Who should help an executor with estate tax returns?

A reader recently sent me the following question about who should be hired to prepare tax returns for an estate. It's a great question really, since we lawyer are always saying that executors should "hire an accountant" but not everyone knows where to turn.

Here's the question:

"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."

I posted this question to my LinkedIn group called "Canadian Will and Estate Professionals" to see what the accountants in the group (and the other estate lawyers) would say about this. The general answer seems to be that an executor should look for a CA (Chartered Accountant).

However, every person who answered the post commented that the individual accountant's experience with estates and trusts is far more important than the letters after his or her name. I would agree with that.

In larger cities, you can get in touch with large accounting firms who have accountants working exclusively in different areas of tax, such as personal income tax, corporate tax, or estates/trusts. However, not everyone has access to a firm like that. When shopping for an accountant to help you with estate returns, ask how much experience the accountant has with estates. (Note that this is a different question than "do you do estate tax returns?")

You can also ask your estate lawyer for some names, as all of us work with accountants on our files on a regular basis.

One of the people who replied to my post suggested that executors avoid tax preparers, as opposed to accountants. This of course brought a reply from a tax preparer to counter that warning. My experience using tax preparers to work on estate returns hasn't been good. One of my clients who went to a tax preparer to have the deceased's terminal return prepared was told to "go away. You can't do a tax return for a dead person".

That of course was completely wrong; you can and should do tax returns for dead persons and their estates. This is why I agree with my colleagues' advice that the individual's experience is most important. Not all tax preparers are as poorly trained as the one that my client was unfortunate enough to encounter, by any means. Make sure you're comfortable with the expertise of the person to whom you trust your estate returns.

Canada Revenue Agency - what to do when someone has died

Here is an extremely useful link for executors from Canada Revenue Agency. It's called "What to do when someone has died" and contains information about which tax returns need to be filed. It also contains information and forms for dealing with RRSPs and RRIFs of a decceased person. Personally, I would never try to handle an estate without consulting an accountant, but I like to be as informed and prepared as possible to make the most of my consultation. This page is also great for just getting that overview of what your job as executor is going to take. Click here to visit the page. I'll add it to my "interesting links" section so that executors can find the link in the future.

Is a US tax return due?

This link leads to a very useful and straightforward article from All About Estates that will be very helpful if you are the executor of an estate with  a US property. Click here to read it.

Why does a trust have to file a tax return?

Some time ago I posted about the tax returns that an executor must file, including both the final return for the deceased and the trust returns on behalf of the estate. Click here to read that post. I've been asked a follow-up question, that is "why does a trust have to file a tax return?"

The simple answer is that when a person passes away, Canadian law states that a new taxpayer is created. That new taxpayer is the estate. Because the assets in an estate are temporarily held on behalf of the beneficiaries, the estate is a form of trust. A trust exists whenever one person or entity holds property or funds on behalf of another person.

Most estates are completed within a year of the deceased's passing away, unless of course there is a lawsuit to be settled or complicated business affairs to be wound down. For that year, the assets in the estate may earn income in the form of interest, dividends or capital gains. The new taxpayer - the estate - will report that income on a return just as individuals do, and pay tax on it if applicable.

In many estates, money is paid into a trust account for a minor or handicapped adult. Once the money has been paid into this trust specifically for that person, the taxpayer is this new trust, not the estate. If there are no trusts set up in a Will and the executor immediately pays out all assets to the beneficiaries, the executor may not have to file any tax returns for the estate.

My suggestion to all executors would be that you check with an accountant about whether or not you have to file a tax return for the estate. I can give you general information here, but if you consult an accountant you will have the chance to crunch the actual estate numbers and get individualized advice.

Gifting tax audits ensnare 170,000 Canadians

This article from the Globe and Mail talks about taxpayers who have been busted for claiming more as charitable donations than they actually gave. I'm posting it because many Canadians include charitable giving in their estate planning for tax (and other) reasons, and this article shows how it can go very, very wrong if not done through reputable people and firms. Click here to read the article.

What is a T3 tax return?

When a person passes away, his or her executor files a tax return for the last year of the deceased's life. That is a T1 tax return. Executors are sometimes surprised to find that they may have to file a tax return for the estate itself, as opposed to for the deceased person. A tax return for an estate or trust is a T3 return.

An estate or trust is considered a "person" for taxation purposes. Just as a living person files a tax return each year to report income, so does an estate or trust.

An estate's tax year begins the day after a person passes away and continues for one year. Any income earned by the estate during the tax year is reported on a T3 return, and is set off against available deductions and exemptions just as it is for a living person. Income earned by an estate may be in the form of capital gain, dividends or interest. If an estate doesn't earn any income, it may not be necessary to file a T3 return.

If an estate carries on for many years, a T3 return has to be filed for each year. When the estate is wound up and all of its assets have been distributed to the beneficiaries, the executor should request a Tax Clearance Certificate from Canada Revenue Agency to show that all taxes owing have been paid.

I always advise my clients to consult an accountant to help with tax returns for an estate. While lawyers such as myself know the basics of estate tax returns, we are not qualified to complete the returns, and an executor should enlist the help of an accountant for that. Accountants can also give advice on whether tax owing on income earned by an estate or trust can be shared out among the beneficiaries rather than borne by the trust itself.

How do I get a Tax Clearance Certificate

A tax clearance certificate is a notice you receive from Canada Revenue Agency that states that all taxes owing on an estate have been paid. Although it is not the law that every executor must get one, the majority of executors will do so. This is because if the executor goes ahead and distributes the estate to the beneficiaries and then later finds out that there is tax owing, the executor himself might have to pay the taxes out of his own money.

I'm often asked how a person goes about getting a tax clearance certificate. The certificate does not come out automatically; it has to be requested in the right way at the right time. The vast majority of executors that I've worked with have asked the accountant who does the tax returns for the estate to request the clearance certificate. This is because accoutants who are familiar with taxation know how and when to get it.

However, if you want to request one yourself, here are the basic steps:

1. file all of the necessary tax returns for the deceased and the estate;


2. receive the Notice of Assessment for the returns you've filed;


3. fill in a form called TX19, that you can find online here;


4. send the form to your local tax office, along with a copy of the Will, a copy of all probate documents and a statement of proposed distribution.


5. wait.

It takes a long time to get the tax clearance certificate. You should expect to wait several months in most cases. Because of the long wait and the unwillingness of beneficiaries to wait longer than necessary for their inheritance, there is a process in place for making an interim distribution of the bulk of the estate while keeping back enough money to pay the taxes and future expenses. I'll post about that interim process in a separate post.

To go to the Canada Revenue Agency page on clearance certificates, click here.

Can an executor review an aging parent's bank records?

Recently I was asked whether an executor named in a person's Will (in this case the person happened to be an aging parent) could legally go through the person's bank and tax records.

Assuming the person who named you as executor is still alive, then no you don't have the right to go through any private documents or records. The Will has no legal effect until the testator (person whose Will it is) has passed away.

I assume that if this question is being asked, it's because the aging parent is showing some signs of difficulty in handling his or her financial affairs. If so, you are right to start thinking about how you can offer some help. However, the Will isn't going to do anything for you. What you need is an Enduring (or Continuing) Power of Attorney.

The Power of Attorney gives someone the right to give assistance with financial, tax and property matters while the person is still alive. If there are already signs of confusion or memory loss, it might be a good idea to consider an Immediate Enduring Power of Attorney that will allow the helper to start assisting right away.

Another solution to consider is that some jurisdictions in Canada allow the aging parent to sign an agreement with a co-decision-maker. The difference is that a co-decision-maker makes decisions with the aging parent while an Attorney under Power of Attorney makes decisions for the aging parent. It is best to consider the least intrusive ideas first.

If you need to help an aging parent with finances, take action as soon as possible, because you don't want to allow the memory loss to advance to the point where options are very restricted. If you act quickly, your parent will still be able to make his or her own choice of who they want helping them.

Be sure to consult an experienced Wills and Estates lawyer because you don't want or need a "cookie-cutter" document. You want real assistance for your parent.

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".

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.