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 subsections 159(2) and (3) apply to an executor who distributes proceeds to (a) credit card companies and (b) a mortgagee with an unregistered mortgage.
Position: (a) Yes. (b) No position taken as this is outside the scope of Income Tax Rulings.
Reasons: (a) A credit card claim (an unsecured claim) cannot be paid ahead of an income tax claim, pursuant to subsection 159(2). (b) It has been suggested that the inquirer consult with Legal Services or a regional office of the Department of Justice.
March 27, 2013
Kitchener/Waterloo Tax Services Office HEADQUARTERS
Income Tax Rulings Directorate
Attention: Robert Zwaag Lindsay Frank
Appeals Section (613) 960-7919
The application of subsections 159(2) and (3) to an executor who distributes property
We are replying to your request for a technical interpretation. At issue, is whether subsections 159(2) and (3) of the Income Tax Act (the "Act") apply to an executor who distributes property in order to satisfy (a) a debt owed to a credit card company; and (b) a mortgage that was not registered in a public property registry system.
Subsection 159(2) of the Act requires every "legal representative", which term is defined in subsection 248(1) and includes an executor, to either obtain a clearance certificate or post security, before distributing property which the legal representative has under his or her control, to a person. Furthermore, an executor, who does not comply with subsection 159(2), may be personally liable pursuant to subsection 159(3). The liability is limited to the extent of the value of the property distributed.
The operation of subsections 159(2) and (3) is not intended to give to the Crown a priority that it would not have otherwise. For instance, if a creditor has a secured claim, an income tax claim would not have priority over the secured claim because it is ranked as an unsecured claim (unless the Minister complies with subsections 223(11.1) of the Act and 87(1) of the Bankruptcy and Insolvency Act, in which case it is deemed to be a secured claim). On the other hand, in Ontario, if an income tax claim is of equal degree with that of a claim of another creditor, the tax claim would prevail: see Mary Constance Wright v. Canada, 86 D.T.C. 6574 (Ont. Dist. Ct.); reversed on other grounds in  1 C.T.C. 107, 88 D.T.C. 6041 (Ont. Div. Ct.). Given that a credit card debt is also an unsecured claim, an income tax claim would have priority. As such, where an estate is indebted for an amount under the Act, and the executor distributes proceeds of the estate to satisfy an unsecured claim such as a credit card debt, the Minister may hold the executor personally liable under subsection 159(3) for the amount distributed.
In relation to whether the Minister can invoke subsection 159(3) against an executor for an amount distributed to a mortgagee who has not registered the mortgage in a public property registry, the position is less certain. The security interest, when registered, gives the mortgagee a secured claim. A secured claim has priority on any proceeds of disposition arising from the sale of the property subject to such an interest. Failure to register a mortgage document may jeopardise a mortgagee's priority to the proceeds, unless remedies such as an equitable mortgage or subrogation are available to preserve the mortgagee's standing. An examination of these concepts is outside the scope of this memorandum and the responsibilities of the Income Tax Rulings Directorate. Consequently, it is suggested that reference be made to Legal Services or to a regional office of the Department of Justice.
Meanwhile, should you have any questions or require additional information, please do not hesitate to contact Lindsay Frank at the number provided at the outset of this memorandum.
Terry Young, CPA, CA
Manager, Administrative Law Section
Income Tax Rulings Directorate
c.c. Michael Wolff
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