On Death Tax Returns and Other Canadian Tax Issues – Analysis and assistance from a Canadian tax lawyer

Introduction: Tax Returns After Death

A family member or close friend’s passing can be a traumatic time. The expert Canadian tax lawyers at our tax law firm are dedicated to providing you with as much support as we can during this difficult time by offering tax, will, and estate preparation before death and outlining some tax recommendations for submitting tax returns after death in Canada. 

Is it necessary to submit an income tax return for someone who has passed away?

Yes. For the year the deceased individual passed away, a tax return has to be submitted. This is considered to be a person’s terminal year tax return. The preparation of the terminal tax return is mainly controlled by the standard income tax rules. There are a few exceptions, such as the circumstances under which the return must be submitted to the Canada Revenue Agency and the method used to determine income.

Who is responsible for submitting the terminal tax return on the deceased person’s behalf?

The terminal tax return is to be filed by the legal representative of the decedent, such as the executor/executrix or administrator/administratrix. The person(s) named in a decedent’s will as executor(s) or executrix(es) are responsible for managing the estate. However, when a person passes away without leaving a will, a court will appoint an administrator or administrator, who will handle the administration of the decedent’s estate (intestate).

When does the final tax return need to be submitted?

On April 30 of the year after a person’s death, the terminal return is often due. A few outliers do exist, though. Those who pass away after October 1 have six months from the date of death to file their terminal tax return through their legal representative. Additionally, there are instances where a legal representative of a spousal trust may have up to 18 months to submit the terminal return. If you want to establish a spousal trust in your will or if you are managing a will that includes a spousal trust, we advise you to get in touch with one of our top Canadian tax lawyers to get tax guidance.

What kinds of income must be reported on a terminal return by a deceased person?

Earned income

All earnings and payments made up until the date of death must be reported as earned income on the terminal return. One or more of these may be income from a job, a company, investments, royalties, a pension, or employment insurance. However, there are several provisions in the Income Tax Act that have the effect of including income for additional sums that would not otherwise be included. Below is a discussion of some of the most typical income inclusions in the terminal return. You may get tax assistance from our knowledgeable Toronto tax lawyers if you need more specific information.

RRSP

When a person passes away, their income must be adjusted to include the full market value of their RRSP contributions. To accomplish tax deferral until the spouse’s death, the RRSP may be rolled over into the spouse’s RRSP if the deceased had a spouse. Learn more about RRSP upon death.

Employee Stock Options

The entire market value of any unused employee stock options held by the deceased at the time of death must be accounted for in the terminal return.

Capital Assets

The Income Tax Act deems a person to have disposed of all of his/her capital assets just before passing away. In other words, the deceased individual is regarded as having disposed of all of his/her capital property for tax reasons. Shares, investments, and real estate can all be considered capital property. The benefit of classifying disposal as a capital gain from the capital property is that only half of a capital gain is included in income.

As a result of its tendency to lose value over time, the certain capital property is sometimes referred to as depreciable capital property and is handled differently for tax reasons than capital property. A printer or a piece of agriculture machinery are two examples of what this may be.

The deceased being deemed to have disposed of all of his/her capital property and depreciable capital property may have a number of distinct tax repercussions. On their depreciable capital asset, they may have a capital gain or loss as well as a recapture of capital cost allowance (a sum that must be included in their income) or a terminal loss (a sum that must be subtracted from their income).

Consult our Canadian tax lawyer specialists if you’re confused if a piece of property is capital or depreciable capital, or if you’re concerned about the repercussions of disposing of it. In addition, there are some restricted tax-free rollovers for children and some tax-free rollovers for spouses for agricultural or fishing assets that provide tax deferral on the sale of capital property and depreciable capital property of the deceased. If you’re wondering if you qualify for these tax avoidance techniques, our Canadian tax lawyers can assist you.

Capital losses

if you incur capital losses because of the deemed disposition on death your executor has an option as to what to do with those losses. You can carry them back to offset capital gains in the previous three years. Alternatively, they can be applied against other sources of income in the year of death.

Revenues Accrued

·         Periodic Payments

A person may have earned money before they passed away, but they may not get it until after their passing in a number of circumstances. They could, for instance, receive regular payments like rent, royalties, interest, or salary from a job that isn’t paid until after death. The taxpayer’s terminal return includes any payments they continued to receive on a regular basis after they passed away. Think about a scenario where a person dies but won’t get their paycheck for another 10 days. In this instance, their paycheck is not due at the time of the individual’s passing. Even if it won’t be paid until after the individual passes away, it is still considered income because it is a regular payment sent to the deceased person.

·         Rights or Things

Certain “rights” or “things” that the deceased may hold may need to be included as income on their final tax return. An advantage of having anything designated as a “right” or “thing” is that the legal representative may choose to submit a separate income tax return for the rights and things. The deceased taxpayer can have additional personal deductions and be subject to separate marginal tax rates from the first terminal return by submitting a separate return for rights or things. Additionally, there are instances in which the recipient, rather than the deceased, will be responsible for paying the tax associated with a “right” or “thing.”

The Income Tax Act expressly excludes some classes of income and property but does not specify what a right or thing is. A right or a thing generally includes sums that are due before death but have not yet been paid, such as a dividend that has been announced but not yet paid, a wage that has been paid retroactively, or a professional’s ongoing job. The Canada Revenue Agency has provided a number of additional instances of rights and things in its interpretation bulletin IT-212R3. Do not hesitate to contact our top tax lawyers in Vancouver, Toronto and other Ontario cities. if you are confused about whether something counts as a right or a thing and should be included in a person’s terminal return.

Tax Assistance on Death

An individual’s tax circumstances after death could be exceedingly complicated. When it comes to dealing with the tax situation of a deceased family member, our experienced Canadian tax lawyers are here to give you the support you need.

Pro Tax Tips

One of the more important duties of the executor of the deceased’s will is to ensure that tax returns are properly filed and that a clearance certificate is received from the Canada revenue agency.  The CRA will clawback any distributions made to beneficiaries of the estate prior to receipt of the CRA clearance certificate. If you are appointed as the executor of an estate, it is important to retain a proficient Canadian tax lawyer to assist you with your estate tax obligations.

Disclaimer:

“Only general information is provided in this article. Only as of the publishing date is it current. It hasn’t been updated, therefore it might no longer be relevant. It cannot or ought not to be relied upon because it does not offer legal advice. Each tax circumstance is unique to its facts and will be different from the instances described in the articles. You should contact a lawyer if you have specific legal inquiries.”