In Canada, an executor is liable for ensuring the debts of the deceased are correctly distributed to all creditors of the estate. Since beneficiaries typically desire their share of the estate as soon as possible, executors may be pressured to distribute assets before estate liabilities have been paid. However, section 159 of the Income Tax Act requires a personal representative to gain a clearance certificate before distribution.
In the Muth Estate case 2019 ABQB 922 (CanLII) | Muth Estate | CanLII, the executor distributed the funds to herself and other beneficiaries without paying the income tax obligations of the estate. The holdback was less than what the estate owed to the CRA; therefore, the executor asked for reimbursement from the beneficiaries. The court concluded that the other beneficiaries were not obligated to indemnify the executor for the income tax or penalties imposed for failing to obtain a clearance certification before distributing the assets from the estate. Thus, the executor was deemed personally liable for the tax liability.
This case study elucidates the importance of executors waiting for clearance certificates before distributing estate assets. Failing to do so, could led to significant monetary consequences.
