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Monday, May 20, 2013

Preparing the deceased's unfiled tax returns may mean CRA gets the whole estate

What if paying late charges and penalties on the deceased's unfiled tax returns means there is nothing left for the beneficiaries? That's an uncomfortable spot for an executor, since doing what he is bound to do will make him pretty unpopular with the family. A reader recently wrote to me about this. Here is her question and my answer"

"My brother passed away a year ago. He never did a tax return since 2004. I am the trustee now as he has some pension money. I am doing the taxes for all the years he never did. Do I have to add late charges and penalties? If so I would imagine there would be nothing left for the siblings."

You are doing exactly what an executor and trustee is supposed to do, in ensuring that all of the unfiled tax returns are taken care of. As a general rule, yes you do have to add late charges and penalties. However, if you are unsure about any specific item on a tax return and you can't find the answer on CRA's webpage, you are safest to ask an accountant rather than a lawyer.

It's possible that the charges and penalties will add up, as you say, to the point where there is nothing left to be distributed to the beneficiaries of the estate. The law says, as I believe you are already aware, that the taxes must be paid in full before the beneficiaries receive anything.

I doubt this will go over well with the beneficiaries; it never does. However, if you are pressured to ignore the late charges and penalties and pay the money to the family members (which CRA will add on anyway even if you don't), please remember this: if you do so, you may well have to pay the money to CRA yourself. out of your own pocket. Many an executor in your position has acceded to pressure from the beneficiaries only to find out that he or she is on the hook personally. Paying out beneficiaries leaves the estate unable to pay the taxes, and an executor who caused that shortfall must make it up out of his or her own funds.

3 comments:

  1. Preparing the deceased's unfiled tax returns may mean CRA gets the whole estate...Something similar to this may have happened in my family...Dad died 2000...not paying his taxes for a while previous to 2000...Mom died in 2009 home etc all in her name...Brother executor says he paid everything of Moms will etc., to Dads debt...I'm just wondering how to get accountability of her will...Did hear of some spending going on (brother) after her death, and that brother(executor) is out of work I request accountabilty from him, but nothing...Dads debt was very old,heard brother was going to apply for monies to be returned from CRA...

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  2. As always, very informative article Lynne!

    Another important note is that the CRA has taxpayer relief provisions in place which may alleviate penalties and interest due to late returns. Of course, this depends on the circumstances involved.

    Here is the link for more information: http://www.cra-arc.gc.ca/gncy/cmplntsdspts/txpyrrlf-eng.html

    Nick

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    Replies
    1. Thanks Nick for that very useful link!

      Lynne

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