Final and Estate Returns

Information required

• Last completed personal tax return
• Last Notice of Assessment
• Death certificate
• Will
• List of all assets owned on the date of death
• For securities and real estate, the original cost and the current fair market value
• All slips / schedules / brokers statements for the year of death
• Any unusual income in the year of death (e.g. death benefit)
• Consent Form (T1013 authorizing our firm to contact CRA – signed by executor)

The executor should read guide RC4111 which provides information about settling the affairs of a deceased person.

If last year’s notice of assessment is not available, or if the deceased taxpayer will be claiming losses carried forward or the capital gains exemption, obtain carry forward information from CRA (multi-year data printout). You will need to provide the death certificate, the will and the consent form (T1013).

Administration

The accounting fees to prepare a final and/or estate return normally range from $500 to $1,500 per return, depending on their complexity. A retainer will be requested. Additional charges may apply where there is undue delay in providing information to us or where additional work is required to complete the returns. Such additional work might include:

• Researching fair market values as at the date of death.
• Requesting information from the Canada Revenue Agency or other third parties.
• Where official tax slips are not available and calculations are required to determine income.

The final return must be filed by April 30 of the following year or six months after the date of death, whichever is later. This return includes income up to the date of death. The final return is sent to the Taxation Centre. If a taxpayer dies between January 1 and April 30, a return for the year prior to death must be filed within six months of the date of death.

The Estate return, if required, can have a year end up to one year after death. The return must be filed within 90 days of the year end. The T3 Estate return is sent to CRA, 1050 Notre Dame Avenue, Sudbury ON P3A 5C2.

After receiving the final Notice of Assessment, the executor should consider requesting a Clearance Certificate (TX19) to avoid personal liability for unpaid amounts. The beneficiaries are still responsible for paying any tax owing discovered after the fact. If a clearance certificate is not requested, it is recommended that a reserve of funds be kept for three years following the final notice of assessment. You may decide not to request a clearance certificate if the executor is also the beneficiary or if the adjusted cost base of an asset is difficult to substantiate. A clearance certificate may also be requested for GST and PST. The Request for a Clearance Certificate is sent to the District Taxation Office.

If the deceased was paying tax by installments, no further installments need to be paid.

If it is discovered that previous returns contained errors, consider making a voluntary disclosure to avoid interest and penalties.

Withholding taxes are required on any payments to non-resident beneficiaries.

Final Return

The final return will include all regular income earned to the date of death (salary, investment income, pensions) as well as any special income (death benefits)

The value of any RRSPs or RRIFs is included in income, unless the property is transferred to a spouse or financially dependant children. A child is considered financially dependant if their income in year before death is under $13,814 (may be higher if there is significant school, medical or special care costs). If the child is a beneficiary of the estate, a joint election may be filed on form T2019 to include income on child’s return. If the child is under 18, an annuity may be purchased to age 18 (or for life if there is a physical or mental infirmity).

All property (real estate, shares, funds) is deemed to have been sold at fair market value as at the date of death. Therefore the increase in value of all investments will be included in income (capital gain), unless the property is transferred to a spouse or a spousal trust.

If the deceased owned property eligible for the enhanced capital gains exemption, it may be claimed even if the property is transferred to a spouse by filing an election (70(6.2)). This election may be made on only a portion of the shares owned. It can also be used to transfer a principal residence at fair market value.

The principal residence exemption may be claimed on either the home or the cottage – however only one principal residence is allowed per family per year.

Charitable donations made through the will may be deducted on the final return. Up to 100% of net income may be claimed in the year of death and the preceding year.

Medical expenses may be claimed within any 24 month period that includes the date of death.

A deductible RRSP contribution may be made to a spousal RRSP up to 60 days after the end of the year, if the deceased had contribution room.

If the deceased taxpayer had a severe and prolonged disability, have the Disability Tax Credit form (T2201) prepared and signed by the doctor. This credit can be claimed on either the final return or on the supporting person’s return. The tax reduction is approximately $1,200.

Net capital losses in the year of death, may either:
1) be carried back to offset capital gains in the three previous years, or
2) reduce other income on the final or previous return (this loss must be reduced by any capital gains exemption claimed).

Net capital losses that were carried forward (incurred before the year of death), may either:
1) be applied against taxable capital gains on the final return, or
2) reduce other income on the final or previous return (this loss must be reduced by any capital gains exemption claimed). Loss from 1988 to 2000 must be adjusted to the 50% inclusion rate

Any alternative minimum tax (AMT) carried forward may be deducted.

A beneficiary should consider registering for HST prior to receiving any property subject to HST (e.g. commercial property).

CRA Guide T4011

Rights or Things

A separate return can be filed for rights or things. Rights or things include:

1. any salary, commission, vacation pay, or bonuses owed to the deceased on the date of death
2. Old Age Security and CPP benefits due and payable before the date of death.
3. bond interest earned before death, but not paid or previously reported
4. unpaid dividends declared before the date of death
5. work-in-process of a professional who had elected to exclude work-in-process previously

The basic, age, spousal and caregiver credits can be claimed in full on this return as well as the final return. The return should indicate Subsection 70(2) in the top right corner of page 1.

The disability, tuition, medical and donation credits may be split between returns.

Estate Return

The CPP death benefit is reported on the T3 Estate Return or the recipient beneficiary’s return. It is not included on the final return.

Income earned by a testamentary trust may be taxed in the trust if the income is not paid or payable to a beneficiary or if an election under 104(13.1) is made. However, if the beneficiary’s income is low, it may be more beneficial to transfer some or all of the income to the beneficiary (a T3 supplementary slip and T3 summary will be required).

Donations made in the will can be claimed on the final return.

Any investments that have gone down in value after death should be sold within one year. A capital loss realized by the estate within its first taxation year may be carried back to reduce capital gains reported on the final return.

If the value of an RRSP declines after death, the loss is lost unless the actual securities are transferred.

Trustee fees for advice or services in respect to shares or securities may be deducted if it is the person’s principal business to do so.