29 January 2010 External T.I. 2009-0336911E5 - Crown Priority

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: Whether Crown priority prevails in the distribution of funds by an estate.

Position: Yes.

Reasons: An estate must first obtain a clearance certificate or provide security before distributing amounts, failing which the trustee is personally liable.

LEGISLATIVE REFERENCE: s. 159(1) to (3) and s. 248(1) ITA; s. 4.1 BIA;

HAA: No paper record.

XXXXXXXXXX 							2009-033691
								Lindsay Frank
(613) 948-227
January 29, 2010

Dear XXXXXXXXXX :

The Estate of XXXXXXXXXX

This is in reply to your letter of August 5, 2009, in which XXXXXXXXXX is seeking clarification regarding the distribution of funds from the above-referenced estate.

XXXXXXXXXX died intestate on XXXXXXXXXX . On XXXXXXXXXX , the XXXXXXXXXX was appointed to administer his estate. The estate has a deficiency in the amount of $XXXXXXXXXX , as illustrated in the attached Statement of Account.

You suggest that there are two possible solutions to this situation. XXXXXXXXXX could split the income tax owing into the federal and provincial amounts payable, whereby the federal portion would be granted priority over all the other debts, and assuming there are funds remaining, the provincial portion would be paid proportionally with the other creditors. Alternatively, the trustee would pay all creditors proportionally. However, as explained below, based on subsections 248(1) and 159(1) to (3) of the Income Tax Act (the "Act"), and notwithstanding section 42 of the Administration of Estates Act, R.S.A. 2000, c. A-2, priority of payment must be given to the Crown undivided.

Subsection 248(1) of the Act defines a "legal representative" to include a trustee, who is administering or is otherwise dealing in a representative or fiduciary capacity with a taxpayer's property. Pursuant to subsection 159(1) of the Act, the legal representative is jointly and severally liable with the taxpayer to pay any amount payable by the taxpayer, and to perform any duty or obligation under the Act. Under subsection 159(2), the legal representative must obtain a clearance certificate, or provide security, before distributing the taxpayer's property in his possession or control. In accordance with subsection 159(3), the legal representative, who distributes the estate's property in his possession or control, without first obtaining a clearance certificate, is personally able to pay the amount owing by the estate. In light of the foregoing XXXXXXXXXX must obtain a clearance certificate if personal liability is to be avoided. Needless to say, the certificate would not be issued if the debt were to be paid.

Furthermore, XXXXXXXXXX must respect the prerogative of the Crown by paying the income tax debt ahead of the other debts of the estate, or provide security for the debt. The amount to be paid to satisfy the debt would consist of both the federal and the provincial portions, since the Province will have already received an amount equivalent to the tax in accordance with the provisions of a collection agreement entered into under Part III of the Federal-Provincial Fiscal Arrangements and Federal Post-Secondary Education and Health Contributions Act. This arrangement operates notwithstanding whether the tax has as yet been collected. Once the Province has been paid, the federal Crown has a claim to the tax debt.

Enforcement of the payment of that tax debt is through the Federal Court as opposed to provincial courts. In this regard, your attention is drawn to the definition of "amount payable" in subsection 223(1) of the Act whereby all amounts, including the amount payable under the provincial legislation, are included. Where payment is not forthcoming the Minister may produce to the Federal Court a certificate for the amount payable, including the amount payable under the provincial legislation. In this respect, the federal Crown asserts its priority over the entire amount payable.

Crown prerogative is not absolute. For example, a creditor who has a security interest in the estate property would prevail over the Crown's claim. Another example might involve a creditor's right of set-off with which Crown prerogative does not interfere.

We understand that the post-death legal fees were incurred in the course of the administration of the estate. To the extent that those fees are subject to a solicitor's lien or a similar enforcement device, the Crown would postpone its claim to the payment of the income tax claim. Likewise, it might be open to the Credit Union to exercise a right of set-off by redeeming the outstanding shares and applying the proceeds of the redemption against the car loan.

Lastly, since the estate does not have the capacity to pay all its creditors in full, assigning the estate into bankruptcy presents an alternative solution, in which case the Crown's claim to priority would cease and the proceeds of disposition would be distributed rateably in accordance with the scheme of distribution in section 136 of the Bankruptcy and Insolvency Act. Note, however, that the cost of the bankruptcy administration would rank ahead of the claims of the unsecured creditors.

Should you need clarification or additional information, please do not hesitate to contact Lindsay Frank at the number provided above.

B.J. Skulski
Manager
Insolvency and Administrative Law Section
Ontario Corporate Tax Division
Income Tax Rulings Directorate

Attachment.

XXXXXXXXXX