What tax returns must an executor file?

The rules for filing tax returns on an estate are the same all across Canada, as tax laws are federal. The Income Tax Act directs that a person acting as an executor must file certain tax returns on behalf of the deceased person, and on behalf of the estate. I have actually had a file where I instructed a client/executor in his duty to file on behalf of the estate, and he was turned away by the tax preparer on the basis that "you can't file a return for a dead person". Well, you can, and if you're the executor, you will probably have to do just that.

The first return that an executor must file is the T1 Terminal Return for the year that the person died. A T1 is the same return that each of us files each year. The return is for the period that starts on January 1 and ends on the day the person passed away. For example, if a person dies on July 12, the return is prepared for January 1 to July 12. As a general rule, the executor has six months to file this return, but can choose not to file until April 30 of the next year (when everyone else files taxes) if that is more than six months.

The executor must also find out whether the deceased person failed to file any tax returns for previous years. If so, the executor must have those completed and filed. Again, follow a general rule of six months as the deadline, but keep in mind that because these returns are overdue, there could be penalties or interest accumulating.

On some estates, the executor should also file a "rights and things" return. This is filed when there were sums of money due to the deceased that had not been paid to him or her yet as of the date of death, and because of that had not been included in the T1 Terminal Return. Some examples are work-in-progress, farm crops not yet harvested, and dividends that were declared but not paid.

The executor usually must also file a tax return on behalf of the estate itself. The time period for this return starts on the day after the person died, and runs for one year. Most estates are wrapped up in a year and won't require more than one return, but if the estate does go on longer, a return should be filed for each year. This return is known as a T3 Trust Return.

In some smaller estates, no T3 is needed because the estate itself earns no income. This is something you should ask an accountant about.

I strongly advise executors not to prepare the returns themselves, but to find an accountant who is familiar with estates and trusts. This protects the executor personally in a couple of ways. First of all, getting accounting advice means you are less likely to miss important items on the return, or to miss deadlines. Secondly, if by some chance there is a mistake that leads to a financial loss on the estate, you are protected from personal liability by having sought out professional advice instead of just "winging it".