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What are the tax issues that befall an estate?

Technically, there are no estate taxes in Canada but there are tax implications once a person has died.

When someone dies usually someone is left to deal with the estate, unless they died without a will – which is called intestate.

There are many estate issues that can arise. For instance, if someone wants to contest or challenge a will, then likely litigation will be started, which can take quite a while.

One of the main issues that are raised in estate issues is estate tax.

When a person dies, he or she is deemed to have disposed of his or her assets a minute before death. Disposition of assets triggers tax consequences. So there are estate taxes, but we just don’t call them that.

There are some common issues those dealing with the estate can face:

There are some very important tax considerations amongst the above, and they include tax return in the year of death and the clearance certificate.

Tax return in year of death

A “final return” always has to be filled on behalf of the deceased.

On the final return, what has to be reported is the final income for the deceased from January 1of the year of death, up to and including the date of death.

Who has to report the fact that the deceased has passed to the Canada Revenue Agency?

You are considered the legal representative if:

  • A Canadian court has appointed you the administrator of the estate;
  • If the will has named you as an executor; and in Quebec
  • If you are the liquidator of an estate.

What are the legal representative’s duties?

Under the Income Tax Act, the representative has to:

  • File all required returns for the deceased;
  • Ensure that all taxes owing are paid; and
  • Let the beneficiaries know which of the amounts they receive from the estate are taxable.

Clearance certificate

This is an important document for a representative to get, because you can be legally liable for anything you’ve distributed. This means if you have distributed the estate and there is no money left, and there is a debtor outstanding, you’re on the hook. That hook can also include the Canada Revenue Agency. A clearance certificate declares that all debts and amounts that the deceased is liable for have been paid up.

All tax years are covered up to the deceased’s year of death.

How do you get a clearance certificate?

To get a certificate, you have to request one. You complete a form called “Form TX 19, Asking for a Clearance Certificate”.

You have to send a lot of supporting documentation proving that all the debts, including taxes owed have been paid off by the estate, otherwise you will not be issued a clearance certificate. These documents include:

  • Copy of will;
  • Renunciations;
  • Disclaimers;
  • All probate documents;
  • Codicils;
  • List of assets and distribution plan;
  • Documents that prove you are the legal representative.

Dealing with tax issues after someone has died can be very hard and you should consult with professionals, such as lawyers and accountants.

Read more:

What To Do When Someone Has Died

Final Return