Estate Tax Returns in Canada

Filing tax returns for the deceased

Estate tax rules can be complex and vary by province. The tax implications of an individual’s death depend on the nature and value of their assets, as well as their specific circumstances. Estate planning is crucial to minimize tax liabilities and ensure a smooth transition of assets to beneficiaries.

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.

You should be aware that:

  • An administrator has quite a bit less flexibility in administering the estate than an executor may have if the testator had with a properly drafted will;
  • There can be substantial delays in distributing the estate and increased professional fees, which can significantly diminish 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

Who needs to file estate tax returns?

When a person dies, the administrator of the estate or executor must file several income tax returns and notify the CRA and Service Canada of the death. Executors will have to send the government 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.

What are the tax returns filed for a deceased individual in Canada?

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

  • Final T1 individual tax return: this must be prepared for all income received between January 1 and the date of death. Upon 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.
  • “Rights and Things” individual tax return: this is an elective return that can be filed to report income earned but not received at the date of the individual’s passing. This can include bonuses, dividends, and other investment income. This return allows a second set of marginal tax rates for those income types.
  • Estate returns: these are necessary when there is property retained in an estate prior to finaldistribution 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 trust return filed isthe 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 31st year end, so the first year of the estate return is from the date of death to December 31st.

Navigating these estate tax filing requirements can be intricate and nuanced. Seeking professional guidance is recommended to optimize the estate’s financial management during this transition period.

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When do you need to file the tax returns?

For Final T1 Individual Tax returns, the due dates are:

  • For deaths between January 1st and October 31st: April 30th of the following year.
  • For deaths between November 1st and December 31st: six months after the date the deathoccurred.

For “Rights and Things” individual tax return:

  • Due by the later of one year from the date of death or 90 days after the mailing date of the NoticeOf Assessment (NOA) for the final return.

For estate tax returns, also known as theeT3 trust return:

  • Filed within 90 days of the trust’s year end (which is March 31st for most trusts).

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.

Accountants for estate tax returns

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.