Why the risk can fall on the executor
An executor is the legal representative responsible for administering the deceased's assets and estate tax matters. CRA states that before distributing property under their control, the legal representative should obtain a clearance certificate confirming that relevant tax has been paid or acceptable security provided.
If assets are distributed first and tax is later found owing, the executor may become personally liable for unpaid amounts, up to the value of the assets distributed.
Filing the final return may not finish every tax matter
An estate may still have the final personal return, income earned during administration, asset sales, prior-year adjustments, CRA reviews, or reassessments to address. Whether a T3 return or other filings are required depends on the circumstances.
Within its scope, a clearance certificate relieves the legal representative from personal liability for existing unpaid tax. It is not a blanket resolution of every estate dispute or unknown future issue.
Prepare a distribution calculation before paying beneficiaries
Before an interim or final distribution, document and review:
- Personal and trust or estate tax returns filed and still outstanding.
- Known tax, professional fees, debts, administration costs, and a reasonable reserve.
- Tax and cash requirements from asset sales or transfers.
- The clearance certificate's scope, supporting documents, and application status.
- Amounts and dates paid to beneficiaries and the basis for the executor's decision.