Tax Returns Required When Settling an Estate

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Only two things are guaranteed in life: death and taxes. And the tax requirement lingers on even after death.

When someone dies, Canada Revenue Agency (CRA) needs to know how much money the person earned in the (partial) year in which they died, so a T1 Personal Income Tax Return will need to be filed. This tax return is also referred to as the date-of-death return or terminal tax return. Depending on the type of assets owned, and whether or not there are any joint owners or named beneficiaries, there can sometimes be a large tax bill payable, so it is wise to have an accountant review the estate at the outset. Let’s hear the bad news now so that we can plan to pay this tax debt later.

Must the tax return be filed by April 30th, like everyone else? Sometimes.

· Date of Death from January 1 to October 31: Due date is April 30thof the following year.

· Date of Death from November 1 to December 31: Due date is six months after the date of death.

If last year’s tax return was not filed, then last year’s tax return and any amount owing are due 6 months after the date of death. CRA can provide you with the necessary T4/T5 tax information slips they have on file.

We are frequently asked how to claim the $2500 Canada Pension Plan Death Benefit. The CPP Death Benefit should not be included in the final tax return for the deceased. Rather, if there is only one beneficiary receiving 100% of the proceeds of the estate, then the CPP Death Benefit should get included in the beneficiary’s own personal tax return. But if there are two or more beneficiaries in the estate, then the CPP Death Benefit should get included in the T3 Trust Income Tax Return (described below).

Does an accountant need to prepare the final tax return? No, you’re permitted to prepare that tax return by yourself, but an accountant may be able to make valuable suggestions, such as applying for a Disability Tax Credit.

In addition to the personal tax return, the estate itself will likely need to file a tax return, too, known as a T3 Trust Income Tax Return. CRA needs to know how much income was earned by the estate. A T3 Trust Return will need to be filed each year, 3 months after the anniversary of the death, until the proceeds of the estate have been fully distributed (there are other reasons, too, for filing). And the last T3 Trust Return will likely be required for the partial year, up to the date of distribution. You might want to consider hiring an accountant to prepare these tax returns rather than doing them yourself, and you will need to include the names, addresses and SIN’s of the beneficiaries.

How do you get through this without pulling your hair out? Be extremely organized with your paperwork, and maintain a detailed list of revenue and expenses.

Gregg Medwid is the owner and president of Executor Support, a firm based in Coquitlam, British Columbia, with expertise assisting executors and administrators in settling estates. The project management expertise and customer service focus Medwid brings to Executor Support ensures questions are answered and help is given when it is most needed.

This article is in no way intended to substitute for competent legal advice.

Gregg Medwid, Owner
Executor Support
gregg@executorsupport.ca
604-999-2106
http://www.ExecutorSupport.ca

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