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As the executor of an estate you likely have many pressing issues facing you at the current time, one of them being ensuring the tax obligations of the estate are taken care of. As the executor, you have the responsibility of making sure the tax returns are properly prepared, filed on time, and payment is made for any taxes owing. If the estate distributes all of its assets before paying all of its taxes, or if a tax return is not prepared correctly and the CRA later reassesses the return after the estate’s assets have already been distributed, the executor will be personally responsible for the unpaid taxes of the estate.
Due to the unique qualities and complexities of Estate taxation, we strongly recommend having the tax affairs of the Estate handled by a professional. At Acuity Advisors we specialize in Estate taxation and can help take the stress out of dealing with the Estate’s tax affairs. We have prepared this information sheet to give you a basic understanding of this process and highlight some significant issues you may face.
Step 1 – Inform the CRA
The first step is to call the Canada Revenue Agency (1-800-959-8281) and Service Canada (1-800-622-6232) to provide them with the date of death. This will allow them to stop benefit payments and transfer them to a survivor, if applicable.
Step 2 – File the Final T1 Income Tax Return
A Final T1 Income Tax Return will need to be filed for the deceased. The due date for the Final T1 depends on the date of death:
If date of death is on or before October 31 the Final T1 is due April 30th of the following year.
If date of death is on or after November 1 the Final T1 is due 12 months after the date of death.
There are some significant differences between the Final T1 return and a typical income tax return. For example, there is a deemed disposition of all the deceased’s assets (investments, real estate, private company shares) at their fair market value which will likely result in capital gains. Additionally, all RRSP and RRIF accounts are deregistered with the full value being taxable on the Final T1. There are many other differences, but to go into detail on each would be beyond the scope of this info sheet.
Because of the unique qualities of the Final T1, the risk of making a mistake by preparing the return yourself or having an unqualified tax preparer prepare it is much higher than with a typical income tax return. An incorrectly prepared return can result in missed opportunities for savings and greater potential for CRA penalties and interest, which ultimately end up reducing the value of the estate.
The deemed disposition rules above do not apply when all property of an estate passes to a surviving spouse. These returns are simpler to prepare and do not require a subsequent T3 return.
Step 3 – File the T3 Trust Return(s)
A T3 Trust Return may need to be filed for the Estate if it has earned any income or disposed of any capital property after the date of death. The Estate can choose any year-end date within one year of the date of death and the trust return is due within 90 days of the chosen year-end.
If it takes more than one year to completely dispose of all the estate’s capital property or the estate continues to earn income for more than one-year, multiple trust returns would be required.
There are certain rules, such as a loss carryback, which are only applicable in the first taxation year of the estate. Because of this, it is imperative to wind-up the estate as timely as possible which means getting started on the process right away.
Step 4 – Obtain a TX19 – Tax Clearance Certificate
The final step is to file a TX19 – Tax Clearance Certificate. After the Estate has filed all the required tax returns, paid all outstanding liabilities, and received its notices of assessment the Request for a Clearance Certificate may be filed. A clearance certificate certifies that all tax amounts the deceased is liable for have been paid. A formal accounting of the distribution of the Estate’s property to its beneficiaries will need to be submitted with the request. If a clearance certificate is not obtained, the executor will be personally liable for any unpaid tax of the deceased/estate.
As an executor, the Estate may compensate you for your services in the form of executor’s fees. These fees are taxable to the executor in the year they are paid, and the Estate must file a T4 or T4A return to report the executor fees paid.
If any beneficiaries of the Estate are non-residents of Canada for income tax purposes, there are additional compliance issues to be aware of. As non-compliance penalties can be up to $2,500 in this area, it is important you advise your tax preparer if any beneficiaries are non-residents so they can determine if any of the compliance issues are applicable.
In summary, the tax compliance requirements of an estate are extensive, and the rules can be very complicated. If the tax returns are not filed correctly and the CRA reassesses the returns after the estate funds have already been distributed, the executor will be personally responsible for any unpaid tax. At Acuity Advisors LLP we specialize in Estate taxation and can help take the stress out of dealing with the Estate’s tax affairs. If you are interested in any of our services, please feel free to give us a call or send us an e-mail.