April 2012 Executive TaxBriefs

14. Legal Representative and Liability for Assets Distributed

TI2011-0429101C6 - 2011/06/03

In this TI, CRA is asked to provide comments on tax related questions pertaining to insolvent estates. While the taxpayer posed a number of questions, the one of more interest is the question on whether the executor of an estate can use estate assets to object to an income tax assessment.

In responding, CRA referenced s.159(3) and stated that a legal representative is personally liable for amounts the taxpayer is liable for under the Act, to the extent of the value of the assets distributed. They state that an estate is required to pay any tax liability before assets can be distributed, although an allowance can be made for the payment of "reasonable funeral, testamentary and administration costs".

CRA lists the following options in the context of funding an objection by the estate to an income tax assessment:

1. the estate could make an assignment into bankruptcy, in which case the trustee in bankruptcy would make the decision as to whether an objection or appeal should be pursued;
2. the executor could personally fund the services of an accountant and in the event that there is a decrease in tax payable, consideration could be given to permitting the fees to be paid out of the assets of the estate; or
3. the executor could use estate assets to fund the services of an accountant, but would do so at the risk of being held liable under subsection 159(3).

From the options listed, it appears that CRA does not consider the cost of objecting to an income tax assessment as a "reasonable funeral, testamentary and administration cost". This would be a moot point where a clearance certificate is obtained prior to a distribution under s.159(2). However, a question arises whether there is a disconnect between what may be legitimate expenses that are deductible to the estate for the purpose of Part I tax (expenses for objection or appeal - s.60(o)) and the "reasonable funeral, testamentary and administration costs" for the purpose of s.159(3).

If an executor in the normal course of administering an estate first puts the estate in order by pursuing a tax appeal, and then requests a clearance certificate at the point when the assets are ready to be distributed to the beneficiaries, CRA seems to suggest that the executoris too late.  CRA appears to be of the view that the executor has made distributions in the form of the payment legal fees incurred to pursue such appeal and if there are insuffient assets in the estate to meet the tax liabilties, in the event of a failed tax appeal, the executor could be held liable under s.159(3). 

It is suggested that this would be a perverse interpretation by CRA and in fact the executor as trustee of the estate may have a fiduciary duty to the beneficiaries to pursue all available rememdies.  The fact that there may be insufficient funds in the estate to pay taxes presents a bit of a conundrum for both CRA and the exxecutor.  Be careful if you find yourself in this position as an executor and make sure you have the beneficiaries sign off beofore proceding with the tax appeal.