Tax Considerations on Death

22 Jul 2019

Kristine DelRosario

Most of us have gone through the pain of losing someone close to us. However, have you considered yet the tax consequences when you pass away? Typically, filing a final personal income tax return and planning for the final tax on death is not an area that is addressed proactively. Nevertheless, it is important to be aware of the tax consequences on death.

When an individual passes away, a terminal personal income tax return is required to be filed. The deadline to file the return is April 30th of the following year, if the death occurred between January 1 to October 31 of the current year, otherwise, the return is due 6 months after the date of death.

So how does a terminal tax return differ from a regular personal income tax return? At the time of death, there is a deemed disposition of all capital properties owned by the deceased. This is the case even though no actual sale took place. This deemed disposition may trigger a capital gain or loss depending on the market value of the property, as well as its original purchase price. This could create immediate income tax consequences for the deceased, and a potential cash flow issue if sufficient funds are not available to pay this tax liability.

There are several optional tax returns that could be filed for rights or things, a partner or sole proprietor, and income from a graduated rate estate. These optional returns are more complex, but in essence, they may reduce or eliminate income tax for the deceased as you may be able to claim additional tax credits and/or split income between multiple income returns.

Any income earned by the deceased after death would be reported on a T3 trust income tax and information return. This return may not have to be filed if there is no income received after death, or if the estate has been fully distributed immediately after death. It is thus important to determine your filing obligations to avoid any interest penalties.

The executor of the estate is responsible for filing all income tax returns for the deceased and estate. This executor is either named in your will or appointed by court if no will exists. It is therefore essential that a will is prepared and routinely updated to ensure both an executor/s and beneficiaries are clearly identified to avoid undesirable consequences on death.

Once all filing obligations have been fulfilled and taxes have been paid as assessed, the executor could request a clearance certificate. The clearance certificate validates that all amounts owing by deceased and/or estate have been satisfied prior to the final distribution of assets from the estate to the beneficiaries.

The information provided above is for guidance purposes only, and each individual situation will differ based on the specific facts and circumstances. Thus, seeking advice from an experienced tax professional is recommended.