Preparing for the final tax bill: Executors and beneficiaries

Find out what you need to know about the final tax bill and your responsibility as an executor for tax filings.

Handling a loved one’s death is never easy but putting their affairs in order needn’t be an impossible task. Keep reading to learn more on how to handle a final tax return.

FILING RETURNS:

The executor is required to file the T1 final tax return for all income earned in that year, up to the date of death. The due date for the final T1 return and the tax payments depends on the date of death. If death occurs between January 1 and October 31, the final return is due by April 30 of the following year. If death occurs between November 1 and December 31, the final return is due six months after the date of death (Canada Revenue Agency, 2018).

There are optional T1 returns that may be available to multiply the use of personal tax exemptions and credits. These optional returns are for:

  • rights or things
  • a sole proprietor or partner
  • income from a graduated rate estate

In addition, a T3 trust tax return should be filed to report the income earned by the estate from the date of death until the assets are all distributed.

FINAL TAXES

The size of the deceased's final tax bill depends on the types of assets owned at the time of death, the appreciation or loss on those assets, who the beneficiaries are (e.g. spouse, kids, charity or other), and the deceased’s income for that final year.

On death, capital property (e.g. stocks, mutual funds, real estate) is “deemed” to have been sold at fair market value. Another rule is that the full value of your RRSPs and RRIFs is included in the deceased's income. An exception to these rules occurs when the asset is transferred to your surviving spouse or common-law partner, otherwise the resulting income is taxable at the deceased's marginal tax rate. The marginal tax rate for a resident of Ontario in 2018, for example, could be as high as 53.53 per cent.

All tax returns, including those of the estate, should be filed and the related taxes paid before the assets are transferred to the beneficiaries. In many cases, a clearance certificate should be requested from the CRA before the estate is wound-up. If the assets are distributed before tax owing to the CRA is paid or before a clearance certificate is received from the CRA, the CRA has the right to request payment from the beneficiaries or even the executor.

One tax break worth noting is the principal residence exemption, in which one does not pay income taxes on the accrued gains of a principal residence if the deceased meets the criteria for each year of ownership and makes the designation in their tax return for the year of sale or on death.

The executor will pay the estate’s taxes from the liquidity in the estate. If there won’t be enough cash available in the estate, estate assets may have to be sold. Planning ahead of time using life insurance strategies can help create liquidity.

Estate planning will help clarify the tax implications of your death and ensure that there are no tax surprises.

KEEP THE CONVERSATION GOING

How will your estate be taxed after death? Post a comment below.

Disclaimer

This is a general source of information only. It is not intended to provide personalized tax, legal or investment advice, and is not intended as a solicitation to purchase securities.  The views and opinions expressed in this article are those of the author and do not necessarily reflect that of CPA Canada.

About the Author

Maricel Ramos

Maricel Ramos , CPA, CGA, CFP, RRC, is a financial consultant with Investors Group Financial Services in Toronto.