Filing tax returns for deceased in Canada
In life, it is said that the only two certain things are death and taxes.
While both may be inevitable, penalties due to incorrect tax filings and stress stemming from not understanding the steps you are to take when a loved passes away, are not.
If you have been named a legal representative [executor (trix), administrator of the estate, trustee, etc.] of a loved one's estate, this guide is for you.
How do I get started?
As a legal representative, it is your responsibility to ensure that the financial affairs of the deceased are in order and ultimately, assets are distributed to the beneficiaries.
It is important to contact CRA to advise them of the deceased’s date of death as soon as possible. A copy of the death certificate, completed will and/or other document showing you as the legal representative should be sent along with a letter to CRA in short order.
Speaking to an accountant at this point will allow them to assist you in this process and give them the opportunity to forward an authorization form in conjunction with the above noted documents.
Tax returns for deceased in Canada – how do I prepare the final return?
When someone passes away in Canada, CRA deems them to have sold all of their assets prior to death. Typically, deemed dispositions of assets must be reported at their fair market value on the final tax return but certain elections, rollovers and other tax rules allow for differing tax treatments. It is important to consult an accountant to ensure the final return is completed accurately and to minimize tax where possible.
- If the individual passed away between Jan 1 and Oct 31, filing date is April 30th of the following year (June 15th if carrying on a business).
- If the individual passed away between Nov 1 and Dec 31, filing date is 6 months after the person passes (Nov 1-Dec 15 due on June 15th and Dec 16-31 due 6 months after date of death if carrying on a business).
What is the return for rights or things?
This return can be filed to report income that was owed to the taxpayer prior to date of death but received afterwards. This can include such items as salary, vacation pay, sick days, commissions, CPP/OAS pensions, certain farm/business revenue and other items.
The return needs to be filed by the later of: 1 year following date of death or 90 days following the date of the Notice of Assessment or Reassessment for the final return.
Are you entitled to compensation for administrating the estate?
In short, yes. Is it a good idea to receive compensation, possibly? Fees are subject to CPP and income tax and would require the estate to register for a CRA payroll account, calculate payroll deductions, remit the same to CRA and file a T4.
Fees are typically legislated by each province and the will should be consulted as this can inform the compensation that the legal representative is entitled to.
When is a T3 estate return required for a deceased person?
A T3 estate tax return is required where the estate:
- Has tax payable
- Has disposed of, or has deemed to have disposed of, capital property or has a taxable capital gain
- Has provided a benefit of more than $100 to a beneficiary for upkeep, maintenance or taxes for property maintained for the beneficiaries’ use
- Has income, gain or profit that is allocated to beneficiaries and the trust has total income from all sources of more than $500
Income earned by the estate may be taxed in the estate or allocated to the beneficiaries.
Clearance certificates, how do they work?
Before distributing the estate to the beneficiaries, the Income Tax Act requires that the legal representative of the estate acquire a clearance certificate from CRA. Failure to do so will cause the legal representative to be personally liable for any amounts owed by the deceased. A clearance certificate applies to the final tax return as well as a final T3 trust return (if applicable).
Once the clearance certificate is issued, CRA considers the chosen date as the actual date of distribution for tax purposes. It also regards the estate or trust representative as holding the properties for the beneficiaries since this date. Income earned by the estate is then reported by beneficiaries from this point onwards.
It's never easy when a loved one passes away. This difficult time will be even more stressful if the estate administrator is not prepared to fulfill his/her responsibilities.
Luckily, the tips outlined above are a great resource for anyone taking on the administrator role. Remember, always consult with an accountant and lawyer early on in the process to ensure you are managing all of the tax and legal implications of the estate.
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Although we make strong efforts to make sure my information is accurate, we cannot always guarantee that the information on this website, blog or podcast is always correct, complete or up-to-date.Posted: 11/14/22