Introduction
This article explains the need for a clearance certificate issued under the Income Tax Act. To request a clearance certificate, complete Form TX19, Asking for a Clearance Certificate . Also, provide the documents required for on Form TX19. This will assist the Canada Revenue Agency to issue the certificate without delay.
Why Do You Need a Clearance Certificate?
The Income Tax Act requires a legal representative to obtain a clearance certificate before distributing property that he or she controls in their capacity as the legal representative. As a legal representative, if you distribute the property without a certificate, you are liable for any unpaid amounts. You do not require a clearance certificate before each distribution, as long as you maintain sufficient funds to pay all outstanding Income tax.
The legal representative is a person who administers, winds up, controls, or otherwise deals with a property, business, or estate of another person who may be an individual, a trust, or a corporation. The facts of each particular case will determine whether a person is a legal representative.
A clearance certificate certifies that all amounts for which the taxpayer is, or can reasonably be expected to become, liable under the Act at or before the time of distribution have been paid, or that the Minister of National Revenue has accepted security for payment. The certificate applies to amounts for which you are or may become liable for payment as the legal representative. These amounts include all income taxes (including provincial and territorial taxes that we administer), together with any interest and penalties. The certificate also covers the payment of any outstanding Canada Pension Plan contributions and Employment Insurance premiums, including any associated interest and penalties.
If you do not obtain a clearance certificate before you distribute property, you are liable for unpaid amounts, whether assessed before or after the actual distribution of property. You will be personally liable for the taxpayer’s debt, up to the value of the property you distributed. In addition proposed legislation, for assessments completed after December 20, 2002, you will also be responsible for any and all interest that is charged as a result of these assessments.
When you give up control and transfer a property to the person entitled to receive it, Canada Revenue Agency considers you to have distributed the property on that date. The date on which a person acquires the right to receive a property does not determine the distribution date.
How to Obtain a Clearance Certificate
To request a clearance certificate, you have to complete Form TX19, Asking for a Clearance Certificate. Forward the material to theAssistant Director, Audit, at your tax services office . Usually, that office will process the certificate. However, under some conditions, another tax services office may process your certificate.
To avoid delays, make sure Form TX19 is as complete as possible, and include the attachments. Identify the person(s) asking for the certificate by providing the name, address, telephone number, and title (for example, executor, trustee, liquidator, or administrator).
For a deceased person, Form TX19 has to include the full name, last address, social insurance number, and date of death.
For a trust, include the name of the trust, the name and address of the trustee(s), the trust account number, and the wind up date.
In the case of a corporation, give the full corporate name, the Business Number, and the wind up date.
The following documents must be submitted with Form TX19:
- a copy of the will, including any codicils, renunciations, or disclaimers, and all probate documents. If the individual died intestate, also attach a copy of the document appointing an administrator (for example, the Letters of Administration or Letters of Verification issued by a probate court);
- a copy of the trust document for inter vivos trusts;
- a statement showing the list of assets and distribution plan, including a description of each asset, adjusted cost base and the fair market value at the date of death and at the date of distribution if not the same. Also include the names, addresses, and social insurance numbers or account numbers of the recipients and his or her relationship to the deceased. If a statement of properties has been prepared for a probate court, we will usually accept a copy, and a list of any properties (such as real estate held in joint ownership, RRSPs with named beneficiaries, etc.) that the deceased owned before death and that passed directly to beneficiaries;
- any other documents that are necessary to prove that you are the legal representative; and
- a letter of authorization for the prescribed Authorization Form that you have signed if you want Canada Revenue Agency to communicate with any other person or firm, or you want the clearance certificate sent to any other address other than your own.
When you receive the clearance certificate, you have to complete, as soon as possible, the actual transfer or distribution of any property over which you have control.
Canada Revenue Agency’s Procedure When Issuing A Clearance Certificate
All clearance certificates will be issued on Form TX21, Clearance Certificate . Canada Revenue Agency will issue a clearance certificate only when:
- you have filed and Canada Revenue Agency has assessed the required tax return(s); and
- Canada Revenue Agency has received or secured all amounts for which the taxpayer is liable. These amounts include income tax (including the provincial and territorial tax that we administer), Canada Pension Plan contributions, Employment Insurance premiums, interest, and penalties.
For an estate or trust, where any tax payable by the estate or trust can be determined only after the fair market value of the property to be distributed has been determined on the date of distribution, Canada Revenue Agency will issue a clearance certificate as long as you do complete all of the following:
- you establish a scheme of distribution by a date chosen by you, which is prior to the date of your request for a clearance certificate;
- you calculate the tax payable as if the distribution had occurred on the chosen date;
- you file a final tax return for the tax year ending on the chosen date and pay any taxes, interest, and penalties that are chargeable against or payable out of the estate or trust property; and
- you submit your request in writing, and include a statement that you will complete the actual transfer of all the property of the estate or trust as soon as possible after you receive the clearance certificate.
Canada Revenue Agency may not issue a clearance certificate if you have not filed a tax return or paid an amount for which the estate or trust is liable, or if there is an indication that the actual distribution will not take place as soon as possible after we issue the clearance certificate.
Once Canada Revenue Agency issues the certificate, Canada Revenue Agency considers the chosen date to be the actual date of distribution for tax purposes and regard the estate or trust representative as holding the properties for the beneficiaries since that date.
You shouldn’t file Form TX19, Asking for a Clearance Certificate , until you receive the assessment notice(s). However, there may be exceptions for an estate or trust.
There may be times when you cannot determine the date of distribution because it may depend on completing the final assessment and issuing the clearance certificate. Since the final assessment has to include the period up to and including the date of distribution of property, it may seem that Canada Revenue Agency cannot issue the final assessment or the clearance certificate. For example, this situation could arise when the properties of an operating corporation continue to generate income until they are distributed. In such circumstances, you should contact the Assistant Director, Audit, at the tax services office where you file Form TX19 to make alternative arrangements.
A clearance certificate covers only the properties you controlled from the date you received control to the date you asked for the clearance certificate. After you receive a clearance certificate, you may discover another property that affects the amounts of income or capital gains you reported on the taxpayer’s tax return(s). If so, you will have to obtain another clearance certificate before you distribute the newly identified property. In this circumstance, you should contact the Assistant Director, Audit, at the tax services office where you file Form TX19.
Individuals
For an individual, you should ask for a clearance certificate only for properties you will distribute in your capacity as a legal representative.
Estates or Trusts
There may be situations when an estate or a trust will continue to exist to pay or allocate its income to the beneficiaries until a certain situation occurs (for example, a beneficiary reaches the age of majority). In such cases, Canada Revenue Agency does not consider the payment or allocation of trust income to a beneficiary as a distribution of property. As a result, you do not need to request a clearance certificate.
Corporations
Under certain rules you can transfer a corporation’s assets and liabilities on a rollover basis to another corporation. If all conditions of the rollover are satisfied, the amalgamation should not create any additional tax liability. In this case, you do not need a clearance certificate. If you are not sure that the rollover is complete, you should apply for a clearance certificate. For any other type of corporate dissolution, you should obtain a clearance certificate before you distribute the corporate property.
Goods and Services Tax/Harmonized Sales Tax
Section 270, of the Excise Tax Act (goods and services tax/harmonized sales tax) includes similar provisions requiring you, as a receiveror representative, to get a clearance certificate by completing Form GST352, Application for Clearance Certificate , before you distribute any property or money you control. For more information on clearance certificates related to the goods and services tax/harmonized sales tax, contact your tax services office.
Conclusion
Joseph A. Truscott, Chartered Accountant, has been assisting clients for over 30 years in the preparation and submission of clearance certificates. There are many tips and traps that he has learned over the years to minimize any implications from a review of a clearance certificate by Canada Revenue Agency to ensure that they are processed as quickly as possible. If you require assistance in the preparation or obtaining a clearance certificate from Canada Revenue Agency, or wish to engage Joe’s services in this area, please contact Joe at [email protected], or call our office at 905-528-0234 ext: 224.
October 2012
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