement of the accountant. Under the terms of such an agreement, the administrator would be entitled to defray the fees in proportion to the percentage by which the tax liability was decreased as a result of the returns having been filed. As part of the agreement the administrator would need to agree to personally pay any costs awarded to the Crown in the event the assessments were to be upheld on appeal in whole or in part.

Lastly, should the administrator decide to pay for the services of an accountant out of the assets of the estate without first obtaining a clearance certificate, he would be at risk of being assessed under subsection 159(3). However, on appeal from the derivative assessment, it would be open to the administrator to challenge the underlying assessment, see Abrametz v. The Queen, [2009] G.S.T.C. 43, 2009 GTC 2013 (F.C.A.); and Gaucher v. The Queen, [2001] 1 C.T.C. 125, 2000 DTC 6678 (F.C.A.). Moreover, in the event of a successful outcome the administrator might be entitled to costs; conversely, were the assessment under subsection 159(3) to be upheld, costs could be awarded against the administrator.

Should you have any questions or require additional information, please do not hesitate to contact Minguy Choi at the number provided at the outset of this letter.

Yours truly,

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

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