CRA Deemed Trust for Unremitted HST: A Trap for Ontario Executors

Being appointed as an executor in Ontario is an honour, but it also carries serious financial risks, especially if the deceased was a business owner. For executors handling the estates of sole proprietors or contractors in cities like Toronto, Mississauga, or Kitchener, the Canada Revenue Agency (CRA) poses a unique and formidable challenge. When a business owner collects Harmonized Sales Tax (HST) from clients or deducts income tax from employees’ paycheques, those funds do not belong to the business. They belong to the federal government. If the deceased failed to remit these funds before passing away, the CRA considers that money to be held in a “deemed trust.”

A deemed trust is essentially a legal mechanism that says, “This money was ours to begin with, so we get to take it first.” 📍 It operates outside the normal rules of bankruptcy and standard creditor hierarchies. The deemed trust gives the CRA super-priority, allowing them to skip the line ahead of unsecured creditors, suppliers, and sometimes even secured lenders. Ignorance of a deemed trust is not a valid legal defence. If an executor distributes estate funds to beneficiaries without obtaining proper CRA Clearance Certificates, they step into a perilous trap of personal liability. Hiring a knowledgeable probate lawyer from our directory is strongly recommended to protect yourself from these severe federal tax penalties.

Step-by-Step Process for Managing CRA Deemed Trusts in an Estate

Handling a business owner’s estate requires a methodical approach to uncovering hidden tax liabilities. Before you write a single cheque to a beneficiary or pay off the deceased’s credit cards, you must secure the estate and investigate the CRA accounts. Here is the process most Ontario executors follow to navigate this complex situation safely.

Step 1: Freeze Business and Personal Accounts

Your immediate priority is preservation. 💵 Contact the deceased’s financial institutions to freeze both personal and sole-proprietorship bank accounts. You must stop any automatic payments to suppliers or secondary creditors. Every dollar in those accounts might technically belong to the CRA under a deemed trust, and releasing those funds improperly is the first mistake an unwary executor makes.

Step 2: Investigate CRA Program Accounts

Next, you need to determine if a deemed trust actually exists. Look through the deceased’s business records for a 15-digit Business Number (BN). You are specifically looking for RT (HST/GST) and RP (Payroll) program accounts. Contact the CRA directly, providing them with the death certificate and the Will, to gain authorization as the legal representative. Request a complete statement of account for all business numbers linked to the deceased.

Step 3: Apply for Probate (Certificate of Appointment)

To fully deal with the CRA and access the frozen bank accounts, you will likely need official court authority. 📈 You must apply for a Certificate of Appointment of Estate Trustee at the local Superior Court of Justice. The value of the business assets will be included in the calculation of the Estate Administration Tax. Once granted, this certificate proves to the CRA and banks that you have the legal right to liquidate assets and settle accounts.

Step 4: File Outstanding Returns and Calculate the Trust

It is very common for deceased business owners to be behind on their filings. You must retain a Chartered Professional Accountant (CPA) to prepare and file all outstanding HST returns, T4 summaries, and personal T1 terminal tax returns. Once filed, the CRA will assess the exact amount of unremitted HST and payroll deductions that form the deemed trust.

Step 5: Pay the Deemed Trust First

When the estate has liquidated enough assets to generate cash, the deemed trust must be paid before general creditors. 💳 You cannot pay off the deceased’s personal credit cards or business suppliers until the CRA’s super-priority claim for HST and payroll deductions is fully satisfied. If the estate does not have enough money to pay the CRA and everyone else, you must seek legal advice on declaring the estate insolvent. Never pro-rate the CRA’s deemed trust alongside standard debts.

Step 6: Apply for CRA Clearance Certificates

Once all taxes, including the deemed trust, are paid, you must apply for clearance certificates. To cover payroll deductions and personal income taxes, you must submit Form TX19 (Asking for a Clearance Certificate) under Section 159 of the Income Tax Act. To cover GST/HST, you must submit Form GST352 (Application for Clearance Certificate) under Section 270 of the Excise Tax Act. These documents are your ultimate shield, confirming that the CRA has no further claims against the estate. Only after both certificates are physically in your hands is it safe to distribute the remaining funds to the beneficiaries.

How Much Does it Cost in Ontario?

Untangling a sole proprietorship’s tax mess is rarely cheap, but using estate funds to pay professionals is entirely permissible and expected. 💰 Here are the estimated costs in Ontario:

How Long Does the Process Take?

Dealing with deemed trusts significantly extends the timeline of estate administration. Gathering business records and filing outstanding returns can take 3 to 6 months. Obtaining the Certificate of Appointment from the Superior Court of Justice adds another 4 to 8 months. Finally, after submitting both Form TX19 and Form GST352, the CRA routinely takes 120 to 180 days (4 to 6 months) to issue the final Clearance Certificates. Overall, executors should expect this process to take a minimum of 1.5 to 2.5 years.

Frequently Asked Questions (FAQ)

Author: lawyerinfo.ca