Principal Issues: Whether the CRA may assess the trustees of a dissolved non testamentary trust under 159(3) where a clearance certificate was issued by CRA after the trustees distribute the assets of the trust and before CRA is aware of unreported capital gains realized in taxation years before the distribution?
Position: Probably yes.
Reasons: The law and previous positions.
November 6, 2019
Ms. Martine Clermont Income Tax Rulings Directorate Canada Revenue Agency Guylaine Gladu XXXXXXXXXX 2019-079802
Subject: Assessment under subsection 159(3)
This is in response to your request dated August 20, 2018 for an interpretation as to whether an assessment pursuant to subsection 159(3) of the Income Tax Act (the "Act") may be issued in respect of the legal representatives of CANPAD Trust (the "Trust") in the Particular Situation.
Particular Situation:
- The Trust was an inter vivos trust created on June 2, 2010 pursuant to the laws of Ontario.
- The Trust had two co-trustees (the "Legal Representatives") and its beneficiaries resided in Belgium.
- The Trust was dissolved on December 30, 2013.
- The Trust filed tax returns for the years 2010 to 2013 within the required deadlines.
- The Legal Representatives distributed the Trust's assets to the beneficiaries on June 3, 2013 and December 30, 2013.
- On July 27, 2015, the Legal Representatives applied for a clearance certificate from the Canada Revenue Agency ("CRA"). The clearance certificate was issued by the CRA on March 7, 2016.
- Following an audit of the Trust that began on February 1, 2016, Revenu Québec issued a notice of assessment of the Trust on January 27, 2017 for undeclared capital gains in 2010 and 2011.
- At the time the clearance certificate was requested from the CRA, the Legal Representatives did not provide any information regarding the undeclared capital gains realized by the Trust.
- Revenu Québec issued a clearance certificate in favour of the Legal Representatives following payment of the amounts assessed on May 18, 2017.
Your Question:
You asked us whether it is possible to assess the Legal Representatives pursuant to subsection 159(3) in the particular situation.
Our Comments:
Unless otherwise stated, all statutory references herein are to provisions of the Act.
Subsection 159(2) provides, among other things, that every legal representative of a taxpayer shall, before distributing to one or more persons any property in the possession or control of the legal representative acting in that capacity, obtain a certificate from the Minister, by applying for one in prescribed form certifying that all amounts have been paid.
To the extent that a taxpayer's legal representative, other than a trustee in bankruptcy, distributes property in the taxpayer's possession or control to one or more persons without obtaining a certificate under subsection 159(2), subsection 159(3) provides that the legal representative is personally liable for the amounts referred to in subsection 159(2) to the extent of the value of the property distributed.
The term legal representative is defined in subsection 248(1) and includes a trustee.
Since the Legal Representatives distributed Trust property without first obtaining a clearance certificate, according to our interpretation of the wording of subsections 159(2) and 159(3), they may be personally liable for the amounts referred to in subsection 159(2) up to the value of the Trust property they distributed. In this regard, we refer you to paragraph 2 of Information Circular IC82-6R12 Clearance Certificate, which reads as follows:
2. Subsection 159(2) of the Income Tax Act (the Act), requires a legal representative, which we define in paragraph 3, to obtain a clearance certificate before distributing property that he or she controls in their capacity as the legal representative. As a legal representative, if you distribute the property without a certificate, you are liable for any unpaid amounts (see paragraphs 4 and 5).
Pursuant to paragraph 159(2)(a), the amounts referred to in subsection 159(2) are the amounts for which the taxpayer is or can reasonably be expected to become liable pursuant to the Act at or before the time the distribution is made. In that regard, paragraph 5 of IC82-6R12 states the following:
5. If you do not get a clearance certificate before you distribute property, you are personally liable for unpaid amounts, whether assessed before or after the actual distribution of property. Your liability will not exceed the value of the property that you distributed. Interest will accrue on the amount assessed.
In the Particular Situation, the unreported capital gains were realized by the Trust in its 2010 and 2011 taxation years, which were prior to the time the property was distributed by the Legal Representatives, i.e. June 3 and December 31, 2013. Based on the facts available to us, we are of the view that the amounts payable pursuant to this Act in respect of the Trust's unreported capital gains are subsection 159(2) amounts, regardless of whether they were determined before or after the actual distribution of the property. We are also of the view that an amount does not have to be assessed to be an amount referred to in subsection 159(2). Thus, an assessment in respect of the Trust does not have to be issued in order to assess the Legal Representatives pursuant to subsection 159(3).
That said, we still have a question about the circumstances in which the CRA issued a clearance certificate to the Legal Representatives after the date on which they distributed the Trust property. We suggest that you attempt to obtain additional information on those circumstances. Based on the information available to us, we are of the view that it is reasonable to consider that, in the Particular Situation, the issuance of the clearance certificate by the CRA does not relieve the Legal Representatives of their personal liability pursuant to subsection 159(3). It is all the more important to consider that, at the time of the request to the CRA for the clearance certificate, the Legal Representatives did not disclose any information relating to the undeclared capital gains.
Finally, we wish to point out that paragraph 159(3)(b) provides that the Minister may, at any time, assess a legal representative for any amount payable pursuant to that subsection without regard to the normal reassessment period.
We hope you find our comments useful and that they answer your question.
Best regards,
Marie-Claude Routhier
Section Manager
for the Director
International Operations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch