Jun 8, 2020

Executor personally liable for estate taxes; beneficiaries not obligated to return estate monies to indemnify

Muth Estate, 2019 ABQB 922 (CanLII)

Beneficiaries generally want to receive their shares of the estate as soon as possible. Executors may feel pressured by beneficiaries to distribute estate assets prematurely, before all of the estate liabilities have been confirmed and paid. In particular, it often takes time to determine the final tax liabilities of the deceased person and their estate, and obtain clearance certificates from the Canada Revenue Agency confirming that no further taxes are owing. As executor, you may be considering payout of estate assets prior to obtaining a clearance certificate, perhaps with a holdback which you intend to apply to any outstanding tax (or other) liabilities as they arise.

There is a risk to this. Section 159 of the Income Tax Act requires that a personal representative obtain a clearance certificate before distribution of an estate and imposes personal liability for the tax liability of the estate on a personal representative who does not do so.

In Muth Estate, 2019 ABQB 922, the executor held back funds for income tax obligations of the estate and then distributed the balance to herself and the other beneficiaries. The holdback turned out to be less than what the estate owed to CRA (calculated by the executor at approximately $24,000), and the executor sought reimbursement from the beneficiaries of their proportionate shares. Her estimate for the amount of the holdback was based on advice from an accountant that turned out to be incorrect.

If a trustee is seeking indemnity from the beneficiaries, such an indemnity may be available when the beneficiaries instigated or requested that the payment to the beneficiaries be made. However, it follows that if the beneficiaries did not instigate or request the payout with an insufficient holdback (i.e. the trustee/executor made their own decision to payout the monies), then the beneficiaries cannot be obligated to indemnify the trustee.

In Muth Estate, the Court concluded that the other beneficiaries were under no obligation to indemnify the executor for income tax or penalties imposed as a result of her failure to obtain a clearance certificate before distributing the estate. The executor was personally liable for the tax liability.

This should serve as warning to executors to not be pressured by beneficiaries (even if they are family!) to distribute assets before it is appropriate to do so, or without adequate holdback or security, such as indemnity agreements signed by all of the beneficiaries.

[This post by James Zaitsoff first appeared on the BC Estate Litigation Blog on May 29, 2020]