22 February 2011 Internal T.I. 2010-0376841I7 - Liability for Tax of a Deceased Taxpayer

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: 1. How is the liability under subsection 160.2(2) calculated?
2.Whether interest can be assessed on an assessment under subsection 160.2(2).
3. Whether the executor of the estate is personally liable for distributing property without first obtaining a clearance certificate.

Position: 1. To calculate the liability, compare the annuitant's liability before the proceeds arising from the RRIFs were included in income with the annuitant's liability after the proceeds from the RRIFs were included; the difference is the liability under s. 160.2(2).
2. An assessment under s. 160.2(2) is treated as though it were an assessment under section 152. Interest is exigible on a section 152 assessment; hence interest is exigible under a s. 160.2(2) assessment.
3. Under subsection 159(3), an executor is liable to pay the liability of the estate for failure to obtain a clearance certificate before distributing property under its control.

Reasons: S. 146.3(6).
S. 160.2(2).
S. 159(3).

									February 22, 2011

	Saskatoon Tax Services Office				HEADQUARTERS
									Income Tax Rulings
									  Directorate
	Attention: Frank Metanchuk, Team Leader		Lindsay Frank
	                 Appeals Division			(613) 957-0000

									2010-037684

Liability for Tax of a Deceased Taxpayer

This is in reply to a request from Angela Taylor for a technical interpretation on issues relating to the taxation of the estate of a deceased taxpayer.

The taxpayer died leaving a will, which instructed the executor to pay all debts, funeral and testamentary expenses, and to bequest the remaining assets to his wife, two adult children, and grandchildren. The assets of the deceased included a principal residence held in joint tenancy, a car, government pension plans, registered pension plans, two life insurance policies, annuities, personal effects, and registered retirement income funds ("RRIFs").

The estate assets available to defray its administration expenses consisted of the proceeds from one of the insurance policies, death benefits under the pension plans, and personal effects. The spouse received the principal residence pursuant to the right of survivorship under joint tenancy, the proceeds from the remaining insurance policy as the designated beneficiary, and the car apparently for no consideration. The adult children received the proceeds from the RRIFs as beneficiaries.

The estate also filed the T3 Return and paid the tax owing. The return of income to the date of death was filed, and tax payable of $XXXXXXXXXX was reported, and $XXXXXXXXXX was paid. The balance owing is $XXXXXXXXXX .

The beneficiaries under the RRIFs were assessed under subsection 160.2(2) of the Income Tax Act (the "Act") for the estate's liability and have filed notices of objection. They contend that the liability is too high, as each received half of the proceeds from the RRIFS and should only pay half of the liability. They also argue that the interest assessed on the amount is too high, as it includes interest from the date of the assessment in respect of the TI return. Furthermore, they take the position that the amount assessed should be reduced by the value of the car.

Ms Taylor poses the following questions:

1. How is the liability under subsection 160.2(2) calculated?
2. Whether interest can be assessed on the assessment under subsection 160.2(2)?
3. Whether the executor of the estate is personally liable for distributing property without first obtaining a clearance certificate?

Answer to Question #1: Calculating the Tax Payable under S. 160.2(2)

Under subsection 146.3(6) of the Act, the funds arising from the realisation of the property held in the RRIFS are deemed to be a benefit to the annuitant immediately before his death, and the estate is liable to pay the tax on the proceeds from the realisation of such property. Should the estate have insufficient funds to pay the tax, subsection 160.2(2) applies.

Subsection 160.2(2) provides that the beneficiaries are jointly and severally liable to pay a portion of the annuitant's tax that is attributable to the amount received by the beneficiaries. Since each beneficiary received one-half of the property, the liability of each would be limited to one-half of the property.

Answer to Question #2: Assessing Interest on a S. 160.2(2)

Subsection 160.2(3) authorises the Minister to assess the beneficiaries under subsection 160.2(2), and such an assessment, when issued, is to be treated as though it were an assessment raised under section 152. Under subsection 161(1), interest is exigible on an amount assessed under section 152. Given that an assessment under 160.2(3) is to be treated as an assessment under section 152, interest will accrue under subsection 161(1) from the day after the issuance of that assessment until the amount is paid, see Zen v. The Queen, 2010 D.T.C. 5109 (F.C.A.), aff'g 2009 D.T.C. 6167 (T.C.C.).

Answer to Question #3: Liability of the Executor

The estate is required to pay the tax on the proceeds arising from the disposition of the assets, failing which, subsection 159(3) applies. Subsection 159(2) requires a legal representative (the executor) to obtain a clearance certificate before distributing estate property under that person's control. Having failed to do so, the executor is personally liable under subsection 159(3) to pay the amount owed by the estate. The executor's liability is limited to the extent of the property under his control. The executor is apparently aware of its liability, as it requested information regarding whether the beneficiaries would be asked for payment in respect of the property received out of the RRIFs.

Notwithstanding the potential liability of the executor on account of the distribution of the car and the possible collection avenue under subsection 159(3), it is unlikely that much tax recovery would be gained pursuing this remedy. The bulk of the tax owing by the estate arose as a result of the income inclusion by operation of subsection 146.3(6). Since the beneficiaries under the RRIFs are jointly and severally liable under subsection 160.2(2) to pay a part of the annuitant's tax that is proportionately attributable to the operation of subsection 146.3(6), it follows that the tax should first be recovered from them.

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

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

c.c. Angela Taylor
Appeals Division
Saskatoon Tax Services Office