Filing Canadian Tax Returns for an Estate

If you are an executor of a will or administrator of an estate of a deceased person in Canada, you are responsible for filing tax returns for the deceased.

If the deceased had not filed tax returns for the years before his or her death, you must file those returns for him or her.

You must also file a terminal return for the year of death. If the deceased died before October 31, then you usually are required to file the terminal return on or before April 30 of the following year. But if the deceased or his or her spouse or common-law partner carried on a business, the period for filing the return is extended to June 15.

If the deceased died on or after November 1, you must file the terminal return no later than six months after the date of death (or the later of June 15 or six months if the deceased or the deceased's spouse or common-law partner carried on a business). This provides you with a little more time to file the return.

In the terminal return, you report all of the income the deceased received before death, and income from deemed dispositions on death. (For example, if the deceased owned a rental property, the deceased will be deemed to have sold the rental property at death for fair market value, and there will be capital gains on the increase in value over the properties cost for tax purposes. In some cases, this will result in a tax liability.)

In addition to the terminal return, you may file other returns in some circumstances, including a return for rights or things, a return for a partner or proprietor of a business, or a return for income from a testamentary trust. For example if the deceased’s employer owed the deceased salary, commissions or holiday pay for a pay period that ended before the date of death, the amount may be claimed in a rights or things return.

These other returns are optional. Why would any sane person file optional tax returns? The reason is that by reporting certain kinds of income in the optional returns instead of in the terminal return, the income tax rate on the items claimed in the separate returns may in some cases be lower. In other words you may save the estate some taxes by filing separate returns.

After you have reported all of the deceased’s income to the date of death your job is not complete. From the date of death to the date you distribute the estate to the beneficiaries, the estate assets may generate income or capital gains. You will need to file T3 – Trust returns for the time from the deceased’s date of death to the date of distribution. You may pick the year-end for the trust; it does not have to be December 31. Sometimes there are tax savings if you pick a different year-end. You must file the T3 return within 90 days of the year-end you select.

You may apply for a Clearance Certificate from Canada Revenue Agency after you have filed the various tax returns, and Canada Revenue Agency has sent you its assessment notices. A Clearance Certificate provides you with some protection in case Canada Revenue Agency later determines that there is more tax owing. It is prudent to wait for the Clearance Certificate before completing the distribution of the estate to the beneficiaries.

For more details, you may consult Canada Revenue Agency’s “Preparing Returns for Deceased Persons, 2006,” “T3 Trust Guide, 2006,” and “Income Tax Information Circular 82-6R5: Clearance Certificate.”

If are an executor or administrator, and you find all of the information in these Canada Revenue Agency publications a bit overwhelming (I do), don’t panic. A public accountant with experience in filing returns for estates can provide enormous assistance, piece of mind, and in some circumstances, tax savings. I always recommend to my estate administration clients that they retain a professional accountant (as opposed to a tax filer without professional training) to assist them.