Tax clearance certificate

Who needs one and why

The Income Tax Act requires a legal representative to obtain a clearance certificate before distributing property they control in that role. The CRA defines the term broadly: executors, administrators, trustees, liquidators and similar people. In a voluntary dissolution there may be no formally appointed liquidator, and the CRA says a director, officer or other person who takes on the job can count as one.

The certificate covers income tax, including provincial tax the CRA administers, plus Canada Pension Plan contributions, Employment Insurance premiums, interest and penalties. Without a certificate, the representative is personally liable for unpaid amounts, up to the value of the property distributed.

How the request works

You ask on Form TX19, with the supporting documents listed on that form. For an Ontario legal representative the CRA lists mail, fax or the Submit Document feature in its online portals. For a corporation, the CRA asks for the resolution to dissolve, the notice of assessment for the final T2 and an authorization form if an accountant or lawyer will act for you. Do not file the request until you have the assessment notices, except in limited estate and trust situations.

The CRA issues the certificate only after the required returns are filed and assessed and all amounts owing have been paid or secured. It covers only the property you controlled up to the date of your request, so a newly discovered asset can need a further certificate.

An illustrative example

Suppose an Ontario corporation has been dissolved and its remaining cash of $50,000 is about to be paid to the shareholder who acted as liquidator. The numbers are illustrative. If the final T2 is later reassessed and tax is owing, the CRA can look to that person for the shortfall, up to the amount distributed. Waiting for the certificate before paying out the cash avoids that exposure.

What to discuss with your accountant

Ask who counts as the legal representative, which returns must be filed and assessed first, and whether part of the property can safely stay in the corporation or estate until the certificate arrives. The CRA notes you do not need a certificate before every distribution if you keep enough property to cover any liability. Bring the will or dissolution resolution, final returns, assessments and an asset list. GST/HST has its own clearance process, so ask whether a separate request applies.