Joan and her sisters have always been very close. Although they have lived in various parts of the world for many decades, annual trips together ensured they continued to stay in each other’s lives. Their father passed away ten years ago, but their mother Erika continued to stay healthy in her own home.
In August 2016, Erika unexpectedly passed away due to a motor vehicle accident, leaving Joan and her siblings Barb and Lorraine devastated. Luckily, Erika had updated her will four years ago and made Joan her Executrix. Her estate included her primary residence, a rental home, a RIF, a TFSA, a group pension and her savings account at TD. Although Joan did not have a financial background, she was competent that she could navigate the executrix duties and landscape without too much problem.
The RIF and TFSA were dispersed immediately since they were not subject to probate. Her realtor friend was able to sell Erika’s primary residence within six months and the rental home within nine months. Once the sales settled, Joan decided she could complete the probate documents with the assistance of a friend who recently completed the forms herself.
The estate wasn’t too complicated, and within seven weeks, the estate was probated. All she had left was a couple of tax returns.
So far, so good thought Joan. After a year, life could finally get back to normal.
Joan filed Erika’s 2016 tax return in March of 2017 and then her 2017 tax return in April of 2018. The taxes had been paid on the estate and Joan and her sisters could move on with their lives. They had already planned a trip together in Thailand for spring 2019. Joan made the decision so take some of the TD savings money and spring for airfare for the three of them.
After all, mom would have liked the fact that they could spend some quality time together at a nice resort. They deserved it!
Fast forward six months…
While the plans were being laid out for the three of them to spend a month in Thailand, Joan received a letter from the Canada Revenue Agency (CRA). Upon review of Erika’s 2014 and 2015 tax returns, discrepancies were discovered in relation to her rental home. Some of the expenses used to decrease her net income had been reviewed and were deemed to be ineligible. Erika’s estate now owed $5,996 in taxes.
Joan did not hesitate to call the CRA to discuss this issue. She spoke to two different people who each reviewed the case and both agents agreed - $5,996 was owed. How was this possible? Could the CRA really go back that far? Yup! Seven years apparently…
Joan proceeded to call her sisters asking for $2000 each to cover the taxes. Barb hesitated, but in the end e-transferred Joan the funds. Lorraine, after checking with her lawyer discovered that Joan, as Executrix could be responsible for unpaid taxes if the estate has already been distributed to beneficiaries. Which it had. Lorraine declined to e-transfer Joan the funds, stating it was Joan’s error, and she should cover it. Too bad…so sad. She had already allocated the funds.
In the end, Joan covered Lorraine’s share, but the relationship going forward was never the same.
What should Joan have done differently?
Obtained a Clearance Certificate from the CRA
A clearance certificate is a written confirmation from the Canada Revenue Agency that the deceased (and the deceased’s estate) has paid all taxes and associated interest and penalties up to the date the certificate is issued. To obtain a clearance certificate, Joan needed to fill out Form TX19 and file it with appropriate documents, including a copy of the will, a statement of estate assets with adjusted cost base and proof that the executor is the legal representative. A usual wait time is up to six months, but it would have provided peace of mind to Joan and continued to keep her sibling relationship close.
Don’t be a Joan.
For more information on estate planning: https://www.greenfeldfinancial.com/estate-planning
(This is a hypothetical example only)