The death of a taxpayer in Canada can have significant tax implications for the deceased’s estate and for the beneficiaries of the estate. It is important for the executor or administrator of the estate to understand their tax obligations in order to properly administer the estate and ensure that all tax obligations are met. In this blog post, we will discuss the various tax implications that arise upon the death of a taxpayer in Canada.
To initiate the process, an executor or administrator of the estate needs to notify the Canada Revenue Agency of a death event as soon as possible via mail or telephone @ 1(1800)929-8281.
T1 Final or Terminal Income Tax Return – T1 DoD (Date of Death) Return
First and foremost, it is important to note that the deceased is considered to have disposed of all of their capital property at fair market value immediately before their death. This means that any capital gains or losses that would have been realized if the property had been sold will be realized at the time of death. The executor or administrator of the estate will need to file a T1 final or terminal income tax return for the deceased and report any capital gains or losses on this return.
Filing Deadline:
For the fiscal year 2022, if a taxpayer, unfortunately, passes away between January 1st and October 31st of that year, the respective due date for their T1 final returns is on April 30, 2023, unless they were self-employed in which case it’s June 15, 2023. On the contrary, should the taxpayer pass away between November 1st to December 31st of 2019 inclusively, then these same taxes must be paid within six months after their death.
Tax Instalments:
After the date of death, no further income tax instalments are required to be paid. However, any instalment that is due prior to the date of death must still be paid on time; otherwise, the Canada Revenue Agency (CRA) will charge arrears interest on those late payments.
Penalties:
Filing the T1 final income tax return late triggers a penalty from the CRA. This penalty is 5% of any remaining balance owing, plus an additional 1% penalty per full month that the filing remains overdue, up to 12 months maximum. Furthermore, interest will also be enforced by the CRA on both this penalty and the balance due.
Employment Income:
Any employment income received before the date of death must be reported on the deceased’s T1 final or terminal income tax return. Any post-death receipt of employment income may either be reported there or on a rights-or-things return, depending on what the executor decides.
Old Age Security (OAS) Pension:
Any OAS pension received before the date of death must be reported on the deceased’s T1 final or terminal income tax return. Any post-death OAS pension payments may either be reported there or on a rights-or-things return, depending on what the executor decides.
Canada Pension Plan (CPP) Pension:
Any CPP pension received before the date of death must be reported on the deceased’s T1 final or terminal income tax return. Any post-death CPP pension payments may either be reported there or on a rights-or-things return, depending on what the executor decides.
CPP Death Benefits up-to $2,500:
The Canada Pension Plan (CPP) death benefits are not reported on the deceased’s T1 terminal income tax return. Rather, they can either appear on the decedent’s estate’s T3 trust income tax return or, if applicable, directly to the beneficiary through their individual T1 personal income tax return.
Investment Income (Interest, Dividends and Other Income):
Any investment income received from January 1st to the date of death must be included on the deceased’s T1 terminal income tax return. Any investment income payable but not received before the date of death must also be included on the final return.
Deemed disposition:
Upon passing, taxpayers are deemed to have disposed of all their capital assets at the fair market value that is applicable on the date of death. Determining the value of the decedent’s assets can be relatively simple in certain cases, such as when they possess investments including mutual funds or publicly traded stocks. However, determining the value of real property and shares in private corporations can be more difficult. To get an accurate estimate, it’s best to consult a professional valuator like a real estate appraiser or Chartered Business Valuator.
RRSPs and RRIFs
When a taxpayer passes away, any registered accounts such as RRSPs and RRIFs they own are deemed deregistered and the fair market value of all assets held within those accounts is added to their income for that year. Unexpected death or unwise withdrawals from these accounts can result in high taxes due upon deregistration, leaving grieving loved ones with an unwelcome financial burden.
Spousal Rollover:
If the deceased’s will specifies that their assets are to be transferred to a surviving spouse, there exists some relief from taxes. By using spousal rollover, any income as a result of deemed disposition at the date of death to be included on the deceased’s final T1 tax return can be deferred for their spouse’s entire lifetime
If a surviving spouse inherits the deceased’s registered accounts and then transfers those assets are then transferred to their own registered accounts, any amounts that would otherwise be included in income can instead be deferred until they take money out of the account or pass away.
Net Capital Losses:
Capital losses realized in the year of death may be carried back and applied against capital gains for the last three preceding tax years from the date of death.
Net capital losses in the year of death (taxable capital losses less allowable capital gains) may be applied to reduce the income from any source in the year of death or the tax year immediately preceding death.
Additionally, any net capital losses carried forward from past years may be used to decrease the income generated from any source in the year of death.
TFSAs/RESPs:
There are no tax consequences to the deceased holder of a tax-free savings account (TFSA) and deceased subscriber of a registered education savings plan (RESP). No reporting for TFSA and RESP is required on the T1 final or terminal income tax return.
Principal Residence:
The principal residence exemption may be claimed in respect of gains on the residences owned by the deceased at the date of death. Any loss on a principal residence would be deemed to nil as a loss on a personal use property.
Medical Expenses:
If any medical expenses were paid by the deceased individual or their spouse for either of them, as well as any dependents below 18 years old within a 24-month span that includes the date of death, they can be claimed on that deceased’s T1 final (terminal) income tax return. Any funeral expenses incurred are considered personal expenses and not deductible for income tax purposes.
Charitable Contributions or Donations:
Any charitable donations made within a tax year can be claimed against up to 75% of the net income reported on the T1 personal income tax return. In special cases such as death, this limit is increased to 100%, allowing for full deduction of all donations from the deceased’s terminal T1 income tax returns.
Rights-or-Things Return:
The executor or legal representative has the option to file a “Rights or Things” return. Rights or things are the amounts that:
- have been earned prior to death
- are unpaid at the time of death
- are payable at the time of death
- would have been included in the income of the deceased when received
Right or things include salary, vacation pay, sick days, commissions owed and dividends declared prior to but acquired after death. Even OAS & CPP income earned post-death must be reported on this return. Submitting this return is optional, however, if you do choose to submit it then all rights and possessions must be accurately reported.
This return must be completed no later than either:
- One year post the date of death or;
- 90 days post the date of receipt of notice of assessment or reassessment for the final return.
For more details on the T3 trust income return filings for the estate, please click here.
Raj Pandher is a qualified CPA (cross border tax accountant), an associate member of Society of Trust and Estate Practitioners (STEP) Canada and a Certified Executor Advisor (CEA) who assists the executors in filing of T1 final or terminal income tax returns for the deceased and T3 trust estate tax returns for the deceased’s estate.
