The Costliest Mistakes Executors Make (and Why You Need Both a Lawyer and an Accountant)

Being named executor is an honour. It is also a legal job with real financial risk, and most people take it on while grieving, with no training and a full-time job of their own.

The most common mistake executors make is distributing the estate too early, before every tax return is filed and the Canada Revenue Agency (CRA) has confirmed nothing more is owed. It feels like the kind thing to do. Beneficiaries are waiting, the house is sold, and the money is sitting in the bank. But under the Income Tax Act, an executor who pays out the estate before obtaining a clearance certificate can be held personally liable for the deceased's unpaid taxes, up to the value of what was distributed.

In other words, if you hand out $400,000 and the CRA later reassesses the final return for $60,000, the CRA can come to you for that $60,000. Getting it back from family members is rarely easy.

Premature distribution is the headline risk, but it is usually the end result of several smaller mistakes. Here are the ones we see most often, and what each one costs.

Common executor mistakes and their tax consequences

1. Not obtaining a clearance certificate

A clearance certificate (requested on CRA Form TX19) confirms that all taxes, interest and penalties owed by the deceased and the estate have been paid. It can only be requested once every return has been filed and assessed, and processing often takes several months.

The tax consequence: without it, you carry the estate's tax risk personally. If you need to make an interim distribution, hold back enough to cover any possible reassessment.

2. Underestimating the tax on the final return

When someone dies, they are deemed to have sold everything they own at fair market value on the date of death. Cottages, rental properties, investment portfolios and shares of a private company can all trigger capital gains on the final (terminal) return, even though nothing was actually sold.

Registered accounts are often the biggest surprise. Unless an RRSP or RRIF passes to a spouse or another qualifying beneficiary, the full value is added to income on the final return. A $500,000 RRIF can push the deceased into the top tax bracket and generate a bill well over $200,000.

The tax consequence: executors who budget only for debts and funeral costs can find the estate short of cash, forcing rushed asset sales at the worst time.

3. Missing filing deadlines

The final return is due April 30 of the following year, or six months after the date of death if the person died in November or December. Any balance owing has the same deadline. Prior years that were never filed must also be brought up to date.

The tax consequence: late-filing penalties start at 5% of the balance owing plus 1% per month, and interest compounds daily. The CRA will not issue a clearance certificate until every outstanding year is resolved.

4. Forgetting that the estate itself files tax returns

Income earned after death, such as interest, dividends, rent, or gains on assets sold during administration, does not go on the final return. It belongs on the estate's T3 trust return, filed annually until the estate is wound up.

The tax consequence: missed T3 filings mean penalties, and income reported on the wrong return creates reassessments that delay everything.

5. Missing elections and planning opportunities

Estate tax has more flexibility than most people realize, but most of it is time-limited. Examples include:

• Filing optional returns (such as a "rights or things" return) that let certain income be taxed at lower graduated rates a second time
• Using spousal rollovers to defer capital gains and RRSP/RRIF income
• Designating the estate as a graduated rate estate, which gives access to graduated tax rates for up to 36 months and more flexibility with charitable donations
• Carrying capital losses realized in the estate's first year back to offset gains on the final return
• Claiming the principal residence exemption correctly

The tax consequence: these are not penalties, but lost opportunities. Missing them can easily cost an estate tens of thousands of dollars that would otherwise have gone to the beneficiaries.

6. Mishandling Ontario probate requirements

Ontario's Estate Administration Tax (probate tax) is $15 for every $1,000 of estate value over $50,000. Executors must also file an Estate Information Return with the Ministry of Finance within 180 days of receiving the certificate of appointment, and amend it if values change.

The tax consequence: missed or inaccurate filings can lead to reassessment, and knowingly filing false information is an offence.

7. Mixing estate money with personal money

Paying estate expenses from your own account, or depositing estate funds into it, makes it difficult to prove what was spent and why.

The tax consequence: poor records make returns harder to prepare and defend, and can expose the executor to claims from beneficiaries. Open a separate estate bank account from day one.

Why you need both a lawyer and an accountant

Many executors assume one professional can handle everything. In practice, estate administration sits on two tracks, legal and tax, and they depend on each other. The lawyer cannot safely approve a final distribution until the tax work is done, and the accountant cannot plan the tax well without understanding the will and the legal structure of the estate.

When the two work together from the start, the executor gets a clear sequence: who to notify, what to file, what to hold back, and when it is finally safe to distribute. When they work separately, or one is brought in late, gaps open up, and those gaps are exactly where the mistakes above happen.

The bottom line

An executor's job is to protect the estate, the beneficiaries, and themselves. Nearly every costly mistake comes from moving too quickly or going it alone. Before you distribute a single dollar, make sure every return is filed, every deadline is met, and the CRA has confirmed in writing that nothing more is owed.

If you have recently been named an executor, or expect to be, MacLean CPA can help you understand the tax side of the estate, coordinate with your lawyer, and get the clearance you need to close it with confidence. Contact us at Ted@macleancpa.com to book a consultation.

This article is general information and is not legal or tax advice for your specific situation.

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