Estate Tax Returns: What You Need to Know About Death & Taxes

Before discussing estate returns, we’d like to point out the importance of having a will. When a person dies without a valid will, they are said to have died intestate. In such cases, someone may have to apply to the court to be approved to act as the estate’s administrator.

The distributions from an intestacy are subject to the provincial rules of intestate successions, which may result in your property being disbursed in a manner that you would not have chosen. Furthermore, an administrator has quite a bit less flexibility in administering the estate than an executor may have had with a properly drafted will. This can also lead to substantial delays in distributing the estate and increased professional fees, which diminishes the value of the estate available for distribution. For these reasons and more, it is always recommended that you have a valid, up-to-date will in place.

When a person dies the administrator of the estate or executor must file a number of income tax returns and notify the CRA and Service Canada of the death. Executors will have to send these bodies a copy of the death certificate, a complete asset listing at passing, and a copy of the final will and testament highlighting that they are legally allowed to act for the deceased.

Estate Tax Filing Requirements

There are several tax returns that may be filed as a result of death:

  1. A final T1 individual tax return is prepared for all income received between January 1 and the date of death. At death, a taxpayer is ‘deemed’ to have disposed of all property at fair market value, subject to certain exceptions (such as gains on their principal residence or property that has been left to a spouse by will and is eligible for the spousal rollover provisions). The full value of the testator’s remaining RRSP or RRIF is included in this return as income.

    This return is due:

    • For deaths occurring between January 1 and October 31: April 30 of the following year
    • For deaths occurring between November 1 and December 31: six months after the date the death occurred
  2. A “Rights and Things” individual tax return is an elective return that can be filed to report income earned but not received at the date of passing. This can include bonuses, dividends, and other investment income. This return allows a second set of marginal tax rates for those sources of income.
  3. Estate returns are necessary when there is property retained in an estate prior to final distribution to beneficiaries, or in a testamentary trust, set up under the will, which earns income. Although testamentary trusts may be separate entities from the estate, the T3 return filed is the same.  

The executor can elect that the estate be a “Graduated Rate Estate” (GRE) for the three years following death so that income earned in the estate may be taxed at the individual annual marginal rates rather than the top marginal rate. It can often take some time to deal with and distribute a testator’s property and it may be impractical to allocate the estate’s income out to its beneficiaries in advance of the distribution of the property. Graduated Rate Estates can have any year end that ends within 365 days of the testator’s passing. Non-GRE’s must have a December 31 year end, so the first year of the estate return is from the date of death to December 31.

Final Thoughts On Estate Tax

It is generally recommended that an executor finalize all tax returns and request clearance from CRA for the deceased’s tax accounts prior to making distributions to the beneficiaries, as the liability for any improper distributions or additional tax owing remains with the executor. In situations where this is impractical, executors should seek legal advice from a trust and estate lawyer prior to making any distributions.

Achen Henderson has extensive experience in trust and estate planning and can help you ensure you meet your goals when it comes to distributing your property in a tax-efficient manner. In fact, two of our partners are members of the Society of Trust and Estate Practitioners. We also work with an extensive network of trust and estate lawyers to meet your specific needs.

If you would like to consult a trust and estate practitioner in the drafting of your will, please contact us. Our estate and trust planning and tax services are available in our accounting and bookkeeping packages for additional fees.