When an individual passes away in Canada, that doesn’t mean they’re done paying taxes. In fact there are several tax consequences that can be triggered when a person passes away.
Obviously, a person who is deceased cannot pay the taxes they owe after they have passed. Therefore, the estate of the deceased is required to pay all taxes that are still outstanding. It usually falls to the legal representative of the estate to take care of, file and to pay any outstanding taxes from the estate.
If you have been appointed as either an administrator, liquidator or the executor of the estate, you are considered the legal representative.
What are the duties of a legal representative?
Under the Income Tax Act of Canada, the responsibilities of the legal representative are:
- Ensuring all taxes owed to CRA are paid;
- Getting a clearance certificate to certify that everything that is owing by the estate to CRA has been paid. A clearance certificate is not a must, but if the legal representative dispenses the estate to the beneficiaries before paying off the taxes, he or she may be liable for the taxes owing;
- Filing all required tax returns for the deceased; and
- Informing the beneficiaries which amounts that they receive are taxable.
Even if you are the legal representative, you can authorize a representative to deal with tax matters, however you will have to mail in a Authorizing or Cancelling a Representative form to the tax centre applicable to you.
Once the legal representative has been determined, through appointment by the deceased’s will or by court order, he or she (or the authorized representative) then deals with the deceased’s tax obligations.
When a person dies, a “final return” is triggered and must be filed.
In the final return, all of the person’s income must be reported, from January 1st of the year of death right up to and including the date of death. The final return has a deadline that must be met or else there will be late penalties that include interest only on the balance owing and other penalties.
If there is income after death, it has to be reported as well but not on the final return. The legal representative would file a separate T3 Trust Income Tax and Information Return.
You can also file up to three optional returns for the year of death for the deceased. An optional return is a report on which the legal representative accounts for some of the income he or she would have included in the final return.
The purpose of doing this is that it may reduce or even remove some of the tax the deceased would have had to pay. You can claim certain amounts more than once, claim them against specific types of income and divide them between returns.
There are three types of optional returns:
- Return for a partner or a proprietor;
- Return for income from a testamentary trust; and
- Return for rights or things.
Deemed disposition of property
When someone dies, they’re deemed to dispose of property right before the time of death, even though there is no actual sale of the property.
All capital property that was owned by the deceased is included in the deemed disposal. That can trigger a capital gain, one half which is taxable to the estate. It can also trigger a capital loss, one half of which can be written off.
When it comes to estate taxes, you should consult an estate lawyer.
What to do when someone has died Canada Revenue Agency
Deceased Tax Returns in Canada: What to Do When Someone Has Died