Section 159

A former resident of Canada (and after her death, her non-resident estate, which had exclusively non-resident beneficiaries) received CPP, interest and RRSP/RRIF payments from Canadian sources. Would CRA issue a clearance certificate to the non-resident estate pursuant to a (Form TX19) request, and would the non-resident estate be required to apply for one? CRA responded:

Subsection 159(2) requires a legal representative to obtain a clearance certificate before distributing property that he or she controls in their capacity as legal representative. If the legal representative does not obtain a clearance certificate before distributing property in his or her control, he or she may be personally liable for unpaid amounts owing to the CRA, whether assessed before or after the actual distribution of property. Where a deceased non-resident individual was a previous resident of Canada obtaining a clearance certificate for the estate would serve to ensure there is no outstanding tax liabilities of the deceased. Accordingly, it is recommended that the legal representative obtain a clearance certificate.

A testator created a trust for the benefit of his mentally incapacitated son, with the trustees accorded the discretion to distribute income and encroach on capital. At the time of the beneficiary’s death, the trust holds a sum which it would be reasonable to consider had not become payable or been distributed out of the taxable income of the trust for a previous taxation year.

CRA confirmed that where the disabled beneficiary of a qualified disability trust dies during a year, this will result (in addition presumably to the QDT not qualifying as such in the year of death) in the imposition of “recovery” tax under s. 122(1)(c), based on the top marginal rate, on any undistributed income from previous years still in the hands of the trust at the time of the beneficiary’s death. In responding to the question, would the trustee of trust be personally liable for this tax, CRA responded:

If the legal representative proceeds with a distribution of property in his or her possession or control without obtaining a certificate under subsection 159(2), the legal representative could be personally liable for these amounts, up to the value of the property distributed. This rule is provided in subsection 159(3).

In the situation provided, the trustee of the QDT, in his or her capacity of legal representative as defined in subsection 248(1), is therefore subject to the above rules, and could be solidarily liable with the trust for the payment of the taxes imposed under paragraph 122(1)(c).

While a graduated rate estate may allocate a charitable donation tax credit within 60 months from the individual’s date of death in cases where GRE status is lost solely because of the expiry of the 36-month period, the gift nonetheless may need to be made within 36 months of death. If a GRE requires a clearance certificate before it can complete a gift to a qualified donee, is there any assurance that it will be provided to meet the 36 month limitation period to complete the gift? CRA responded:

The overall process to receive a clearance certificate is currently under review. … One avenue that can be pursued by legal representatives is the request of a clearance certificate for partial distribution. This type of certificate is issued to the executor or the administrator of an estate for partial distribution of estate assets. The process to request a partial clearance certificate is the same as with other types of clearance certificate requests.

An estate's property consists solely of a registered education savings plan ("RESP"), which had been transferred to the estate for distribution to the estate's beneficiary. Could the executor distribute this property without paying the estate's income tax liability? The Directorate stated:

[I]f the executor distributes the property in the RESP without first obtaining a clearance certificate, subsection 159(3) would hold the executor personally liable for the payment of the tax liability, to the extent of the value of the funds in the RESP.

Respecting whether ss. 159(2) and (3) 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, CRA noted the requirement for the executor to obtain a clearance certificate or post security, before distributing property which was under his or her control, and then stated:

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 [1988] 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. ...

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. ...

A partnership "could" be a "taxpayer" for the purpose of s. 159(2) so that a general partner of a limited partnership, viewed as a legal representative of that taxpayer, "would" be required to apply for a certificate under s. 159(2) in connection with a winding-up of the partnership.

For example, a clearance certificate under subsection 159(2) would be required to ensure that all source deductions have been remitted before the partnership is wound-up.

However, no certification would be required "that each limited partner has paid all income tax owing on partnership income allocated to that limited partner."

Where a taxpayer dies with a tax debt larger than the value of his estate, the administrator would be at risk of an assessment under s. 159(3) if he paid for the services to the estate of an accountant without first obtaining a clearance certificate.

"A person may be found to be a de facto liquidator, notwithstanding the fact that the formalities of a liquidation under corporate law have not been carried out (see Charles Malka, David Malka v. Her Majesty The Queen (FCTD) 78 DTC 6144)."

A trust, whose sole trustee is a corporation, acquired, as its only asset, a property valued at $50 million (the "Property") in consideration for the issuance of a note payable in the same amount, and then disposed of the Property and used the proceeds to repay the note. Should the trust obtain an advance certificate for distribution under s. 159(2) before the note is repaid and, if so, and in the event that the trustee has failed to obtain such a certificate? CRA responded:

It is generally not necessary to obtain a clearance certificate before a distribution where the legal representative retains sufficient property to pay any tax liability.

We are of the view that the term "distributing" used in subsection 159(2) has a broad enough meaning to include a transaction by the legal representative that has the effect of greatly diminishing the value of the property in the legal representative’s custody. Furthermore, we are of the view that a transaction whereby a legal representative transfers, to an unsecured creditor as payment, all of the taxpayer's property in its custody as legal representative, would be a transaction coming within these terms.

The “Trustee” of a trust holds a portfolio of securities whose fair market value is $125,000 on December 31, 2014. The 2014 return of the sole beneficiary of the trust (the “Taxpayer”) was assessed on April 30, 2015, showing an unpaid amount of $150,000, at which time the FMV of the portfolio was $100,000. On January 1, 2016, a demand to pay was issued to the Trustee, the Trustee liquidated the portfolio and applied the net proceeds of $70,000 (reflecting market declines) towards the demand to pay. Is the Trustee’s liability under s. 159(1) limited to the proceeds received on the arm’s length sale of such property? In responding negatively, CRA stated:

[A] legal representative’s liability…can commence at any time a taxpayer has an amount owing under the Act that remains unpaid. …

[S]ince the Taxpayer has an amount payable of $150,000 established on April 30, 2015, that remains unpaid, the Trustee is jointly and severally… liable with the Taxpayer, to pay the amount owing by the Taxpayer at that time. Moreover, the Trustee remains…[so] liable with the taxpayer at the time when the Minister makes a demand on the Trustee for payment (i.e., January 1, 2016) and any other time the amount owing by the Taxpayer remains unpaid while the Trustee remains the taxpayer’s legal representative. …

Furthermore…the Trustee’s liability is restricted to the property in the trust…notwithstanding that between the time the taxpayer’s liability arose on April 30, 2015 and the time the Trustee liquidated the Portfolio in satisfaction of the demand to pay on January 7, 2016, the value of such property declined in value from $100,000 to $70,000.

What is the potential liability of the executor of an estate where the deceased was the sole shareholder and director of an inactive corporation which CRA records shows owes money from a GST and payroll trust account? After noting that "there is no direct legal obligation under the Act for the executor to file a T2 on behalf of the corporation of which the deceased person was the director and sole shareholder" and that "the deceased taxpayer could be liable as a director of the corporation under section 227.1 of the Act or section 323 of the Excise Tax Act," CRA stated:

If the deceased taxpayer has a tax liability, including any that arose from his capacity as a director as described above, and the CRA issues an assessment to that effect, the executor would have the same rights to object that the deceased taxpayer would otherwise have had. … Finally, before making any distributions from the estate, the executor is required to obtain a clearance certificate, pursuant to subsection 159(2)… .

A trust, whose sole trustee is a corporation, acquired, as its only asset, a property valued at $50 million (the "Property") in consideration for the issuance of a note payable in the same amount, and then disposed of the Property and used the proceeds to repay the note. After finding that the trust should obtain an advance certificate for distribution under s. 159(2) before the note is repaid, CRA went on to address whether, if the corporate trustee failed to obtain the certificate, the corporation’s directors could be liable for the trust's unpaid tax liability, and concluded:

[A]n employee or director of a corporation authorized by law to be a trustee who acts in the course of the trustee’s duties for the corporation should generally not be considered to be the legal representative of the taxpayer for whom the corporation is the legal representative.

Mr. B, who inherited farmland from his father, used the land for farming for a number of years before selling part of it. There was a deemed disposition of the farmland following Mr. B's death.

Could Mr. B's legal representatives can take advantage of the 10-year tax payment measure? CRA responded:

The 10-year tax payment measure to which you refer is provided for in subsection 159(5). This election allows, where subsection 70(2), (5) or (5.2) applies in respect of a taxpayer who is deceased and the legal representative provides security, for income tax to be paid in consecutive and equal annual instalments, the number of which cannot exceed 10. You should note, however, that any unpaid amount bears interest from the day after the deadline for filing until the date of full payment.

To take advantage of this election, you have to complete Form T2075 …. In the situation presented, the legal representatives would not be able to benefit at death if subsection 70(9), not subsection 70(5), applied.

Is the s. 159(6.1) election available for a tax liability arising from a deemed disposition of resource property under s. 104(5.2)? CRA responded:

Subsection 104(5.2)… provides that each Canadian resource property and foreign resource property of a trust is treated, for specified purposes, as having been disposed of immediately before the end of a day determined under subsection 104(4), i.e., as indicated in paragraphs 104(4)(a) [to] (c).

Since subsection 159(6.1) specifically refers to tax liability arising on the occurrence of a time determined under paragraph 104(4)(a), (a.1), (a.2), (a.3), (a.4), (b) or (c) which is the time when a deemed disposition pursuant to subsection 104(5.2) occurs, an election under subsection 159(6.1) is possible in respect of tax liability arising from the disposition of property pursuant to subsection 104(5.2) of the Act.