One’s tax responsibility, unfortunately, does not end until death. Although, it may not be easy for the family, usually, someone has to be named the legal representative of the deceased. This person has the responsibility of filing the decedent’s final tax return, as well as deal with other tax related issues of the decedent.
At Aylett Grant Tax LLP, we often come across clients who are unaware that they need to inform the Canada Revenue Agency (CRA), and other government authorities about the death as well as complete other legal formalities. Throughout this article, our Canadian tax analysts have outlined some of the important steps to take in the case of a deceased Canadian person.
Canadian Tax Responsibility of a Deceased Person
Inform the Authorities
As mentioned above, the first and foremost step is to inform the CRA and ‘Service Canada’ about the deceased person, and provide the date of death. This is necessary since the person may have been receiving certain benefits and credits, which would either need to be stopped or passed on to the survivor as ‘survivor benefits’.
Benefits, such as: goods and services tax/harmonized sales tax (GST/HST) credit payments, working income tax benefit advance payments, or the Canada Child Benefit. Service Canada needs to be notified to stop the payments of Old Age Security Pension and Canadian Pension Plan payments.
File the Final or Terminal Income Tax Return
When it comes to taxes, the appointed legal representative or named estate executor is responsible to file all required income tax returns for the deceased and make sure all taxes owing are paid. This, initially, begins with a final income tax return.
Basically, the income of the deceased received from January 1 of the tax year until the death date is re portable on the final return. The executor or legal representative is required to file the final tax return by April 30 for deaths occurring from January 1 to October 31 and within 6 months after the death for deaths occurring in November or December. However, if the decedent was a self-employed individual, the final tax return should be filed by June 15 (within six months for deaths occurring after December 15).
Any balance of tax owing is due six months after the date of death. When filing the final return, all tax credits and deductions that the decedent is eligible for, may be claimed on the tax return. Once a death has taken place during the year, any tax installments that are due after the date of death, do not need to be paid.
NOTE: If a person dies before the due date of his previous year return and the person has not yet filed, the due date for filing it and paying any balance owing is six months after the date of death.
For example, if a person with no self-employment income died on March 20, 2017, the 2016 tax return would not be due until September 20, 2017. The 2017 tax return would be due April 30, 2018.
Deemed Disposition of Assets
In Canada, upon death, the decedent’s assets are considered to be disposed of at the prevailing fair market value on the date of death.
This deemed disposition is considered for all types of assets, whether it is financial investments, such as: mutual funds, stocks, and others, or real estate property, such as: a vacation home or rental property. Valuation of real property and a private corporation’s shares can be quite complex, therefore it is highly recommended to seek the help of a real estate appraiser or other such professionals.
In addition, any registered assets, such as: RRSPs and RRIFs, are considered as ‘deregistered’. That is, the entire value of the account is included on the final income tax return. It is necessary to address the succession planning need of your financial investments, especially registered accounts since deregistration could lead to significant tax liability.
These deemed disposition and deemed deregistration rules do not apply if the asset or registered account is transferred to the decedent’s spouse.
Prepare the Estate Income Tax Return
Until the assets are distributed to the beneficiaries of the estate, the estate is required to report any income earned between the date of death and the distribution to the beneficiaries. Along with the decedent’s returns, the executor or legal representative also needs to file the estate tax return.
The executor can choose the year-end for the estate. Although December 31 is an ideal choice, the executor may choose any date within a year of the date of death.
Note that, the estate taxes should be paid with-in 90 days of the chosen year-end. The representative may either have the taxes paid by the estate or by the beneficiary. Any income allocated to a beneficiary must be reported on Form T3. It is the legal representative’s responsibility to let the beneficiaries know what amounts they receive from the estate are taxable.
As mentioned above, a deemed disposition is carried out for the decedent’s estate for both capital assets and registered accounts. After death, the income from these accounts is taxable to the estate of the decedent. Once the assets have been transferred to a beneficiary, another deemed disposition is considered to take place and the estate is liable for the taxes on the change in value of the asset until the date of transfer of ownership. Any income earned by the asset thereafter is payable by the beneficiary.
If, in case, some of the decedent’s assets value has depreciated resulting in an overall capital loss on the estate tax return, these losses can be carried back to the decedent’s final tax return. If there are not enough gains on the final tax return to use these losses, half of the losses may be used to reduce other taxable income on the final tax return.
Obtaining Clearance Certificate
Before making any distributions from the estate, the executor may request a clearance certificate from the Canada Revenue Agency (CRA) confirming there are no taxes owing by the estate, as of the date indicated on the application. The executor or legal representative is responsible for both the decedent’s tax liability as well as the estate tax liability. Therefore, he/she should keep in mind that they have to verify that the decedent has filed all the past years tax returns, and ensure that all liabilities are paid, including any taxes due. If this verification is not done, and the CRA finds out that the decedent has unfiled tax returns, and/or unpaid taxes, the executor could be held liable for any unpaid liabilities that he/she distributed from the decedent’s estate.
Being a decedent’s estate executor is a big responsibility, and as a safe practice it is highly recommended to reach out to a Canadian tax professional to assist with the final tax responsibilities of a decedent in Canada.
AG TAX LLP CAN HELP
If you have any tax-related queries, need assistance with tax planning or filing your tax returns please contact us. Our team comprises of highly experienced tax professionals with extensive knowledge of US and Canadian tax laws as well as cross-border compliance.
Furthermore, as a full service accounting firm, AG Tax assures complete assistance with even your most complex tax needs.
We can assist with:
- Canadian Personal and corporate tax returns
- Cross Border Taxation and Business Planning
- US Personal and Corporate Taxation
- Disclosure of Foreign Assets and other information filings
- Retirement planning
- Estate Planning, Inheritance tax advice
To obtain a quote or to arrange for a consultation to discuss your tax related queries, please contact us at:
- 604-538-8735 (Greater Vancouver Area, BC)
- 780-702-2732 (Greater Edmonton Area, AB)
Disclaimer: The information in this publication is accurate as of the time of its publication. AG Tax assumes no responsibility for changes to tax legislation subsequent to the publication of this document. The information provided is for general information purposes only and should not be acted upon without seeking professional advice. If you would like to engage our services, please contact our staff and obtain authorization to send our firm confidential information. A client relationship is not created by the transmission of information. A client relationship is only formed with our firm when a scope and engagement letter signed by the firm and the potential client detailing the terms of engagement is present.