February 2008 Article
Tax Considerations upon the
Death of a Loved One
Article by Barbara
When there is a death of your spouse or a good friend, as the executor
(or legal representative), it is easy to feel overwhelmed by making
the arrangements for the funeral, securing and valuing the deceased
person’s assets, cancelling credit cards and identifying all
of the debts, and still allowing for the grief. Then, to make matters
worse, it is the executor’s responsibility to file all of the
necessary tax returns for the deceased.
There are a number of things that the executor should consider when
they attend to this responsibility, including:
Have all previous tax returns been filed?
The executor of the estate is responsible to file all of the
personal tax returns for the deceased on a timely basis. If
the loved one passed away in January, February or March there
is a good chance that the return or the previous year was not
filed and therefore it is due to be filed within 6 months of
the date of death. For
example if your spouse passed away on March 1st 2007, the 2006
return was due by Sept. 1st, 2007. And in some cases if
the deceased was a good friend who had been sick for a year or
more, it is very possible that there are one or two years of tax
The executor can contact Canada Revenue
Agency (CRA), by sending them a copy of the death certificate,
social insurance number and a complete copy of the will, asking
them what personal tax returns are outstanding. Delaying
these filings could cost the estate considerably more dollars in
interest and penalties. This extra interest and penalty cost
may be reduced by completing a taxpayer relief request.
What are the filing deadlines?
If your loved one passed away during the months of January 1 and
October 31, the final return is not due until April 30th of the
following year. If the death occurred during the period from
November 1st through December 31st then the return is due six months
after the date of death. As mentioned above if the previous
year’s tax return has not been filed, it is due 6 months
from date of death.
What is taxable for the deceased on the final return?
All income earned from the period January 1st to the date of death
must be reported on the final (terminal) personal tax return for
the deceased (unless reported on optional returns – see below). This
would include any employment income, investment income such as
interest and dividends to date of death, all of the person’s
RRSP or RRIF, any capital gains on securities, etc.
year of death the Income Tax Act treats all capital property owned
by the deceased as if it was sold immediately prior to death. So
assets like stocks and bonds, buildings or land would be treated
as disposed of at fair market value as of the date of death. Capital
gains must be calculated on these assets and included on the deceased’s
final tax return. There are certain assets that can be transferred
at cost to a spouse or in some cases to a child or grandchild,
there by deferring the reporting of any capital gain. CRA’s
pamphlet, Preparing Returns for Deceased Persons, is a good source
of information to assist the legal representative in determining
all of the taxable income for the final return.
How much will the taxes be and can I make any istribution to
It is best to file all of the outstanding tax returns before the
legal representative makes any distribution to beneficiaries. However
if there is a pressing need for the beneficiaries, you may wish to
estimate the taxes by reviewing previous year’s assessment
notices to ensure all taxes to date have been paid and to get an
idea of the usual annual tax cost.
Calculate the capital gains
on all of the deceased’s assets and then take 25% of that as
a tax cost. Then take 50% of all RRSP or RRIF assets as another tax
estimate cost. Then add all of these tax estimates together (usual
annual tax cost prorated + capital gain tax estimate + RRSP or RRIF
tax estimate) plus another 10% of the balance should give you a good
estimate. However, the executor is legally responsible for
taxes payable by the estate and if there had been a distribution,
any short fall of monies for taxes, may end up as the executor’s
How can I pay as little taxes as possible?
As many as four separate tax returns may be filed by the legal representative
for a deceased person. The final or “date of death” personal
tax return must be filed and it includes taxable income from January
1st to date of death, unless reported on one of the optional returns. The
optional returns include the “rights or things” return
for amounts owing to the deceased but not paid as of the date of
death; the “business” return for business income; and,
a testamentary trust return for trust income.
There are very
specific conditions for each of these optional returns, but under
the correct circumstances the filing of these returns will reduce
taxes in the year of death because each return is subject to tax
at the marginal rates and allows for full personal tax credits. It
is best to seek professional advice to see if the deceased qualifies
for these filings.
The executor may also consider what assets to transfer at cost to
a spouse, if available, to defer the reporting of capital gains where
appropriate. Also, if the deceased’s assets are not all
distributed to the beneficiaries very close to the date of death,
a T3 trust return for the estate may have to be filed and this can
provide other tax saving opportunities.
There are many tax planning opportunities that arise on death, so if
you have taken on the role of executor, it may be best to consult a
professional to assist you or at least visit the Canada Revenue Agency
web site: www.cra-arc.gc.ca/
This newsletter is for information and educational purposes only.
The information contained in this report has been compiled from
sources I believe to be reliable.