Tax Return Filings on Death

Posted on by Tax Partners
31
Dec

Introduction

The passing of a loved one is a challenging time, often compounded by financial and administrative responsibilities. Filing a deceased individual’s tax return, known as the terminal return, is a crucial step in settling their affairs. 

This article provides a comprehensive guide on filing tax returns for deceased individuals, outlining key inclusions, deadlines, and tax-saving opportunities.

 

 

Is a Tax Return Required After Death?

Yes, a tax return must be filed for the year of the deceased’s death. Known as the terminal return, this filing accounts for all income earned up to the date of death. While most standard tax rules apply, some special provisions modify how income is calculated and when the return is due.

 

 

Responsibility for Filing the Terminal Return

The deceased’s legal representative is responsible for preparing and filing the terminal return. This representative may be:

  • Executor/Executrix: Appointed in the deceased’s will to manage the estate.
  • Administrator/Administratrix: Appointed by the court when no valid will exists (intestate).

Legal representatives are also responsible for paying any outstanding taxes from the estate and distributing the remaining assets to beneficiaries.

 

 

Filing Deadlines for the Terminal Return

The filing deadline depends on the date of death:

  1. Death Before October 1: The terminal return is due by April 30 of the following year.
  2. Death After October 1: The terminal return is due six months from the date of death.
  3. Spousal Trusts: Specific provisions may extend the filing deadline to 18 months. Seek professional advice for such scenarios.

 

 

Income to Include in the Terminal Return

The terminal return must include all income earned and received up to the date of death. Certain income categories have special rules or inclusions:

  1. Regular Income Sources:
    • Employment income
    • Business profits
    • Investment income (e.g., interest, dividends, royalties)
    • Pension and government benefits
  2. Registered Retirement Savings Plans (RRSPs):
    • The full market value of RRSPs is included as income unless transferred to a surviving spouse or financially dependent child, deferring taxes.
  3. Employee Stock Options:
    • Unused stock options are valued at their fair market value and included as income.
  4. Capital Property:
    • The deceased is deemed to have disposed of all capital property immediately before death.
    • Capital gains or losses are calculated, with only 50% of the gain included as taxable income.
    • Special provisions allow tax-deferred rollovers for certain properties, such as family farms, fishing assets, or transfers to a spouse.
  5. Depreciable Property:
    • Depreciation or "recapture" amounts are included as income, while terminal losses may be deducted.
  6. Accrued Income:
    • Periodic payments (e.g., rent, interest, royalties) earned but unpaid at death are included in the terminal return.
  7. Rights or Things:
    • Unreceived income such as unpaid wages, declared but unpaid dividends, or professional work in progress may qualify as rights or things.
    • A separate tax return can be filed for these amounts to leverage lower tax rates and additional deductions.

 

 

Tax-Saving Opportunities

  1. Spousal Rollovers:
    • Defer taxes on RRSPs, RRIFs, and capital property by transferring them to a surviving spouse or financially dependent child.
  2. Separate Return for Rights and Things:
    • Filing a separate return for rights and things allows the estate to benefit from lower marginal tax rates and additional credits.
  3. Donations and Charitable Contributions:
    • Donations made before death or through the estate can be used to reduce taxable income in the terminal return or estate filings.
  4. Loss Utilization:
    • Apply capital losses against gains to reduce taxable income, maximizing tax efficiency.
  5. Professional Valuation:
    • Engage professionals to assess property values accurately, especially for private investments or real estate.

Filing Procedures

  1. Gather Required Documentation:
    • Death certificate
    • Income records (T4s, T5s, etc.)
    • Investment statements
    • Valuation reports for capital property
  2. Complete Form T1:
    • File the terminal return using the standard T1 personal income tax return form, including all applicable schedules.
  3. CRA Notification:
    • Notify the CRA of the individual’s death using Form RC4111 and provide the death certificate and legal representative’s information.
  4. Clearance Certificate:
    • After filing the terminal return and paying taxes, request a Clearance Certificate from the CRA to confirm no further tax liability.

 

 

Conclusion

Filing a tax return after death involves navigating unique rules and potential tax-saving opportunities. Understanding income inclusions, filing deadlines, and tax-saving strategies can significantly benefit the estate and its beneficiaries. 

For comprehensive guidance on managing a terminal return, consult a professional tax advisor to ensure compliance and optimization.

 

This article is written for educational purposes.

Should you have any inquiries, please do not hesitate to contact us at (905) 836-8755, via email at info@taxpartners.ca, or by visiting our website at www.taxpartners.ca.

Tax Partners has been operational since 1981 and is recognized as one of the leading tax and accounting firms in North America. Contact us today for a FREE initial consultation appointment.