Among the myriad responsibilities executors take on when administering an estate, tax obligations are some of the most critical. The Income Tax Act requires executors to file the deceased’s tax returns, ensure all taxes owing are paid and inform beneficiaries of the taxable nature of their inheritances.
Executors who fail to comply with all tax requirements for a deceased person and their estate risk being held personally liable for significant penalties. Therefore, executors need to educate themselves and fully understand all tax-related steps in administering an estate.
Gaining Authorization to Access Deceased’s Records
When trying to access the deceased’s information from institutions such as a bank or Canada Revenue Agency, an executor will need to prove their authority as the deceased’s chosen representative.
In most cases, the executor will require to present the following documents before an institution will release the deceased’s information:
- A copy of the death certificate;
- The deceased’s social insurance number; and
- A complete copy of the deceased’s Will or other legal document confirming the executor is the estate’s legal representative (e.g. a grant of probate, trust agreement, or letters of administration).
Filing Tax Returns
An executor must file a tax return for the deceased for the year of their death (called a “final return”), as well as a tax return for the estate. The due date of these returns differs depending on the circumstances and date of death.
Personal Tax Returns
To date, Canada Revenue Agency has mandated the following due dates for a deceased’s final return, if the deceased and their surviving spouse or common-law partner did not carry on a business in the tax year:
Deceased and Surviving Spouse/Common-Law Partner Did Not Have Business
|Date of Death||Due Date for Final Return|
|January 1 to October 31||April 30 of following year|
|November 1 to December 31||6 months after date of death|
If a deceased or their spouse or common-law partner carried on business during the year of death, a different set of due dates for the final return apply:
Deceased or Spouse/Common-Law Partner Had a Business
|Date of Death||Due Date for Final Return|
|January 1 to December 15||June 15 of following year|
|December 16 to December 30||6 months after date of death|
Canada Revenue Agency states that these due dates do not apply where the expenditures made in the course of operating the business were mainly the cost or capital cost of tax shelter investments.
In addition to the final return, an executor is also responsible for filing any tax returns for previous years that the deceased did not file.
Estate Tax Returns
Tax filings for estates and trusts are due 90 days after December 31 of the year of death (i.e. the end of the following March). This 90-day timeline applies to all estates (except Graduated Rate Estates) and all trusts, including inter vivos and testamentary trusts.
Reporting Income Earned by the Estate After Death
Any income earned by the deceased’s estate after their death must be reported to Canada Revenue Agency. This is done through a T3 Trust Income Tax and Information Return. A T3 must also be filed for any trust established via Will or court order relating to dependant relief or support law.
A T3 may not be required if the estate assets are distributed immediately after the deceased’s death or if the estate did not earn any income between the date of death and the date of distribution. T3s should not be confused with the deceased’s final return, which must always be filed.
A Clearance Certificate is issued once all amounts owing to Canada Revenue Agency have been paid (or Canada Revenue Agency has accepted security for payment). An executor must ensure that they receive a Clearance Certificate before distributing the estate to the beneficiaries. Otherwise, the executor may be held personally liable for any losses or penalties the estate occurs.
Basic Steps for Completing a Deceased’s Tax Return
While every deceased and estate are unique, some basic steps can be expected to be taken in most cases. Canada Revenue Agency sets these out in a comprehensive checklist, including the following steps:
- Determine the deceased’s income from all sources, which may be found by:
- Reviewing their previous tax returns for employer names and investment companies used;
- Checking safety deposit boxes;
- Contacting employers, banks, trust companies, investment brokerages, pension plan managers, and any other institution or person known to have paid money to, or held money for, the deceased;
- Reviewing all T4 slips for remuneration paid and T5 slips for investment income (note that estate amounts may appear on T4A and T4RSP slips);
- Contacting Service Canada to determine whether the deceased received Canada Pension Plan Benefits and/or their Old Age Security Pension (which will also be documented in T4A slips).
- Identify any applicable deductions or credits available in the province or territory where the deceased lived at the time of their death.
- File the final return and T3 return for the estate; and
- Apply for a clearance certificate after the Notice of Assessment for all required returns has been received.
Executors: Remember Your Own Tax Obligations!
Executors need to remember that the tax obligations related to estate administration are not limited to the deceased and the estate itself. Individual, non-professional executors must declare any executor, trustee, or liquidator fees as income from employment on their own tax returns via a T4 form. Professional executors, trustees, or liquidators will ordinarily report these fees as business income.
Contact Bader Law in Mississauga for Trusted Advice on Estate Representation
While the above tax considerations are common to many matters, the administration and distribution of an estate can be complicated and involves numerous financial and legal considerations. Bader Law provides comprehensive estate planning and probate services and can help executors navigate their obligations. Our Wills and estates lawyers are experienced in probating Wills, managing real property transactions, facilitating the distribution of assets, and preparing estate tax returns.
Bader Law is located in Mississauga and proudly serves clients throughout the Greater Toronto Area. To discuss your estate matter with a member of our team, contact us online or call 289-652-9092.