Personal Liability of Executors for Unpaid Taxes
Did you know an executor of an estate can be personally responsible for any unpaid taxes of the deceased? Many people take on the role of the executor as a favour to a friend or family member and often forgo any compensation for their time and effort. Consider the following scenario. John is the executor of his father’s estate and after the distributions have been made to the beneficiaries and the final tax return has been filed, he believes his work is finished. One year after the estate has been closed, John receives a note from the tax department saying that his dad owes $10,000 in unpaid taxes. He had no idea his dad had an unpaid tax liability from prior years, but since John was the executor of the estate, he owes the money to the tax department.
How could this situation have been avoided? Once John filed the final tax return, he should have applied to CRA for a clearance certificate. This document is a statement from the tax department that the deceased has no outstanding taxes. Once the clearance certificate has been received, the assets can be distributed to the beneficiaries and John no longer has a personal liability for any unpaid taxes.
Some executors will not distribute assets until the clearance certificate is obtained in order to the ensure they have no personal liability. This strategy can significantly delay the distribution of the assets. For example, if a person died on August 27, 2017, the tax return may not be filed until April 2018. Once the tax return has been filed, the executor can apply for a clearance certificate which may not be received for another four months. Thus, if the clearance certificate is received in September 2018, over a year has passed and the executor was unwilling to distribute the assets to the beneficiaries.
Bottom Line – Executors should always get a clearance certificate from CRA to ensure they have no personal liability for helping a friend or family member.
TFSA and Foreign Stocks
If you own a foreign stock, any dividends with be subject to a withholding tax, normally 15%. In other words, if you receive $100 dividend from an American company, the American government will keep $15 and you will receive $85. However, if the stock is owned personally or within your RRSP, there are no tax issues. If the stock is owned personally, you claim the tax withheld as a foreign tax credit. If it is held by your RRSP, RRIF or a locked in retirement account, most countries have a tax treaty with Canada that waives the withholding tax requirements. These rules do not apply to Tax Free Savings Accounts and as a result, any withholding tax is not recoverable by Canadian taxpayers
Bottom Line – Do not put foreign stocks in your Tax Free Savings Account, as the withholding tax on dividends will be lost.
Fun Fact
Baby diaper sales are forecast to increase by 2.6% by 2020, whereas adult diapers are expected to increase 48%.
