Litigation, Taxation law

Income Tax Clearance Certificates and the Right of Liquidators to Indemnification

Jan 21st, 2020

By Barry Landy

Sub-sections 159 (1), 159 (2) and 159 (3) of the Income Tax Act (ITA) and their Quebec equivalents operate to impose personal liability for income tax and other amounts due by a deceased taxpayer on a legal representative who distributes property of the deceased in his possession or control without obtaining a clearance certificate from the CRA.

In Quebec, a liquidator is the legal term for the person who administers an estate. A liquidator has seisin of the estate assets, namely the right to physical and legal control of the estate assets and this right supercedes the seisin of the heirs and the legatees by particular title.

The liquidator has the obligation  to identify and call in the successors, determine the content of the succession, recover the claims, pay the debts of the succession, whether these be debts of the deceased, charges on the succession or debts of support, pay the legacies by particular title, and finally render an account and deliver the property.

But what happens if a liquidator is asked by the heirs to distribute their inheritance to them before a clearance certificate is obtained? Or alternatively, if a liquidator makes such a distribution on his own volition?

For example, assume that after payment of all debts and particular legacies, the liquidator makes an estimate of the income taxes owing and makes an interim distribution of the assets of the estate to the heirs, holding-back an amount sufficient to pay the income taxes. Assume further that in good faith, the liquidator underestimates the amount of taxes owing.

In such circumstances, it is clear that the liquidator will be personally liable for the unpaid taxes and other amounts due by the deceased. What is less clear is whether or not the liquidator has a right of indemnity against the heirs who actually received the inheritance.

After all, Parliament could have chosen to make all beneficiaries of an estate liable for the taxes of the deceased, but chose not to do so. Also, while Parliament did impose a legal obligation on the liquidator, it did not state that where the liquidator distributed estate assets without obtaining a clearance certificate, the beneficiaries would ultimately be responsible for the liquidator’s failure to pay the correct amount of taxes owing.

Justice Little of the Court of Queen’s Bench of Alberta addressed this issue in the case of Muth Estate 2019 ABQB 922. Justice Little decided that in accordance with trust law principles applicable in Alberta, where a legal representative of an estate distributed trust assets without obtaining a clearance certificate on his own volition (as opposed to at the request or instigation of the beneficiaries), the legal representative and not the beneficiaries would bear the ultimate financial consequences.

While trust law principles and civil law principles in Quebec are not the same as in Alberta, arguably the same type of legal reasoning could apply in this province and liquidators in Quebec would be well advised not make interim distributions of estate assets to beneficiaries without specific contractual guarantees of indemnification, preferably secured by legal hypothec.


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