The deceased was the sole owner and director of a corporation. In your due diligence, you have discovered the corporation has not filed corporate tax returns for one or more fiscal year ends prior to the date of death. To date, you have been unable to determine whether there are any assets in the corporation. However, you have determined that the corporation owed money to the Canada Revenue Agency (“CRA”) for HST and payroll withholdings, but to the best of your knowledge, no director’s assessment has been levied by the CRA.
As executor of the estate, what are your obligations, if any under the Income Tax Act (‘ITA’) with regard to the above scenario?
In a recently published technical interpretation, the CRA was asked to comment on the following:
1. Whether the executor has the legal obligation to file T2 (corporate tax) returns on behalf of the corporation;
2. Can the CRA take action that would make a deceased taxpayer liable for debts owed by the corporation for which the deceased was a director;
3. If the CRA were to assess the deceased taxpayer for the corporate debts owed, how could the executor object to this; and
4. If the CRA were to make the deceased taxpayer liable, can the executor be held liable for these amounts and how can an executor can ensure he or she will not be liable for any tax debts owed by the corporation.
With regard to issue 1, CRA commented that there is no direct legal obligation under the ITA for the executor to file a T2 on behalf of the corporation of which the deceased person was the director and sole shareholder as that obligation is technically the corporation’s as a separate person. However, considering the deceased person was the sole shareholder and director of the corporation, CRA noted it may advisable for the executor to take steps to ensure the corporation files any outstanding T2 returns in order to determine the assets and debts of the deceased.
Regarding issue 2, CRA commented that under the provisions of the ITA the deceased taxpayer could be liable as a director of the corporation jointly and severally, or in solidarity liable with the corporation, to pay amounts that were not remitted by the corporation while the person was a director, such as payroll amounts and HST. Further, if any property had been transferred to the deceased from the corporation for less than fair market value through, for example, shareholder benefits or dividends, CRA noted that the deceased taxpayer could also be liable for tax debts of the corporation. The deceased could be liable for taxes owed by the corporation for taxation years prior to and including the year that included the date of the transfer.
On issue 3, CRA confirms that if the deceased taxpayer has a tax liability, including any that arose while as director, 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. To that end, the executor could contest the validity of the underlying assessment.
Finally, on issue 4, CRA cautions that before making any distributions from the estate, the executor is required to obtain a clearance certificate, pursuant to the relevant sections of the ITA. If the executor fails to obtain a clearance certificate before distributing property, he or she will be personally liable for unpaid tax debts, whether assessed before or after the actual distribution of property.
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