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Friday, January 22, 2010

Income tax returns that an executor must file

The executor of the estate of a deceased person is responsible for filing tax returns on behalf of the deceased person and also on behalf of the estate. I once had a client who was the executor of an estate who asked a professional tax preparer to prepare the return for the estate and was told that "you can't file a tax return for a dead person" and was turned away. The tax preparer was simply wrong. You can, and must, file certain returns on behalf of a deceased individual.

These are the returns that are required to be filed on the death of a person for whom you are the executor:

1. T1 Terminal Return for the year of death. This is a personal tax return for the person who died, as opposed to his or her estate. It will cover the period starting on January 1 of the year of death and ending on the date of death. For example, if the person died on March 15, 2010, the return would cover the period of January 1, 2010 to March 15, 2010. This return is due on the later of either
a) the normal filing deadline of April 30 of the year of death, or
b) six months after death.

2. Any T1 Returns for the deceased person for previous years that the deceased has not filed. They are due six months after death, but since they are already late and therefore subject to penalties and interest, it is best to get them filed as soon as possible.

3. Rights or Things Return. This return does not apply to every estate. It is a return that is filed when there were amounts due to the deceased person which were not paid to him or her yet at the date of death, and therefore were not included in the last T1 return. Examples of the amounts are unpaid work-in-progress for a professional person, dividends that were declared but paid, and farm crops that were not yet harvested.
This return is due on the later of either
a) one year after death, or
b) 90 days after assessment of the T1 Terminal Return.

Your best bet is to hire an accountant or tax preparer who has experience with estate returns. Not all accountants do the same kind of work, so look for someone whose experience is in taxation or estates. One accountant that I really like for estate tax matters is Alan Sawiak of Kingston Ross Pasnak in Edmonton.

If you'd like to read more about taxation of estates (and hey, who wouldn't?) check out a paper I wrote for the Legal Education Society in 2009 called Taxation of the Average Estate.

48 comments:

  1. ThisEstateStuffIsHardSeptember 6, 2011 at 8:24 PM

    Hi.

    My mom passed away in June 2011. I am one of the co-exectuors. My sister seems to think we need to wait until January 2012 to file my mom's, and her estate's, tax returns. My thought is that once we have all the appropriate paperwork, we can file ASAP, even if it is prior to the end of this year. Can you please advise?

    Also, my mother was to receive an inheritance of approximately $25,000 from my brother's estate (he passed away in 2010) but hadn't before she passed away. The lawyer handling his estate, and acting as the executor, has indicated s/he will pay out her portion of my brother's estate to each of her beneficiaries, according to the percentages outlined in her will (the beneficiaries in both wills are exactly the same). My other sister believes there are "huge tax implications" if we proceed in this manner, regardless of the fact Revenue Canada clearly states most inheritances are not taxable. Can you please advise on this as well?

    ReplyDelete
  2. Hi, this is a good question. In my view, you guys need an accountant who will explain the tax implications of the estate to you and schedule the filing of returns properly.

    I don't see the significance of waiting until 2012, based on what you've told me. In fact, your mother's last tax return is due 6 months after death, which is December 2011. Waiting until January would make that return late.

    I have a question for the sister who thinks that paying out your brother's estate as directed by the will would cause tax issues. The question is, what else would you suggest? If that is the distribution directed by the will, then that is what the executor is going to do. And how "huge" can the tax implications be when the original amount is $25,000 divided by at least three people?

    There is no tax in Canada to a person receiving an inheritance. That is not to say there is no tax to be paid by an estate, depending on the type of asset (e.g, there could be capital gains tax on property) but that tax is paid by the estate, not by individuals receiving an inheritance.

    There is too much wrong information and half-wrong information going around in your mother's estate. I strongly suggest that you executors hire an experienced estate accountant who can keep everyone on track.

    Lynne

    ReplyDelete
    Replies
    1. Dear Lynne,
      You are wrong about the T1 Final due date. It is April 30th of the FOLLOWING year, not the year of death or 6 months after death if the death was between November 1 and December 31.
      http://www.cra-arc.gc.ca/tx/ndvdls/lf-vnts/dth/fnl/d-eng.html

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    2. Thanks for the clarification.

      Lynne

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    3. My mother died in Feb 2015. I will be filing her final tax return this year. What I can't find any information on is if I need to file an 'estate' tax return on any monies earned by the estate account prior to distribution to the beneficiaries while I wait for a clearance certificate.

      Delete
  3. Taxes are owing and estate is empty who is responsible

    ReplyDelete
  4. Hi, thanks for your question. The short answer is that the estate is responsible for the debts of the deceased, as opposed to the executor or the beneficiaries. This means that if there is nothing or very little in an estate, the beneficiaries will get nothing at all until taxes are paid.

    Lynne

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  5. the estate has withheld money to cover income tax and capital gains of a property. How long do we have to wait for this money? the excecutors have previously withheld our inheritance and we feel that they are again. also do you pay capital gains on a property that the deceased lived in?

    ReplyDelete
    Replies
    1. Hello. Your first sentence suggests that the executor has made an interim distribution of part of the estate, and held back a portion. This is very common on estates, and is done so that the beneficiaries can receive some of the inheritance without having to wait until the whole estate is finished. How long do you have to wait? Until the final Tax Clearance Certificate is received by the executor from Canada Revenue Agency. Though I have no way of knowing whether this particular executor is deliberately delaying the distribution, I can tell you that it takes a good 6 months or more (often up to a year) to get that clearance certificate. Perhaps next time you talk to the executor you could ask when he/she applied for the certificate so you can estimate the remainder of the wait time.

      As for paying capital gains on a property, the key to it is not whether the deceased lived in a particular house, but whether that particular house was his principal residence. FOr example, a person could have both a house and a lake cottage, and declare the lake cottage his principal residence for tax purposes. Same for rental or revenue properties. Now if the deceased only owned one house and lived in it, the chances are pretty darn good that it was his principal residence.

      If the property was his principal residence, then no, there is no tax owing when the house goes from the deceased to his estate. If the property has sat in the estate for a long time, and it sounds like it might have done that in your case, there could be tax arising on the transfer from the estate to the buyer.

      Lynne

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  6. Hi Lynne, what if there's no money to pay off income taxes for the deceased? In this case a riff was payed to a beneficiary but there's no withholding applicable.

    The individual had no assets to cover the taxes for a partial year. What action would CRA try to take?

    ReplyDelete
    Replies
    1. I like your attitude - when you say "try to take" rather than "take", I get the impression of someone braced for a fight!

      As a general rule, when there is simply no money in an estate, CRA will write off the debt. You should be aware though that CRA does sometimes pursue the person who received a RRIF or RRSP for the tax, depending on the circumstances.

      Lynne

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  7. I am the executor of an estate, as well as one of the beneficiaries.
    If the estate received only one taxable income (the death benefit) after the date of death, is it best to file an estate tax return, or split this income amongst the 3 beneficiaries stated on the will and file on our tax returns? If splitting is the best way, how would we show this on our return?

    ReplyDelete
    Replies
    1. Hi Katelyn,
      An accountant would be much more useful to you than a lawyer when it comes to this type of question.

      Lynne

      Delete
  8. I suspect no one ever filed a final income tax for my mother, she died 25 years ago. There was little in her estate and what was there went to her spouse,including her pension from work to complicate maters he was under the care of the Public Trustee, I do not believe anyone was ever named as executor.
    Is it to late to file one and if we did would the late penalties be huge and who would be liable?

    ReplyDelete
    Replies
    1. This is something that you really should ask an accountant.

      Lynne

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  9. Hi . Wat does it meant that lawyers sending out 1st copy to beneficiaries . Is it the final and how soon can we get the funds when 1 st copy is out

    ReplyDelete
    Replies
    1. I actually don't know what you mean by this. The first copy of what? Whatever it is, I expect you mean a first draft as opposed to first copy, so it's unlikely to be a final document. A first draft is often meant to be a starting point that is fine-tuned based on feedback from the people who received it.

      Lynne

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    2. Hi . I receive a letter from solicitor notifly inheritance amt from my late aunty . I was ask to email my name n Acc over . But the letter stated tax clearance in UK may take sometime . Can I know how long should I wait to receive the funds? How about insurance payment , will it come with the funds?

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    3. Hi . Can I know in a last will my children n I was the beneficiaries . I got a letter from solicitor about the inheritance to me , but for my both minor they doesn't have any letter from the lawyer . Also what it meant in a last will the very last page stated something Like EQUAL SHARE TO BOTH . Wat does it meant . Pls advise . Deceased will done in UK n presently beneficiaries are in Singapore . Thanks u

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    4. Hi there,
      Yes, tax clearance does take a very long time. It may take months or even close to a year.

      I haven't seen the will you're talking about, of course, but I think I know what it might say. Most of the time, minor children only inherit if their parent (named in the will) dies before the person whose will it is. I suspect your children are only supposed to get something if you're not around to get it. This would explain why they were named in the will, but have not received a notice saying they are getting an inheritance.

      The other possibility is that the Public Trustee was notified on their behalf. If that is the case, you will be able to tell from reading the probate documents. Maybe because of the international nature of the estate, the executor or the lawyer are still figuring out how to properly send the notices to the right people.

      "Equal share to both" means just what it says - that two people named in the will get the same thing as each other from the will.

      You seem to have a lot of questions about the estate, and I certainly don't mind chipping in to the extent that I can, but have you considered hiring a lawyer near you so that you can show her the documents and ask for more specific help?

      Lynne

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  10. Hi .Lynne .
    Wat does it meant in a copy of will , eg ( gross value £100k n Net value £96k ) . Is it meant that net value is after deduction inheritance tax of 40% ? Meaning that £96k will be distribute to beneficiaries? Thanes you

    ReplyDelete
    Replies
    1. Hi. Generally when gross and net values are included, these numbers come from the inventory of the estate assets and liabilities. The liablilities listed will include funeral costs, loans, credit cards, mortgate, etc. It usually doesn't include tax as the amount of tax isn't generally known yet. In your situation it couldn't possibly be a reduction of a 40% inheritance tax (and I make no comment on that because I don't know if that really is the % where you live) but 40% of 100k would be 40,000 not 4,000.

      Lynne

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  11. Hi Lynne what type of person should I be looking for to help me prepare terminal (and other tax returns) for my father who died last year? CA vs CGA vs CMA? I'm so confused. What I want is someone who can assess the tax implications of the estate and handle filing all the appropriate returns.

    ReplyDelete
    Replies
    1. Hi. Please note that I answered this question by way of a new blog post. The short answer, to summarize my post, is that most people working in this area agree that you should seek out a CA, but that the person's experience with estates far outweighs the particular letters after his/her name.

      Lynne

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  12. Hi Lynne,
    My mom owes $7400 in taxes, but has nothing in her estate to pay this. She owns no property, only has some furniture (bed/dressers etc) not worth much. What happens when I file her taxes? I was told by an bank person, that when an estate owes tax, but there is nothing in the estate, then CRA just writes it off. Is this true?

    ReplyDelete
    Replies
    1. Hi,
      CRA will write it off if there is simply no money to get from any sources. If your Mom had an RRSP or RRIF that she left directly to you or someone else, CRA might pursue that even though that asset is not in her estate.

      Lynne

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  13. My husband passed away with no estate, and owed CRA taxes. will CRA go after me ask for the taxes payment. I don't have any estate and any sources of income also.

    ReplyDelete
    Replies
    1. Hi. As a general rule, the CRA doesn't pursue person A when the debt belongs to person B. That includes spouses.

      Lynne

      Delete
  14. Hi, I'm a executor. Who is responsible to pay the penalty fees on overdue income tax from the year of death (money owing to government)? estate or executor?

    ReplyDelete
    Replies
    1. Hi. Normally all taxes, penalties and interest are paid from the estate. The executor would only pay tax penalties personally if the executor filed late, and therefore caused the penalty in the first place.

      Lynne

      Delete
  15. My spouse owes CRA lot and lot of money which he cannot repay. Our house which was left to my husband by his parents has been in the Estates name for over twenty years. can the CRA take our house for payment if it is still in the estates name. Or if we put the house in my name (wife) can the CRA still take our house for payment ?

    ReplyDelete
  16. I am widowed and have a Life Income Fund to be divided 4 ways when I pass. 2 step-children and 2 of my own children. Will the LIF be divided 4 ways with no income tax withheld and my estate would then pay the income tax? Is this the only way I can have this setup.

    ReplyDelete
  17. My mom received a letter from CRA asking that taxes owed by my dad's estate to be paid and stating that my mom is the legal representative.
    My dad didn't have a will and my mom didn't apply for administrator letter. The estate was too small.
    When he died, the condo that was in both their names and was their principal residence, went to my mom; his RRSPs went to me, as the named beneficiary (I'm the only child).
    1. Is my mom the legal rep? If not, can she be personally responsible for the last tax owed? After we paid for the funeral, there was nothing left in the estate - assests that did not have a named beneficiary.
    2. In what circumstances would CRA go after the beneficiary of an RRSP?
    3. My mom is thinking about selling the condo. Can CRA ask for money from the sale of the condo?

    ReplyDelete
  18. Hi
    My mother passed away in march 2007 while I was only 13, when I turned 20 I was finally able to attain her RRSP in 2014. Without any notification from the bank or CRA, the bank account was confiscated and emptied by the CRA. Nobody has returned my calls or given any answers, what recourse do I have?

    ReplyDelete
  19. If there is more than one executor, can only one of the excutor's sign the final tax return ? Thank you.

    ReplyDelete
  20. Our mother passed away April 13,2015. My brother and myself were the beneficiaries of her estate. We paid the probate fees and tax as required by BC Law and as the will stated, divided her estate equally. All of her assets for the most part were held through investments which included a RRIF & a TFSA these were divided between my brother and myself also. Tax slips in my name as a result of liquidating her assets are a T4RIF & a T4A with my SIN # but with my mothers contract numbers referenced. Can I file these with her final income tax even though they name me as the recipient? Also why is there even T4A? I thought a TFSA was exactly that........tax free? Should I have an accountant prepare her final tax return?

    ReplyDelete
    Replies
    1. Definitely consult an accountant on this one.

      Lynne

      Delete
  21. Hi Lynne,

    My Mom passed away in Dec-2015. I am the sole executor in her will. Because I am a California resident, the cross border taxation becomes complicated. So on the advice of an attorney who confirmed that I had not intermeddled, he is working with me to renounce my appointment & to apply for a grant of administration for my brother.

    I wanted my brother to begin filing my Mom's T1 final return before the due date in June-2016. However, the attorney said my brother "does not yet have the authority to act on behalf of the estate. He can engage an accountant as soon as the grant is issued."

    I am concerned the grant will NOT be issued in time to meet the filing deadline. A late filing penalty fee would be quite substantial in our case.

    I contacted CRA to see what can be done to avoid penalty & interest charges. Surprisingly they said they can accept & process a T1 filed by a family member who does NOT have the legal documents required to be established as the legal representative of the estate.

    Under this condition, the T1 is to be filed along with a letter from my brother explaining the situation, copies of the will, death certificate, my signed renunciation & consent forms, plus my brother's signed application for grant of administration. The package is to be mailed to the attention of T1 SPECIALTY SERVICES UNIT in the tax center for my Mom’s location.

    An accounting firm agrees to file the taxes as described above.

    We plan to wait as long as possible before filing, in hopes the grant will be issued in time to avoid any potential complications.

    My question -

    Are there any foreseeable problems for the grant of application process if we have to file taxes before the grant is issued?

    I am hoping that filing taxes & the grant of application are 2 separate & independent processes that will not affect one another.

    Thank you for a very educational column!

    ReplyDelete
    Replies
    1. Theoretically, it's always possible that there could be something in the application that the judge will not accept. They are not rubber-stamped as an administrative process but do actually go to a judge who reads it all and decides whether things are in order or not. However, if the application has been put together by a lawyer with some experience, surely he or she would have spotted any potential issues at the time of preparing the application, and advised you of them.

      Lynne

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  22. Thank you!

    I have follow up questions -

    1.. Is it OK to file the taxes before the grant is issued?

    2.. Would there be any problem in the event that the taxes were file BUT the judge ended up not approving the grant?

    My goal is NOT to cause any problems for the application, AND also file taxes timely to avoid a hefty penalty.

    ReplyDelete
  23. My dad passed away in 2011, all taxes were done as they should be, in 2013 taxes got reassessed and we owe $7000, we are just finding this out now and my co-executor is refusing to pay, am I responsible for the whole amount??

    ReplyDelete
    Replies
    1. No, you and the co-executor are equally responsible. However, I doubt that CRA really minds which one, or both, of you pays it. If you end up paying all of it to avoid further penalties and interest being assessed, you might consider recovering the co-executor's half through the courts.

      Lynne

      Delete
  24. This comment has been removed by the author.

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  25. Hi Lynne ,

    My Mother died in 2007 and had left everything to my daughter who is now 15 years old. The liquidator ( who is my aunt ) had not finalized the estate but the name of my daughter is now written on Municipal taxes etc.. My mother left 2 duplex to my daughter which is co-owned with the liquidator . The question is, do we file taxes for these buildings in my daughters name ?

    ReplyDelete
  26. My mother recently died and I am one of the executors. My mother owned a house with 3 of my siblings. She left her share of the house to them. Is there any taxes that they will have to pay?

    ReplyDelete
  27. Excellent article. Very interesting to read. I really love to read such a nice article. Thanks! keep rocking. Online Tax Return

    ReplyDelete
  28. Our brother passed away on May 30, 2015 so we filed the estate final return for 2015 and paid the taxes owing after we received the assessment. Now we just recd a chq dtd June 16, 2016 for his RCMP pension payable to the estate. Do we now have to file a 2016 tax return or an amendment to the 2015 one even though the funds were recd until 2016? Will there be a tslip issued? We didn't anticipate a pension chq from his employer so thought we had done everything. Now what do we do?

    ReplyDelete
    Replies
    1. This is a question best answered by an accountant, not a lawyer.

      Lynne

      Delete

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