Taxes, even in the best of times, are a nuisance and an unavoidable burden. At worst, they can represent an unexpected liability and financial headache. After death, one of the most important duties of the Estate Trustee is to submit and pay taxes on behalf of the deceased’s estate. This post will canvass a few of the estate tax basics every Trustee should be aware of.
What kind of return needs to be filed when someone dies?
The tax return prepared for the year someone dies is called a “Final T1 General Tax Return,” or the “Terminal Return.” The Terminal Return is very similar, but not identical to, a regular annual return.
What is the deadline for a “Terminal Return”?
The deadline for Canadians to file an income tax return is April 30th, unless you or your spouse is a business owner, in which case the deadline is June 15th. The same is true when someone dies, except that the period of the tax return ends on the date of death instead of December 31st. The deadline to file and pay taxes for the deceased is only modified if the date of death is between November 1st and December 31st, in which case it is six months after the date of death instead of April 30th.
Under what name is the return filed?
While a tax return usually lists a person’s legal name, the final return for a deceased person is made in the name of their estate (e.g., The Estate of John Doe).
How does the Terminal Return treat assets?
On death, a person is deemed to dispose of their assets. This disposition must be reported on the tax return based on the market value of the assets on the date of death. This is why you may have heard accountants or estate practitioners refer to death as a major tax event. Once ‘disposed’ of, often the estate encounters a capital gain, the tax on which is applied to 50% of the income earned.
What about the estate’s other tax returns?
It is not uncommon for the assets in an estate to continue to generate income or increase in value while the estate is being administered. Once the estate trustee concludes the administration of the estate (often a lengthy process), these earnings are reported on the estate’s tax return, also known as a T3 Trust Income Tax and Information Return. This return is filed for each year that the estate is active until all distributions are made to the beneficiaries, and the estate is wound up. The income being reported on the T1 and T3 returns is different, therefore the estate is not being double taxed, but the Estate Trustee will have two sets of tax returns to complete (at a minimum).
Taxes are just one aspect of an estate administration that Estate Trustees need to be aware of. As this blog post cannot cover every tax issue a Trustee may encounter, it may be wise to consult with a lawyer or tax professional for specific advice if you are taking on the role of Estate Trustee.
Thanks for reading,
Ian Hull & Marie Kazmer