The executor or administrator of an estate is usually responsible for winding up the deceased’s tax situation, including filing any outstanding tax returns. Before distributing any estate property, it is prudent to apply to the Canada Revenue Agency (CRA) for a clearance certificate. A clearance certificate certifies that all amounts owing by the deceased to the CRA have been paid or the CRA has accepted some form of security in lieu of payment. It covers all tax years up to the date of death.
An executor who distributes an estate’s assets without first obtaining a clearance certificate may be held personally liable for any amounts owing by the deceased to the CRA. Earlier this year, the Tax Court of Canada emphasized this risk in the case of Mingle v. The Queen.
Deceased’s son granted mortgage against father’s estate property
Samuel Mingle (Mingle) and his brother were named co-executors of their father’s estate. Their father died in 1994 and left most of his estate to Mingle’s brother, with a portion also going to the father’s grandchildren and great-grandchildren.
Although Mingle did not contest the distribution of his father’s estate, he wanted to ensure that his daughter received her share. Sixteen years later, Mingle’s daughter’s interest in her grandfather’s estate was secured by a mortgage against his property. This required Mingle to sign documents in his capacity as executor of his late father’s estate. At the time the mortgage was granted in 2010, the estate was in arrears for unpaid income tax.
Government sought to hold son liable for estate’s tax debts
Mingle’s brother died in 2016. Subsequently, the Minister of National Revenue assessed Mingle as personally liable for the estate’s tax debt as the mortgage placed against the property was granted without obtaining a clearance certificate. By securing his daughter’s interest in the estate without first applying for a clearance certificate, Mingle unknowingly placed himself at risk for personal liability for the estate’s tax debts.
Before the Tax Court of Canada, Mingle argued that he was not liable for the unpaid taxes as he had renounced his executorship by letter two months after his father’s death. He also denied that he became a trustee de son tort for his daughter’s share of the estate by granting the mortgage. A trustee de son tort is someone who takes control of property on behalf of another without legal authority and may be liable for loss or damage to that property.
Executor tax liability under the Income Tax Act
Under the Income Tax Act, executors and trustees are included in the definition of a taxpayer’s “legal representative”. A legal representative can also be:
“… any other like person, administering, winding up, controlling or otherwise dealing in a representative or fiduciary capacity with the property that belongs or belonged to, or that is or was held for the benefit of, the taxpayer or the taxpayer’s estate.”
Under section 159 of the Income Tax Act, the Minister of National Revenue has the authority to assess an executor for an estate’s unpaid tax debt. Under that section, a trustee or executor is personally liable for the estate’s tax, interest, and unpaid penalties before and while the person is trustee/executor.
Without clearance certificate, estate tax debts assessed as executor’s responsibility
Before an executor or trustee can distribute the estate’s property, they must obtain a clearance certificate from the Minister of National Revenue. The certificate certifies that there are no amounts owing to the Minister. If the executor or trustee distributes the estate property without first getting a clearance certificate, they become personally liable for the estate’s tax debts (up to the value of the property distributed). In fact, the outstanding amounts can be assessed as if they are the executor’s own tax debt.
No evidence that son renounced executorship of father’s estate
The Tax Court of Canada acknowledged that Mingle did not play a prominent role in administering his late father’s estate. However, the Court found no evidence that he had renounced his executorship.
The original handwritten renunciation letter (purportedly from July 1994) had a notation that it was a copy of the letter delivered to Mingle’s brother (the co-executor). The Court questioned why the original letter, which would have been in the brother’s possession until his death in 2016, would have this notation. As Mingle was unable to provide an explanation, the Court found it likely that the letter had not been written or delivered to Mingle’s brother in 1994.
Son liable for estate’s taxes as he improperly encumbered estate property
The Tax Court noted that Mingle may not have understood every aspect of his role as executor or all implications of the land transfer documents he had signed. However, the Court determined he understood that the mortgage was necessary to secure his daughter’s share of her grandfather’s estate. Further, the Court held that Mingle understood in signing the mortgage documents that he did so in his capacity as executor.
The Court found that, as executor, Mingle failed to obtain a clearance certificate before distributing or encumbering his father’s estate property. As a result, he was personally liable for the tax debt that the estate accrued between 2006 and 2010.
Campbells LLP: Providing Trusted Estate Litigation Services in Oakville
The skilled estate litigation lawyers of Campbells LLP represent clients in a variety of estate disputes, including Will challenges, Family Law Act claims, power of attorney disputes, consent and capacity issues, and problem trustees or executors. We take decisive action to ensure the legacy of our clients or their loved ones is protected. Campbells LLP also offers comprehensive advice on estate planning to help avoid future disputes and legal challenges. To schedule a confidential consultation with an estate lawyer, contact us online or call 905-828-2247.