Income Tax Audit Manual
Compliance Programs Branch (CPB)
This chapter was last updated in June 2020.
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Chapter 16.0 Clearance certificates
Table of Contents
- 16.1.0 Clearance Certificate Program
- Appendix 16.1.0 Letters
- Appendix 16.2.0 Forms, templates, checklists, etc.
Subsection 159(2) of the Income Tax Act (ITA) requires that every legal representative, other than a trustee in bankruptcy, obtain a clearance certificate certifying that all taxes have been paid or that acceptable security has been provided before distributing any property under their control.
Representatives effectively act for the deceased or other taxpayer in all matters relating to that person's tax matters. For the responsibilities definition of the legal representative, go to subsection 159(1) of the ITA. There are generally two types of representatives involved with a taxpayer's account:
1. Authorized representative
An authorized representative is defined as a person or a business to which a taxpayer or a legal representative has given the Canada Revenue Agency (CRA) permission to deal with on the taxpayer's behalf.
2. Legal representative
Subsection 248(1) of the ITA defines a legal representative of a taxpayer as, “a trustee in bankruptcy, an assignee, a liquidator, a curator, a receiver of any kind, a trustee, an heir, an administrator, an executor, a liquidator of a succession, a committee, or any other like person, administering, winding up, controlling or otherwise dealing in a representative or fiduciary capacity with the property that belongs or belonged to, or that is or was held for the benefit of, the taxpayer or the taxpayer's estate.” Common types of legal representatives include: power of attorney, public trustee, executor, and administrator. Go to Appendix A-16.2.3, Glossary – Estate of deceased taxpayers, for more information on these types of legal representatives.
There are indicators in RAPID Option M.1.1 for each type of representative. The facts of each particular case will determine whether a person is a legal representative.
Taxpayer dies without a will (intestate) or without having named an executor or both
Generally, when a taxpayer dies without a will or without having named an executor or both, the CRA requires a letter of administration identifying a particular individual as the estate administrator.
Usually a court grants letters of administration to an individual or individuals to settle the estate of a deceased person who died without a will. If the administrator gives a copy of the court document appointing them, this is enough to confirm that they are the legal representative for concluding the estate. In any case, the RAPID Option M.1.1 should be updated before issuing the clearance certificate. The clearance certificate officers have the ability to update the Rapid Option M.1.1.
Family members of deceased individuals
Section 251(2) of the ITA defines persons related to each other as “individuals connected by blood relationship, marriage or common-law partnership or adoption.” For the purpose of this chapter, we will refer to these individuals as family members.
There are cases where a taxpayer has died intestate (without a will) and the estate is quite small. It would be too costly and could create financial hardship for a family member (surviving spouse, common-law partner, or parent) to get letters of administration. This type of circumstance must be looked at individually (based on its own merits) to determine whether the individual should be updated as the taxpayer’s representative.
Individuals who want to act as a legal representative for concluding an estate where there is no will, should write to the Taxfiler Representative Identification System (TRIS) Section at their tax centre (TC). Do not give clearance if the legal representative is not updated in RAPID Option M.1.1.
If you need help, refer the file to TRIS before issuing the clearance certificate. The following is a list of TRIS mailbox addresses:
- For Sudbury TC:
Via encrypted email, forward Form TX19, Asking for a Clearance Certificate, and accompanying documents to TRIS Section– IBSD – Sudbury TC
- For Prince Edward Island TC (Summerside) and Winnipeg TC:
TRIS-WinnipegTC / SIRC-CFWinnipeg (CRA/ARC)
- For Jonquiere TC:
SIRC-CF Jonquière / Jonquiere TC-TRIS (ARC/CRA)
- Ottawa Technology Centre (OTC):
TRIS T3- Ottawa TC / SIRC T3-CT Ottawa (CRA/ARC)
Purpose of the clearance certificate
Clearance certificates are most frequently issued on the distribution of property of a deceased individual, that person's estate, or a testamentary trust arising on the person's death. Clearance certificates are also required if a corporation surrenders its charter on the winding up of its affairs.
A clearance certificate can be issued only after all required income tax and goods and services tax / harmonized sales tax (GST/HST) returns have been filed and assessed and the income tax and/or GST/HST liability of the taxpayer is paid or secured.
Under subsection 159(3), representatives that fail to get a clearance certificate before distributing the property in question are liable for any unpaid taxes. The amounts include all income taxes and GST/HST (including provincial and territorial taxes that CRA administers), along 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. The liability of the representative is limited to an amount not greater than the value of the property distributed.
The requirement to obtain a clearance certificate under subsection 159(2) does not apply to a trustee in bankruptcy. Issuing a clearance certificate to a trustee in bankruptcy would be misleading as the certificate would not cover any liability of the trustee under section 128.
It is important to note that issuing a clearance certificate does not prevent the minister from seeking to recover any unpaid tax from an estate or its beneficiaries, but relieves the legal representative from personal liability for such tax.
A clearance certificate covers only the property under the legal representative’s control up to the date the certificate is issued. Properties discovered later that affect the taxpayer’s reported income tax should be accounted for under a new clearance certificate.
Where is the clearance request processed?
If the legal representative is a resident of Canada, Form TX19, Asking for a Clearance Certificate, will be sent to the regional tax services office (TSO) serving the area where the legal representative resides.
If there is more than one legal representative, they must all agree as to which representative will be responsible for the income tax affairs of the deceased and estate, including the request of a clearance certificate.
If the legal representative wants us to communicate with someone else, it is important to verify that there is proper authorization on file. If not, we should ask for a letter of authorization signed by the legal representative.
If the taxpayer's properties are located in an area served by a TSO other than the TSO serving the area where the legal representative resides, then the TSO processing the request may contact the other TSO (if warranted) to make sure that any additional information or lead is taken into account prior to issuance of the clearance certificate. Exceptionally, the legal representative, in conjunction with the authorized representative, may wish that the clearance certificate request be processed by the TSO serving the area where the deceased resided and the authorized representative is located, in which case, authorizations from all legal representatives to this effect are especially important.
If the legal representative is a non-resident of Canada:
- Deceased was a non-resident of Canada - forward Form TX19 to the assistant director of the Audit Division of the TSO serving the area where the legal representative resides.
- Legal representative is a non-resident of Canada - forward Form TX19 to the assistant director of the Audit Division of the TSO serving the area where the taxable Canadian property (TCP) (real property) is situated.
- Legal representative is a non-resident and the TCP (real property) is intangible property (that is, shares of a Canadian controlled private corporation (CCPC)), forward Form TX19 to the assistant director of the Audit Division of the TSO serving the area where the mind and management of the corporation or partnership is situated. To identify where a corporation resides, refer to paragraphs 15 and 16 of Interpretation Bulletin IT391R, Status of Corporations.
Excise Tax Act (Goods and Services / Harmonized Sales Tax)
Section 270, Part IX of the Excise Tax Act (goods and services tax / harmonized sales tax) includes similar provisions requiring a legal representative to obtain a clearance certificate by completing Form GST352, Application for Clearance Certificate, before distribution of any property or money under their control.
Refer the file to the GST / HST Workload Development area for review to determine whether or not a clearance certificate should be issued to the registrant's representative.
Types of clearance certificates
Basic types of clearance certificates may be issued:
- Clearance certificate to date of death - issued to the legal representative of an estate (up to and including the date of death). In many cases, this is the only clearance certificate requested.
- Clearance certificate for partial distribution - issued to the legal representative of an estate for partial distribution of estate assets.
- Clearance certificate for distribution purposes (final) - issued to the legal representative of an estate or a trust before the final transfer of assets to beneficiaries.
- A clearance certificate can also be issued to the representative of a GST/HST registrant.
- A clearance certificate can be issued to liquidators of corporations and partnerships prior to transferring assets to shareholders or partners.
- A clearance certificate can also be issued to the representative of a GST/HST registrant.
Clearance certificates for deceased individuals, trusts, and corporations are issued on Form TX21, Clearance Certificate. Clearance certificates under the Excise Tax Act are issued on Form GST158.
If the representative is applying for a clearance certificate for distribution (final), there is no requirement to receive a date of death or partial certificate.
Requesting a clearance certificate
- why a clearance certificate is necessary;
- how a representative requests a clearance certificate and what information and documents must accompany the application, (Form TX19, Asking for a Clearance Certificate);
- what actions the representative must take regarding the distribution of the property under their control; and
- what conditions must be met before the CRA issues a clearance certificate.
A payment or allocation of trust income to a beneficiary is not a distribution of property. As a result, a clearance certificate is not required.
Procedures for obtaining a clearance certificate are also in tax guides:
The regional TSO serving the area where the legal representative is located, will handle and process the request, even if the deceased taxpayer's file was handled by a different TSO. Clearance certificates are handled by a separate Estates and Trust group or by other designated officers in the TSO.
Final T1 General – Income Tax and Benefit Return for a deceased individual
A representative has a period of at least six months to file a deceased person's final T1 return. The due dates for the final T1 return are:
|Period when death occurred||Due date for the final return
|January 1 to October 31||April 30 of the following year|
|November 1 to December 31
||Six months after the date of death
If the deceased or the deceased's spouse or common-law partner earned business income during the year of death, special rules apply. For more information, go to Tax Guide T4011, Preparing Returns for Deceased Persons.
T3 Trust Income Tax and Information Return
- Inter vivos trust
The tax year-end of an inter vivos trust is December 31, except for a mutual fund trust that elects to have a December 15 year-end. A mutual fund trust that previously elected to have a December 15 year-end can revoke the election.
- Testamentary trust
The tax year-end of a testamentary trust may be, but does not have to be, December 31. The first tax period of the trust begins on the day after the person dies, and ends at any time you select within the next 12 months. The tax rates used, and the tax year of the slips issued to the beneficiaries, is based on the year-end of the trust.
Commencing in 2015, testamentary trusts (other than graduated rate estates) will be required to use a calendar year tax year-end, and have their fiscal periods end in the calendar year in which the periods began. Those testamentary trusts which currently have a non-calendar year-end, will have a deemed tax year ending on December 31, 2015, unless the trust is an estate that exists at the end of 2015 and is a graduated rate estate for its 2016 tax year.
A graduated rate estate, of an individual at any time, is the estate that arose on and as a consequence of the individual’s death, if all of the following conditions are met:
• time is no more than 36 months after the death of the individual
• the estate is at that time, a testamentary trust
• the individual’s social insurance number is provided in the estate’s return of income for the tax year that includes that time and for each of its earlier tax years that ended after 2015 (36 month period after the death of the individual)
• the estate designates itself as the graduated rate estate of the individual in its return of income
• no other estate designates itself as the graduated rate estate of that individual in a return of income for a tax year that ends after 2015
An estate can only be a “graduated rate estate” for up to 36 months following the death of an individual. The estate will cease to be a graduated rate estate if it is still in existence at the end of the 36 month period.
Form T3RET, T3 Trust Income Tax and Information Return, may not be necessary if the estate is distributed immediately after the death of the person or if the estate did not earn any income before its distribution. If the filing of a T3 return is required, the due date will depend on the type of trust. For more information, go to Tax Guide T4013, T3 Trust Guide.
Income Tax Act
- Section 159
Directory of Learning Products
- Learning product TD1160-000, Estates and Trusts - Audit of a Deceased Person’s Return
- Learning product TD1161-000, Estates and Trusts - Auditing Trusts
Processing timeframes - service standards
In order to make sure that a taxpayer's legal or authorized representative obtains a clearance certificate from the CRA relating to specific authorized years of that individual's tax records, properly completed / submitted requests are to be entered into the Clearance Certificate System (CCS) database on a timely basis, and processed accurately.
CRA’s service standard is to address 80% of requests within 120 days of receipt by the CRA. The standard will be reviewed and reported on annually.
Reporting time and production
Activity type 628
Record the time spent on all activities related to the review of clearance certificate requests:
- documenting the receipt of the request
- obtaining and examining documents and information
- reviewing various accounts to make sure there are no debts owing
- dealing with enquiries related to requests
- preparing relevant forms, leads, etc.
- processing the clearance certificate
Production: do not record a unit of production for this activity.
Activity type 490
Record the time spent processing adjustments related to the clearance certificate requests:
- obtaining Integras case from team leader
- uploading previously obtained documents
- creating working papers (if needed)
- finalizing Integras case for processing the adjustment
Processing Form TX19 requests for clearance certificates – 8 Steps
Receipt of requests
Determine which TSO should process the request by verifying the address of the legal representative.
Confirm the TSO jurisdiction of the applicant by checking on the mainframe. If the legal representative has authorized another person or firm to act on their behalf with CRA, make sure this authorization has been updated on RAPID M.1.1. The legal or authorized representative may request a clearance certificate from the TSO that served the taxpayer. Where more than one legal representative is named or appointed, one legal representative (the applicant) may have assumed responsibility for communicating with CRA, which can be verified by contacting the applicant.
In order to assist in approving low-risk clearance certificates, we have created a T1 Clearance Certificate Decision Tool (CCDT). This tool will assist in determining if a request should be accepted or denied.
Enter the SIN into Compliance Risk Profiling Viewer (CRPV):
- If the CCDT returns a “No” response, then issue an acknowledgment letter and prepare the file for further review.
- If the CCDT returns a “Yes” response, prepare to issue a clearance certificate without further review.
Review the completeness of the clearance request to make sure the application is complete and that it includes the persons asking for the certificate by providing the name, address, telephone number, and title (for example, executor, trustee, liquidator, and administrator).
For a deceased person, the request must include:
- the deceased's name
- the deceased's social insurance number
- the taxpayer's date of death
For a trust, the request must include:
- the name of the trust
- the name and address of the trustees
- the trust account number
- the wind up date
For a corporation the request must include
- the full corporate name
- the business number (BN)
- the wind up date
For a GST/ HST registrant, the request must include:
- the full name of the registrant
- the business number (BN)
- the wind up date or date of death for a sole proprietor
Form TX19 received without complete documents
When you receive a Form TX19, Asking for a Clearance Certificate, request, you must only deny and return the request to the executors or representatives where the final return was not filed or assessed. Otherwise, the request should be accepted and entered in the Clearance Certificate System (CCS).
If there are missing documents, then you will send a letter to the executors or representatives requesting that they send the missing information and allow 30 days for submissions. If there is no response within 30 days, deny the request. You may also consider phoning the representative to request the missing documents and make a note in the CCS, instead of sending a letter.
Enter the request into the CCS and initiate a query sheet. For more information, go to Clearance Certificate System (CCS) procedures.
NOTEPAD is to be updated that a request has been received and the applicable TSO. The “date the request is received” is the date received by CRA, regardless of which TSO or TC initially received the request. CCS will allow another date to be entered for when the request has been received by the processing TSO.
If the legal and authorized representatives have been updated on RAPID M.1.1, proceed to obtain any necessary returns or permanent documents to facilitate review of the request (a copy of any relevant document should have been previously supplied and should be in Perm Docs).
If a copy of the will, appointment of a legal representative, or third-party authorization accompany the request, update the authorized representative on RAPID M.1.1.
If the taxpayer dies without a will (intestate) or without having named an executor, or both, refer the file to TRIS, or inform the client to write to the TRIS Section at their TC. TRIS staff will review the case and update Option M.1.1 if appropriate. Do not send a clearance certificate until Option M.1.1 is updated.
If the necessary documents do not accompany the request and no legal or authorized representative has been updated on Option M.1.1, a copy of the will, grant of probate or administration, schedule of assets, and any third-party authorization must be requested from the applicant before proceeding. For more about this, refer to TSO letters, to be used by the Clearance Certificate Program.
The following are the most common documents necessary to process a clearance certificate request:
- A complete copy of the will, including any codicils, renunciations, or disclaimers, and all probate documents.
- If the individual died intestate, a copy of the document appointing an administrator (for example, the Letters of Administration or Letters of Verification issued by a probate court). If the estate is small and the deceased owned no real property in their own right, the “next-of-kin” may have assumed the responsibilities of administrator; in which case, seek team leader assistance.
- A copy of the trust document for inter vivos trusts or the related will, if a testamentary trust.
- 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 or at the date of distribution, if not the same. For help with this, see the “List of Assets” in the TSO letters that can be sent to the legal representative for completion.
- If a statement of properties has been prepared for a probate court, CRA will usually accept a complete copy, along with a list of any properties (such as real estate held in joint ownership, Registered Retirement Savings Plan (RRSP) contributions with named beneficiaries, etc.) that the deceased owned before death and that passed directly to beneficiaries.
- Any other documents that are necessary to prove the legal representative and the distribution of the deceased's estate.
1) Required returns
A clearance certificate will be issued only when all “required” income tax returns have been filed and assessed. Use the following chart to decide, according to the type of request being processed, the returns required and whether they are available for charge out.
|Requests||Verify that these returns are assessed||Required returns (if necessary)
|Date of death||The T1 final return and all the returns * Note 1||The T1 final return, the prior year return, and the permanent document (PD) envelope|
|Inter vivos Trusts (final and partial)||All T3 returns||The T3 returns for last 3 years and PD|
|Corporations||All T2 returns||The PD envelope. Since T2s now E-file, CORTAX should be accessed for assessing information. Details of asset dispositions should be requested.|
*Note 1: If returns are not assessed, consult with the resource or team leader. It may be possible to accept the request if the returns are not “required” under the ITA.
To verify the status of T1 reassessments, check:
- RAPID Option Y and T1 Case system - For pending RAPs and outstanding appeals (Appeals Stall Code in the T1 Case system)
- Case Appeals (CSAPP)
New Records Storage Model
A New Records Storage Model (NRSM) has been adopted by the CRA in response to the need to store and retrieve the increasingly large volume of hard copy tax and operational documents both produced and received during the normal course of business.
As a result of the move to the NRSM, combined with sustainable development and cost containment initiatives, it has been decided that it is no longer necessary to print and send documents produced during the course of an audit to the taxpayer’s permanent document (PD) folder. Furthermore, the outsourcing of records storage means that RAPID is no longer the method by which auditors may request taxpayer records from storage. Auditors who require access to tax and related records may begin the training and authorization process for ReQuest Web, the online charge-out system.
For more information on the NRSM, including training on how to use the charge-out system and the instructions on getting authorization to access the system, go to Centre of Records Expertise.
2) Returns already charged out
If the required returns are charged out to someone, contact that person to determine the reason for the charge-out and to inform them a request for a clearance certificate has been received. Based on the person's response, you must decide whether the review of the request can go ahead. If not, the request should be denied and any documents submitted should be stored in Recall.
3) Returns not filed
If one or more returns that are required (see the preceding Table) are not filed, refer the request to the resource or team leader to decide whether the request can proceed.
4) Outstanding amounts
For all clearance certificate requests, make sure all taxes, penalties, and interest have been paid or secured.
Check the following systems to decide whether there are any outstanding balances or unapplied credits:
- T1 Case for T1s: Sometimes you may see a “Keep code” on N.5. The presence of a “Keep code” means that any credit (refund) is to be held and applied against an outstanding balance or previously written off debt.
- RAPID Option AA for T1s and T3s: The RAPID subsidiary ledger system (Option AA) keeps accounting information, such as balance owing, payments, arrears interest, and penalties. Check the sub-ledger account to decide whether there is an existing balance owing or unapplied credit.
- Automated Collections and Source Deductions Enforcement System (ACSES) - key in the “ACS” option for T2s: For corporation requests, check ACSES by searching the BN followed by RC.
- ACSES - key in the “ACS” option for GST/HST: For GST/HST requests, check ACSES by searching the BN followed by RT number.
For more information on how to navigate within this system, go to ACSES.
The “Keep code” holds back issuing a credit (refund) in order to apply it against an outstanding balance. The “Keep codes” and their meaning are shown below.
|0||Keep credit not required
||This code is set automatically by the system when an account is nil or in debit status and the Keep code is not 4 or 6. If the “Keep code 0” comes from a “Keep code 4” which has just been deleted (visible in the T1 Case System), do not transfer the case to Collections.|
|1||A credit balance exists
||Transfer an ERA item as a Refund Enquiry (Category code 04) to the taxpayer’s TC. When the client is entitled to a credit, refer the file to the resource or team leader so that an ERA item can be created to release the credit or an audit set up to assess an offsetting debit.|
|2||Withhold the credit for a reassessment||The code is set when an offsetting debit is expected. Check Option Y for a pending reassessment. If there is no indication a return is being reassessed, refer to the resource or team leader so that an ERA item can be created to release the credit.|
|3||Withhold the credit for an arrangement||Collections set this code when they have made an arrangement with the client to pay off an existing debt.
|4||Withhold the credit for collection of a previously written-off debit
||This code is set when a debit balance has been written off as uncollectible.
|5||Interception requested by the Collections Section
||Collections will set this code when they expect a debt to be owing at some time in the future or the client has a debt owing on another account.
TSO: If the T1 Case System shows the status is TSO, refer the request to the responsible TSO Revenue Collections.
Call center: If the T1 Case System shows the status is Call Centre, refer the request to the Debt Management Call Centre (DMCC).
In the case of a “Set Off” flag on the account, any tax refund may be used to pay debts owed by the taxpayer under federal, provincial, or territorial programs. In the case of a Stall Code on the account, all collection action stops until the outstanding query is resolved.
When there is a Set Off Flag, a Keep Code, or a Stall Code on the account, verify with your resource or team leader the appropriate actions to take.
If there is a balance owing over $0 in any revenue account, and the collection limitation period (CLP) for the balance owing has not expired, the clearance certificate cannot be issued.
If there is a balance owing in any revenue account, and the CLP for those amounts has expired, no more actions can be started to collect the debt. As a result, the clearance certificate can be issued.
A letter requesting payment of the balance owing, where the CLP has not expired, must be sent to the representative. Allow 30 days for receipt of the payment.
Where the balance owing remains unpaid after 30 days, the request for clearance certificate must be denied.
If you phone the representative, you can direct them to the CRA’s Automated Collection Service at 1-888-863-8657 to make arrangements to pay the balance owing. If they have any other questions, you can also direct them to the Individual tax enquiries line at 1-800-959-8281.
If the reason for a credit balance in any account cannot be readily determined and resolved, deny the clearance certificate request and send a letter to the representative informing them to contact the Individual income tax enquiries line at 1-800-959-8281 if they have any questions relating to the credit.
The inventory of incomplete files must be checked on a regular basis to make sure that requests for more information do not stay unanswered. If the information is not received after the bring forward (BF) period, the request should be denied and referred to the resource person or team leader.
When the legal representative decides to abandon a request, the file must still go through “Initial review” to decide whether audit actions are required.
Where all the documents shown on the checklist are submitted or if the screener believes that more information is not required, the request should be updated in CCS as ready for review and the file referred accordingly.
It will be more expeditious to phone the legal or authorized representative. If a telephone call is not successful, a letter must be sent. Standard form letters that simplify the letter creation process and help to save time have been created. Refer to the TSO letters. If you must write to the representative:
- It is preferable to use one of the standard letters. The information related to the author and the recipient is automatically added to the letter.
- BF the file for 30 days and allow 10 more days for mail handling,
- Update the "Comments" area of CCS with the details of the action taken.
If a reply is not received at the expiration of the 40-day period the request will be denied.
Charge out of returns
Only charge out returns when it is not possible to properly assess the tax at-risk based on the information available on-line.
Update the "Comments" area of CCS to document the action taken. The request and the accompanying documents should be placed in a folder and kept, while waiting for the returns to arrive, according to the filing system in use in the office.
Upon receipt of the returns, match them with the file, and send for review.
Review the NRSM information included in Business Audit News - Issue 5 - April 2014.
During the review of a request for a clearance certificate, make sure that all required returns have been assessed and the taxes paid or secured. Only issue the clearance certificate when no further returns and no examination will be required. Therefore, it is important to examine all available information to decide their possible tax consequences.
The next step is to review the documents submitted with the request and the tax information available to decide whether an adjustment to the returns is required or whether a clearance certificate can be issued. To assist you in conducting the review, use the T1 and T3 checklists and query sheets. Pay particular attention to the following items:
- Summary of assets: The list of assets should allow you to quickly gain an idea of the total value of the estate and the potential tax consequences after their disposition (for example: interest income - no consequences; ownership of shares or a cottage - capital gain (loss); ownership of capital property = complex review).
- Distribution of assets: Where there are non-residents beneficiaries, research of non-resident tax would be required. (See your resource or team leader).
- RAPID system: Examine the information on Options C, DD.3, HH.1, Y, GST/HST, CPP/QPP for unreported incomes or credits to which the taxpayer is not eligible.
- Interest income: Compare the amounts reported, on Option C with the information available on DD.3 and note any material discrepancies. Verify also that dispositions of securities as per T5008 information slips have been reported.
- Amounts in RRSP or RRIF: Examine the information available (RAPID Options C, DD.3, R and the list of assets) to decide potential tax consequences after the death of the annuitant. These amounts are usually taxable on the deceased person's final return, except when the rollover rules apply. Refer your findings to the resource or team leader for proper action.
The instructions above are not exhaustive. Refer to the T1 deceased Audit Plan for an extensive list of possible audit issues.
Clearance certificate (CC) teams should not see a complicated technical issue as a reason to automatically refer the CC request to another area. Referring CC requests to other areas adds additional days to the processing days and this should be avoided except in exceptional circumstances.
The SP6 and team leader are initial resources to resolve technical issues. When the technical issue cannot be resolved within the team, the CC teams may send the question to the HQ email box. If the issue is T3 related, the CC teams may also consult the T3 National Trust Team (NTT) in the KW TSO. However, the CC teams should not automatically refer the T3 file to the NTT; the initial contact should be on a consultation basis only.
Referrals of CC Requests
There are situations when referrals to other areas may be necessary, but such referrals must only occur in the context of obtaining a specific service, and only after the CC officer has taken all steps to resolve the issue. This includes an information consultation with the area to which the request may be referred. When a referral occurs, the CC officer cannot cancel the CC request and should inform the legal representative that a referral has occurred and provide an estimate of the time the referral will take.
For example, the CC officer may note a possible undervaluation of an asset on its deemed disposition upon the death of the taxpayer. The CC officer should attempt to resolve the issue by obtaining information from the legal representative, including obtaining a copy of the private valuation report if one was prepared. The possible undervaluation must also be material and what constitutes an appropriate level of materiality should be discussed with the SP6 or team leader. After these steps, the CC officer can informally consult the Valuations Section. If Valuations agrees that the file can be referred, then the CC officer may make the referral and should inform the requestor that this has occurred. The CC team is responsible to monitor the status of these referrals.
Referrals to the Kitchener-Waterloo NTT
There is a change in policy on referring CC requests with specific T3 issues to the NTT. CC teams must now attempt to resolve T3 issues, as is done with T1 and T2 issues. In many situations, the T3 CC request is part of a T1 CC request. The CC officer is the person best placed to review the issue and obtain information from the legal representative. In some situations, a reassessment of the T3 return may be required and the CC officer may complete these reassessments the same as for T1s and T2s.
The CC teams will be supported by the reinstatement of the SP6 for technical issues, access to the NTT through the email box, and access to the HQ Technical Applications Section. It is also expected that the regions will ensure training is provided to the CC teams through learning product TD1160, Estates and Trusts – Audit of a Deceased Person’s Returns. It may be appropriate also that an informal training session be provided by the NTT.
It is understood that there will be material trust audit issues that are too complicated for the CC team, even after attempting to resolve as noted above. When it is a T3 issue, the NTT will likely agree that an audit is warranted and the CC team will refer the requests to the NTT. When the complicated issue relates to a T2 or T1, the CC team may refer to one of the Complex Transaction (CT) audit teams for review.
However, the CC request must stay active and cannot be cancelled. The CC officer should tell the legal representative that the request has been referred and provide an estimate of the time in referral status. The CC team remains responsible for the CC request and its approval once the NTT or the CT completes its audit. Accordingly, the CC team will have to periodically monitor referrals and update the legal representative on its status.
If the request is in respect to a statute-barred period, refer the file to the regional BI and they will decide if there is any risk associated with the file. If so, BI will open the file for an audit, if not, then you can process the clearance.
You will not deny the request for clearance certificate simply because the file is statute barred.
As a result of the review, the BI officer may conclude that there is no compliance issue and recommend the clearance certificate be processed. In this case, proceed with the issuance of the certificate.
Fee paid to Executor
If a family member or friend acts as an executor, who does not regularly give these services, then they are considered to earn income from an "office" and the amount is taxable in the same fashion as a salary. The fees are subject to tax and Canada Pension Plan (CPP) withholdings. A payroll account will need to be opened by the executor and failure to comply may result in an unexpected personal tax bill for the executor. Executor fees are not subject to employment insurance premiums.
Make sure the executor reports the CPP withholdings and the tax on the executor’s fee before sending the clearance certificate.
Approval and Issuance
At this stage, the audit work is completed and any balance owing paid. The request and all the documents pertaining to the file are returned so the clearance certificate can be issued. Take the following actions to finalize the file:
- Re-check RAPID Option Y (for pending adjustment), Option Q, N.5, and AA for debits owing (or credits). Re-check the ATS system: options 1.2, 1.3, and 2.6 for intercepts, charge out information, or any assessments or both.
If there is an outstanding issue with the T3, e-mail mailbox: NOR-Ottawa, ERP-Gladwin.
- If the system data shows that there are no outstanding issues, go ahead with Form TX21 by updating CCS for Clearance sent and print the clearance certificate. The clearance certificate is a prescribed form with a unique number pre-determined by CCS - the first two digits showing the TSO sending the clearance, followed by a sequentially issued number.
- Stamp the clearance certificate with the signature stamp.
- Update RAPID Option L.6.13 to record the date sent and the number of the clearance certificate. Later, if a reassessment is entered for the SIN, an error message will be given and the file referred to the TSO that sent the clearance certificate.
You are no longer able to update an account with an unknown date of death. There should be very few situations where you would update an individual with a date of death unknown. Make every attempt to get the correct date of death from estate.
In cases, where an unknown date of death update is required, send the request to ABSB/DGSCP-BPD/DPP-Section II/IP for their review.
Note: do not update any survivors account with a clearance certificate number.
- Update ATS 2.02 to change the account status to "inactive" by changing the Master Status Code to "03."
- Mail the clearance certificate to the legal or authorized representative.
- As per the Agency’s NRSM project, once we complete the clearance certificate request, complete the RC 467 Trailing Documents Records Transmittal Slip to send the documents to storage.
- To reduce the number of documents to store, use the CCS and only send the following documents to NRSM:
1. Form TX21 – as there is no separate check box for Form TX19 and the correspondence received by taxpayer, attach Form TX19, the checklist, list of assets, any other important documents sent by the taxpayer.
2. Legal documents – check the proper box on RC467 Trailing Documents Records Transmittal Slip.
A corporation may wind up its affairs and distribute its assets as a winding-up dividend to its shareholders. The representative will submit a request to surrender the corporation’s charter and have the company struck from the federal or provincial corporate register.
A corporation is considered to have been wound up if:
- it has followed the procedures for winding-up and dissolution provided by the appropriate federal or provincial companies act or winding-up act; or
- it has carried out a winding-up, other than by means of the statutory procedures and has been dissolved under the provisions of its incorporating statute.
Generally, applicable federal or provincial statutes authorize the dissolution of a corporation only if it can be shown that:
- the debts, obligations, or liabilities of the corporation have been extinguished or provided for, or the creditors have given consent to the dissolution; and
- after the interests of all creditors have been satisfied, all remaining property of the corporation has been distributed among its shareholders.
Subsection 88(1) of the ITA provides rules that apply if a subsidiary has been wound up into its parent corporation provided that both corporations are taxable Canadian corporations and the parent owns not less than 90% of the issued shares of each class of the subsidiary’s capital stock. The provisions in subsection 88(2) apply to a winding up of a Canadian corporation to which subsection 88(1) does not apply.
Corporations that are dissolved under the provisions of their incorporating statute or wound up by law, will surrender their charter according to either the Canada Business Corporations Act or the applicable provincial corporations’ legislation. The date of issue of the dissolution certificate is significant to the CRA, as that is when the corporation is deemed to have disposed of all of its assets.
An involuntary dissolution can occur when a corporation fails to fulfill the requirements of the incorporating jurisdiction, such as the payment of certain fees or filing periodic reports. Depending on the statutes of the incorporating jurisdiction, it may be possible to restore the dissolved corporation. The procedures vary and may include the submission of an application and the payment of a fee. Usually, the corporation continues to operate.
Under the corporation acts, there may be a significant period of time between the struck off date and the dissolution date, during which the corporation actively seeks or is forced to seek a formal dissolution.
The CRA can reassess a dissolved corporation or one that has been struck permanently from the corporate registry, subject to the provisions of the applicable corporate statute. The corporation does not have to be revived in the following jurisdictions that allow a civil, criminal, or administrative action to be initiated within a specified time period following the date of dissolution:
|Incorporating Jurisdiction||Corporate Act Provision||Time Limit|
|New Brunswick||152(2)||2 years|
In all other jurisdictions, the corporation has to be revived before a notice of assessment or reassessment can be issued; there are no time limits or windows of opportunity. Revivals are usually methods of last resort to assess a corporation.
If a clearance certificate has not been obtained under subsection 159(2), it is possible to assess the representative who is responsible for the affairs of the corporation.
After property of a corporation is distributed to the shareholders, they are liable for taxes, interest, and penalties, but only to the amount of the distribution made to them and subject to the time limits for actions that can be taken against the shareholders. This action must be brought in the province where the corporation had its registered office immediately before dissolution.
Prior to bringing any action, the CRA must obtain the financial statements, minute books, shareholder register, books of account, and other records to ascertain the information relevant to each shareholder’s distribution. The onus is on the CRA to prove the extent of the shareholder’s liability and to determine the applicable section of the provincial corporations act.
Audit procedures for charter-surrendered corporations
If an audit is required on a corporation requesting a clearance certificate, it will be sent to the TSO to be completed. The TSO auditor assigned the file should complete these audit procedures when reviewing the account of a dissolved corporation:
- Review RAPID:
- Confirm that the corporation has been struck off the corporate register or surrendered its charter.
- Determine if a clearance certificate has been issued.
- Note the date of the last filed T2 return.
- Confirm that there has been no activity beyond the struck off date by reviewing mainframe information relating to income tax and source deductions.
- Identify the shareholders and review their T1 returns to determine income that might relate to the corporation.
- Review of returns filed:
- Obtain the relevant returns.
- Ensure that returns have been filed to the date of charter surrender.
- Determine if there is notification of a final return, wind-up, or amalgamation.
- Determine if there has been a final distribution of assets.
- Determine if a clearance certificate was issued or requested.
- In the case of an amalgamation, identify the merging corporations and determine if the new corporation files returns.
- Consider referrals to GST/HST Registration for name changes.
- Review of the balance sheet:
- Note if the corporation had any assets such as capital property and inventory.
- Determine the amount of shareholders’ equity.
- Determine the status of shareholder loans (asset or liability).
- Determine if subsection 15(1.2) relating to forgiveness of shareholder debt is applicable.
- Determine if there is potential for assessing deemed dividends.
- Miscellaneous audit procedures:
- Review expenses and verify further any unusual items.
- Determine if other areas such as Registration, Collections, and Enforcement have any concerns.
- Follow-up on the distribution of assets if the corporation has ceased operations.
- Determine if there is a change in use of real property; determine if there are any income tax consequences.
- Review all notes (SUDS and ASCES) to determine if additional verification or concerns have been noted.
- Determine if a final income tax audit is required.
- Consider if there are any valuation issues for capital assets or inventory.
- Consider calling the taxpayer for a certificate of revival if any collection or audit action is required.
Certificate of revival
A certificate of revival may be required to assess a dissolved corporation. If a corporation has distributed its assets, the corporation must be revived before an assessment can be made. In either case, it may be in the best interests of the shareholders to ensure that the certificate is filed.
A revival deems the company to exist from the time of its incorporation so the assessment is valid under subsection 152(1). Assessments are addressed to the dissolved corporation, in care of the representative who is responsible for the affairs of the corporation. The representative is assessed under subsection 159(3), but the representative’s liability for payment is limited to the value of the property distributed.
Instructions on how to restore a dissolved corporation are available from the local corporate registry office or the regional office of the Department of Justice.
The actions required depend on the circumstances of the case and may include:
- If the corporation has not filed returns and its retained earnings account is in a deficit position, these procedures are required:
- Contact the taxpayer to obtain the certificate of revival and any final returns.
- Advise the taxpayer the file will be coded Inactive once the certificate of revival is provided.
- Inform the taxpayer that the returns will be held in abeyance until the certificate is received.
- If the certificate is not provided, assess the taxpayer based on the last returns filed. Ensure that refunds cannot be paid until the certificate has been issued.
- Assess shareholders with respect to income earned by the corporation from the date of dissolution based on the shareholder’s ownership percentage. The assessments will not be reversed until the certificate has been provided.
- If the corporation has filed returns and its retained earnings account is in a positive position, consideration should be given to reassessing the shareholders for deemed dividends under subsection 84(2) for the year in which the corporation was dissolved.
- If the TC sends several T2 returns to the TSO, including a return for a tax year after the date of dissolution, this action will be taken:
- The TC will be instructed to process the returns for fiscal years ending before the charter surrender date.
- The returns for the year of charter surrender are to be stored in Recall until the certificate of revival has been obtained from the taxpayer.
When the corporation is revived, assessments will be made as a consequence of filing the final returns. For example:
- Deemed dividends will be assessed to the shareholders using the last fiscal year before the corporation was dissolved.
- The income of the corporation from the date of dissolution until it was restored will be reassessed to the shareholders according to their share percentage.
Professional judgement should be exercised and materiality considered when determining whether to pursue any adjustments for the year in which the corporation surrendered its charter. If no adjustments are made, the corporation should be coded Inactive and the unassessed returns are to be stored in Recall.
Income Tax Act
- Sections 87, 88, and 159
- Window on Canadian Tax, 3000, Wind-up without Dissolution, meaning of a winding-up where a company has not been dissolved because of outstanding litigation
- Window on Canadian Tax, 3119, Assessment of Dissolved Corporation
- Form TX19, Asking for a Clearance Certificate
Month DD, YYYY (Insert date)
Dear Mr./Ms./Mrs./Miss/Dr. (Insert last name):
Subject: Request for clearance certificate
We received your request for a clearance certificate on (insert date), but cannot process it because a clearance certificate cannot be issued until the required income tax returns are filed and assessed.
Please resend your request to us after you receive the notices of assessment for all the returns filed. To help us process your request quickly, please include the notice of assessment numbers and dates issued, as well as:
- the social insurance number of the deceased
- a copy of the probate letter (if it applies), the will, and any supplement
- a statement of assets that shows the adjusted cost base and deemed or actual proceeds (if it applies)
- a list of the beneficiaries and the proposed distribution of the estate, if the deceased died without a will
- a copy of all court orders or agreements changing the distribution of the estate
We will process your request as soon as we receive the information.
To learn more, see Information Circular IC82-6R11, Clearance Certificate, at cra.gc.ca/E/pub/tp/ic82-6r11.
To help you understand your rights with the Canada Revenue Agency (CRA), please read the Taxpayer Bill of Rights at cra.gc.ca/rights. The Bill is a set of 16 rights confirming that the CRA will serve taxpayers with a high degree of accuracy, professionalism, courtesy, and fairness.
You can also get these publications by calling us at 1 800-959-8281 for individual income tax enquiries or at 1 800-959-5525 for business and self-employed individual enquiries.
If you have questions, please call me at xxx-xxx-xxxx. You may also reach my team leader, (insert name), at xxx-xxx-xxxx.
Tax Services Office:
There are three forms of wills under which a person can dispose of property on death:
- A will under common law must be written or typed and signed by the testator before two witnesses, who must sign in the presence of each other and the testator. The witnesses cannot be the beneficiary or the spouse of a beneficiary.
- A notarial or authentic will must be witnessed by two notaries or one notary and two witnesses, all in the presence of each other. This type of will is found in Quebec and is based on Civil Code.
- A holograph will must be written in the handwriting of the testator and signed and dated by the testator. No witnesses are required. This is legal in Alberta, Manitoba, New Brunswick, Ontario, Quebec, and Saskatchewan.
|Identification||Gives the testator’s name, occupation, and domicile
|Revocation||Revokes all previous wills|
|Notation of executor/trustee
||Names the executor or trustee
|Power of appointment to trustee||Gives the trustee powers to deal with the assets, such as the power to sell, administer, or distribute the estate|
|Power to pay debts
||Enables the trustee to pay legal debts|
|Specific power of sale
||Enables the trustee to sell a specific asset at a certain price within a certain time|
|General or specific legacies
||Directs assets to named individuals|
|Distribution of residue
||Distributes the estate remaining after payment of debts and distribution of legacies
|Transfers to minors||Allows payments to persons under legal age, with receipt by the parent or guardian being sufficient to discharge the trustee’s responsibility|
|Power of appointment to trustee||Allows the trustee to invest estate funds without being restricted to investments authorized by the Trustee Act|
|Power to borrow
||Allows the trustee to borrow money and exonerates the trustee from loss, providing the borrowing was done in good faith
|Signature of testator and witnesses
||Includes the signature of the aforementioned and the date they signed
The executor may take the will before a proper officer or court to obtain legal assurance that the will is the last will and testament of the deceased person. The establishment of the validity of the will is called probate. Not all provinces require that the will be probated. Refer to provincial legislation to establish if probate is necessary. A list of estate assets and liabilities is included when wills are probated.
These are terms the auditor may encounter during audits of estates:
||A person who is legally appointed to represent a deceased person because the person died without a will, without naming an executor or alternate executor in the will, or because there may be a dispute between the named executor and the beneficiaries. If the deceased had no will (intestate), the provincial laws of succession will generally be followed in appointing an administrator.|
|Codicil||The means by which a will can be amended without the execution of a new will. It must be executed with the formalities of a will.|
|Contingent interest||A future interest in real or personal property that is dependent upon the fulfilment of a stated condition.
|Corpus||The principal or capital of an estate, as distinguished from income.|
|Dependant’s relief||The establishment of property rights under family property legislation for the benefit of a spouse or children.|
|Demonstrative gift||A gift by will of a sum of money to be paid from designated funds or assets, such as a gift of $2,000 paid from a specific bank account.
|Disclaimer||An outright refusal of a gift, share, or interest in a will.|
|Distribution||To divide the estate property among the beneficiaries according to the terms of the trust document, or according to the applicable law.|
|Encroachment||The power given to the executor to use capital funds for the purpose described in the will.|
|Exclusive spousal or common-law partner trust||
A trust created by the deceased under which:
See subsection 70(6) of the ITA.
|Executor||A person named by the deceased to carry out the provisions of the deceased's will. NOTE that in the province of Quebec an executor may also be known as a liquidator.|
||A specific bequest for non-specific property, such as “$500 to my son Bob.”|
|Indefeasible||Not capable of being annulled or rendered void.|
|Issue||All persons who have descended from a common ancestor.|
|Joint tenancy||A holding of a property by two or more persons in such a manner that, on the death of one of the joint owners, the survivors take the entire property.|
|Lapse||A falling of a gift into the residual of the estate by reason of the death of the legatee or devisee during the lifetime of the testator.
|Letter of administration||A certificate of appointment or authority to settle an estate, issued to an administrator by the appointing court.|
|Letter testamentary||A certificate of appointment, issued to the executor by the court in the probate process.|
|Legacy||A gift of personal property by will (same as a bequest).|
||One who owns an estate or real property for their own life or the life of another person.|
|Power of Attorney
||An instrument appointing a person to act as the agent or attorney of the person granting it. The power of attorney may be general or limited to specific duties or functions, and it may be applicable immediately or at some future date or upon some future occurrence. When an individual dies, as with all other authorizations, the power of attorney ceases.|
|Probate||Formal proof before the court that the instrument offered is the last will and testament of the deceased.|
||A provincial office which may be appointed to administer an individual's financial and legal affairs because of the individual's incapacity to do so. The Public Trustee usually becomes involved when a person is declared incompetent and there are no family members or friends to take charge of their affairs. The Public Trustee also administers the affairs of minors. NOTE that provincial Public Trustee legislation provides the Public Trustee's appointment ceases on the taxpayer's death.|
|Release or surrender
||A discharge of a right of action against another person. It must be made under seal or by consideration.|
|Renunciation||The refusal of a beneficiary to accept their interest in an estate or the refusal of an individual named to a fiduciary capacity to accept the appointment.|
|Succession||The act or the fact of a person becoming entitled to the property of a deceased person.|
|Specific devise||A gift by will of a specific parcel of real property.
|Specific legacy||A gift by will of a specific article of personal property.|
|Tenants in common||Holding of property by two or more persons who each have an undivided interest in the property. Upon death, the interest passes to the heirs or devises and not to the survivors.
|Testamentary capacity||Mental capacity to make a will.
|Testamentary debts||Debts of the deceased that were outstanding immediately before death and any amount payable by the estate as a consequence of death.|
||The deceased person who made and left a valid will.|
|Variation of the will
||A rearrangement of the terms of the will after the death of the taxpayer by consent of the beneficiaries with respect to their interests.
|Vested interest||An immediate fixed interest in property, although the right of possession and enjoyment may be postponed.|
|Will||A legally enforceable document that declares the intentions about disposition and administration of the testator’s estate after death. It is effective only at death and can be revoked at any time prior to death.|
|ITA Reference||Subject Matter||References Interpretation Bulletin (IT) Information Circular (IC)|
|34.1(8), (9)||Alternative year-end methods
|40(2)||Choice of property to claim as principal residence|
|56(1)(a) (iii)||Death benefit||IT508R, Death Benefits|
|70(2)||Amounts receivable for rights or things (elections)|
|70(3), (3.1), 69(1.1)||Rights or things transferred to beneficiaries||IT427R, Livestock of Farmers|
|70(4)||Revocation of election in 70(2)||IT212R3, Income of Deceased Persons – Rights or Things|
|70(5), (5.1), (5.2), (5.3), (5.4)||Capital property of a deceased taxpayer: Depreciable and other property
|70(6), (6.1), (6.2)
||Transfers or distribution to spouse or common-law partner or spousal or common-law partner trust: Exception to subsection 70(5)|
|70(7)||Special rules for spouse or common-law partner /spousal or common-law partner trusts
||IT305R4, Testamentary Spouse Trusts
|70(8), (10)||Meaning of certain expressions and definitions|
|70(9), (9.1), (9.2), (9.3), (9.6), (9.8)||Tax deferred rollovers on intergenerational transfers of certain farm property
|70(13)||Capital cost of certain depreciable property||IT349R3, Intergenerational Transfers of Farm Property on Death
|70(14)||Order of disposal of depreciable property||IT349R3, Intergenerational Transfers of Farm Property on Death|
|72(1)||Reserves in the year of death|
|72(2)||Elections by representative for reserves|
|80(2)(a), (p), (q)
||Debt forgiveness rules|
|104 to 107||These sections apply to the estate and the representative as if the estate was a trust where a trust arrangement is in effect|
||Definition of testamentary trust
|111(2)||Year of death: Net capital losses||IT232R3, Losses – Their Deductibility in the Loss Year or in Other Years|
|118.1(4), (5), (6), (7), (7.1), (8)
||Gifts of property|
|118.2(1), (2)||Medical expenses|
|122.5(1), (2)||GST credit for T1s||Definitions and exceptions|
|122.62(5)||Death of cohabiting spouse or common-law partner and the child tax credit||Form RC65, Marital Status Change|
||Filing for deceased individuals
||Tax Guide T4011, Preparing Returns for Deceased Persons|
||Death of a partner or proprietor|
|159(2)||Certificate before distribution|
|159(3)||Personal liability of the legal representative||IC98-1R7, Tax Collections Policies|
|159(5)||Elections for certain provisions under subsections 70(2), (5), (5.2), and (9.4)|
||Application of losses realized upon death to the TD1 of prior years||
Regulation 1000, Election by a legal representative for property dispositions
||Estate or trust income|
||Books and records retention||IC78-10R5, Books and Records Retention/Destruction|
||Definition of disposition
|248(1)||Definition of taxable Canadian property||IT420R3, Non-Residents – Income Earned in Canada|
|248(8)||Occurrences as a consequence of death|
|248(9)||Definition of disclaimer and release or surrender|
|248(9.1)||How a trust is created||IT305R4, Testamentary Spouse Trusts
|Regulation 204||Filing returns for estates and trusts
||IT531, Eligible Funeral Arrangements
||Legal representatives and others regarding filing of returns
|Regulation 1001||Annual installments for the deceased taxpayer
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