My understanding of this (which may or may not be correct) is that "it" belongs to (or is close to) neither speaker nor listener, or just to the speaker. And "that" belongs to (or is close to, or was a topic brought up by) the listener. Example dialog: "I broke my favorite cup". "I'm sorry to hear that". "It's ok". "I'm sorry I broke your cup" "That's ok". Or even (this is the who-brought-the-subject-up example): "I heard the news, I'm sorry you broke your cup." "That's ok."