The death of a loved one can be devastating on many levels. Not only do you have to mourn the loss of someone close but you may also have to conduct important business on their behalf after their passing. In some cases, you might even be appointed as the legal representative of their estate to settle their affairs regarding bequests, gifts, and other distribution of assets.
But in order to settle an estate and properly distribute assets like cash, real estate, or other belongings, you’ll have to go through a very specific process to avoid fines or penalties by both the courts and local tax authorities.
A tax clearance certificate is essential in conducting the affairs of the entity you are representing, so you’ll want to make sure you understand what it is, how to obtain it, and what you should do after you’ve received it.
If you happened to make moves (like taking distributions from the estate of the deceased) without it, you could be personally held liable for any problems that arise from neglecting to pay taxes owed by the deceased’s estate. To finalize the business of the entity, whether an estate or a corporation/trust, this tax clearance certificate will be key.
What is a clearance certificate?
A tax clearance certificate simply states that all tax liabilities are satisfied—specifically when it comes to the estate of a deceased person or a corporation. This means there are no outstanding debt or other obligations to the tax authority in the jurisdiction in which you are operating.
Though these certificates are most common in Canada, the UK and Ireland, there are some circumstances in the U.S. and other countries where you might need to obtain a tax clearance certificate. If you are conducting affairs in the U.S. you’d need a clearance certificate from the Internal Revenue Service (IRS) or perhaps even a local jurisdiction, like a county, state or city. In Canada, the Canada Revenue Agency (CRA) would issue the tax clearance certificate.
According to the Canada Revenue Agency website the certificate confirms that these entities have paid all, “Amounts of tax, interest and penalties it owed at the time the certificate was issued.”
In order to be valid, the certificate must be issued by the tax authority who can confirm that the entity in question has, indeed, paid all tax obligations. They will examine all the information presented to them about the estate or corporation to make sure it is correct and properly reflects a value to be taxed. Ultimately, tax obligations will be based on the determined value of the estate or corporate entity.
To make sure you pay the right amount of tax, you’ll have to properly assess the value of the estate. If you report inaccurate information about the estate or corporation, your tax liability could be understated and you could end up owing taxes down the line.
A common scenario that requires a tax certificate would be when a loved one passes away and their assets need to be distributed to their heirs. The estate representative has to make sure all the taxes owed are paid so that assets are unencumbered by tax debt obligations. To ensure that this is the case, the legal representative will need a clearance certificate to distribute the estate’s assets.
How to apply for a clearance certificate
Applying for a clearance certification will vary depending on what you need it for and the jurisdiction where you are operating. In Canada, where it is common to need the tax clearance certificate in order to settle an estate, the estate’s legal representative can apply for the tax certificate with a paper form or submit the application electronically in some cases.
Before applying for the tax clearance certificate, you need to determine if the clearance certificate is necessary. According the CRA website, these are the scenarios where the certificate is not necessary:
The estate or trust continues to exist to pay income to the beneficiaries.
The corporation’s assets and liabilities are being rolled over into another corporation and there is no other tax liability.
Enough funds remain in the estate or corporate account to pay amounts owing to the CRA.
The CRA website instructs you to take these steps before applying for the clearance certificate:
Notify the CRA of the death (individual).
File the final tax return(s).
Get the notice(s) of assessment and notice(s) of reassessment that apply.
Pay or secure all amounts owed.
What to do after obtaining a clearance certificate
Assuming the CRA doesn’t request an audit, you should receive a tax certificate within 120 days of applying. Once you receive the tax certificate, you are cleared (hence the name tax “clearance”) to take distributions from the estate.
If any heirs are named in a will or in the court proceedings, the legal representative of the estate must distribute assets according to those instructions. Additionally, the legal representative must ensure that all expenses and other debts are paid out of the estate in order to close it.
If you happened to be a beneficiary of an estate, you might receive a large amount of cash or some other asset that can be converted to cash.
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