Written on behalf of Feigenbaum Consulting
Tax planning is important for any individual or corporation, and a large part of our practice includes helping clients with both personal tax planning and compliance as well as corporate tax planning and compliance. While maximizing savings and reducing tax obligations is important while one is alive, it’s also important to consider how your tax situation might impact your estate and your loved ones in the event of your death. This is one of the reasons Feigenbaum Law offers cross-border estate planning for people living in Canada and/or the United States. A failure to properly plan for your taxes both before and after death can have significant negative impacts on your loved ones, which is terrible to think about when most people put estate plans in place in order to leave positive contributions to family and those they were close with. A recent decision from the Tax Court of Canada, Mingle v. The Queen, shows how a failure to address taxes while alive left a testator’s family footing the bill.
Son of deceased puts mortgage on father’s home
The appellant in the case lost his father in 1994. Both the appellant and his brother were named executors of their father’s estate. The father’s will left most of the estate to the appellant’s brother, but also included a portion to his grandchildren and great-grandchildren. The appellant was “peaceful” with his father’s decision, but he wanted to take steps to ensure that his daughter would receive her share of the estate. This led the appellant and his brother to put a mortgage against the father’s property. These steps were taken sixteen years after the father died. When the mortgage was put in place the appellant had to sign documents in his capacity as the executor of the estate.
Unfortunately, the appellant’s father’s estate owed income tax and was in arrears when the mortgage was put on the house in 2010. By 2016 the appellant’s brother had passed away, and the Minister of National Revenue assessed the appellant personally for the tax debt on the estate because the mortgage was granted without the appellant obtaining a clearance certificate.
It is the appellant’s position that he should not be liable for the unpaid taxes because he had renounced his role as executor two months after his father’s death, and that he had simply acted as a trustee de son tort when he put the mortgage in place.
The issues before the court were whether the appellant is liable for the tax debt incurred by the estate from 2006 to 2010 because of his failure to obtain a clearance certificate before distributing the estate’s property. In order to answer this question, the court had to determine whether the appellant had successfully renounced his executorship.
Was the appellant still the executor of his father’s estate?
The testator’s will provided that any unpaid debts and income taxes should be paid out of his estate. Not long after his father died, the appellant wrote to his brother saying that he did not intend to act in the role of co-executor of the estate, asking his brother to keep him out of any matters to do with the estate’s administration. He told the court he personally delivered the letter to his brother.
During the years that followed, an accountant testified that he had handled accounting matters for the estate and he filed tax returns for it. He told the court the estate had been in arrears since the death of the testator and that the estate had entered into arrangements with the Canada Revenue Agency to pay what was owed. The accountant did not deal with the appellant, instead working with the brother.
When the appellant put a mortgage for $240,000 against the property, he and his brother both signed documents stating they were estate trustees. The appellant told the court nobody had mentioned the estate was in arrears for taxes. The testator’s will had not ever been probated.
Minister has authority to assess executor for unpaid taxes
The court noted that the Minister has the authority to assess an executor for any unpaid taxes owed by an estate. The Income Tax Act provides that an executor must obtain a clearance certificate before distributing any property. By following this step, the appellant would have discovered there were taxes owing. The Act goes on to state that there is personal liability that follows if these steps are not taken, and taxes are owed.
The court summarized its decision by clearly stating that a trustee or executor will be held personally liable for an estate’s taxes owed as well as interest and penalties associated with those taxes. This includes taxes that are unpaid before and during the person’s time serving as trustee/executor. The court also reminded people of how critical it is to obtain a clearance certificate from the Minister to confirm that there are no taxes owing before a property is sold or mortgaged. A failure to follow this rule once again leads to personal liability, though it’s worth noting that such liability is capped up to the value of the property being distributed.
While the court was sympathetic to the situation being faced by the appellant and the family dynamics at play, noting that he did not play a role in the day-to-day administration of the estate. That said, when he mortgaged the property, he could not also say that he had renounced his executorship. It seems like a classic case of not being able to have your cake and eat it, too.
Work with the experienced tax and estate planning lawyers at Feigenbaum Law to ensure you don’t get caught with avoidable tax liabilities
Many people who serve as executors for an estate have not done so before. That’s why it’s important to work with a skilled lawyer to ensure all of an estate’s finances and taxes are addressed in order to avoid personal liability. It’s equally important to prepare for one’s eventual passing by creating a solid financial plan for one’s estate. Sadly, many of the situations we see where executors are personally liable for taxes owed by an estate could have been avoided through working with an experienced professional. Contact Mark Feigenbaum and the team at Feigenbaum Law either online or by phone at 1-877-275-4792 to see how we can help you prepare today.