This guide is for executors, administrators, and surviving family members trying to understand what comes next from a tax perspective. Filing the deceased’s tax matters is a slower process than most people expect. Even under the best circumstances, getting the final clearance certificate from CRA can take one to two years.

What an executor is responsible for

As the legal representative of an estate, you are responsible to:

• File all required returns for the deceased
• Ensure all taxes the deceased and the estate owe are paid
• Notify beneficiaries which amounts they receive from the estate are taxable

That sounds simple. The complexity comes from the four returns and elections that may apply, depending on the deceased’s assets and how long the estate continues to operate.

The Final Return

A Final Tax Return reports the income earned by the deceased from January 1 of the year of death up to the date of death. It looks like a regular T1, but it is filed with several extra considerations:

• The deemed disposition of the deceased’s capital property
• Whether income belongs on a Rights and Things return instead
• Whether a spousal rollover applies (and whether to elect out of it)
• Available deductions and credits, some of which can be doubled where the elective return is filed

What is “deemed disposition”?

For tax purposes, on the date of death the deceased is treated as having sold all their property at fair market value. Accrued capital gains and losses are triggered and reported on the Final Return. There are exceptions, the largest being the spousal rollover.

Property typically subject to deemed disposition

• Cottage or recreational property
• Land in excess of the principal residence allowance (1.25 acres in most cases)
• Farmland (may qualify for the Qualified Farm Property capital gains exemption)
• Rental properties
• Unregistered investment accounts
• RRSP and RRIF balances
• Shares of a private corporation (may qualify for the Qualified Small Business Corporation Shares capital gains exemption)

The capital gains exemption on Qualified Farm Property and Qualified Small Business Corporation Shares is one of the largest tax-planning opportunities in an estate. We assess whether the deceased meets the criteria as part of preparing the Final Return.

The spousal rollover

Assets that pass to a surviving spouse can roll over at cost. There is no capital gain or loss triggered on the transfer. In some situations the surviving spouse is better off electing out of the rollover and disposing at fair market value, especially when the deceased had unused capital losses or capital gains exemption to absorb the gain. We model both options before the Final Return is filed.

The Rights and Things Return

Rights and Things are amounts the deceased earned but had not received by the date of death. Common examples: declared but unpaid dividends, accrued bond interest, vacation pay owing. These can be moved to a separate elective return that gets its own access to the graduated tax brackets and certain non-refundable credits. Filed correctly, this can reduce or eliminate tax on those amounts. Whether it is worth filing depends on the size of the items and the deceased’s tax situation in the year of death.

The T3 Estate Return

On the date of death the estate comes into existence as a separate legal entity. Income earned by the estate’s assets after the date of death is reported on a T3 Estate Return, not on the Final Return. T3 returns may be filed annually for as long as the estate continues to hold assets. Common items reported there:

• Interest earned on term deposits and GICs
• Dividends from corporate shares and mutual funds
• Increases in value of TFSA, RRSP, and RRIF accounts
• Rental income earned on properties
• Proceeds on the sale of property by the estate
• Deemed proceeds on the transfer of property to a beneficiary
• The CPP death benefit ($2,500)

The clearance certificate

Before the executor distributes the estate’s assets to beneficiaries, they should obtain a clearance certificate from CRA. The certificate confirms that the deceased and the estate have paid all tax, interest, and penalties owed to that date. Without it, the executor can be held personally responsible for amounts CRA later determines were owed.

The clearance certificate process is not fast. CRA assessment of an estate is not routine, and processing reviews and CRA errors are common. Plan for one to two years from the date of death to the certificate.

How we work with executors

We walk executors through every step: gathering the documents, preparing the Final Return, evaluating elective returns, filing T3 returns for as long as the estate operates, and applying for the clearance certificate. Where the deceased had farm property, corporate shares, or substantial unregistered investments, we plan the disposition of those assets to use available exemptions and rollovers.

If you have just been named executor and need a starting point, contact us. We can outline the steps and timing for your specific situation.