Paying Taxes

Decedent Income Tax Returns

An executor is responsible for filing personal income tax returns for the decedent.

The final personal return is normally due on April 30 of the year following the death, but if the decedent died in the last 2 months of the year (i.e., November or December), the final return is not due until 6 months after the date of death.

If the decedent had not yet filed tax returns for any years prior to his or her death (imagine that he or she died on January 15 and didn't get around to it yet), then you are responsible for filing those previous year returns as well, by their normal due dates.

Tax forms for the decedent's province are available online, as well as links software programs to help you prepare the necessary returns. Note that you cannot use NETFILE for recent decedents.

Filing considerations:

• Requirements: As with any taxpayer, income tax forms generally need to be filed if the decedent earned more than $2 during the year (see CRA filing requirement for a more extensive list of conditions that may require filing even in the absence of any income).
• Time Period: The final return should cover the year of death up until the day of death, after which the estate becomes responsible and must file its own taxes if necessary (see below).
• Deemed Disposition: A decedent's final tax return must treat all capital assets as if they had been sold (i.e., deemed disposition), and pay taxes on 50% of any net capital gains. For example, if the deceased had purchased 100 shares of stock for $10,000 years ago, and the shares are now worth $15,000, you must report the $5,000 gain in value as income, and pay any associated taxes due on 50% of that gain. See Deemed Disposition for important details and exceptions.
• Retirement Accounts: On death, the full value of any retirement accounts such as Registered Retirement Savings Plans (RRSPs), Registered Retirement Income Funds (RRIFs), Group Registered Retirement Savings Plans (GRSPs), and Locked-In Retirement Account (LIRAs) should normally be included in the income reported on the final tax return. However, if the beneficiary of the plan is the decedent's spouse or common-law partner, he or she may choose to roll over those accounts into their own registered accounts, deferring any tax implications.
• Optional Returns: Rather than reporting all income in a single return, you may also use optional returns to declare certain types of income, potentially reducing the total amount of taxes due.

Since the CRA does not collect and administer taxes for Quebec, if you are dealing with a Quebec resident, you may also need to file a Form TP-1-V either online or by mail.

See Preparing Returns for Deceased Persons (Publication T4011) for more CRA information.

Annual Estate Income Tax Returns

An estate must file an annual T3 Trust Income Tax and Information Return (T3 Return) to report any income the estate earned in a given year, until it is completely reconciled and closed. The estate begins existence at the moment of death, so only report income generated by estate assets from that point onwards.

If you dispose of capital property for a loss during the first tax year of the estate's existence, you can elect to include those losses in the decedent's final tax return rather than the T3 Return (this may reduce overall taxes owed).

When you file the first income tax return for the estate, you can also elect to file as a Graduated Rate Estate (GRE), which allows estate income to be taxed at graduated rates rather than the highest marginal rate (for up to 36 months after the deceased’s death). Such an election can result in significant tax reductions, and the GRE election is very popular.

The T3 Return is normally due on March 31 (covering activity during the preceding calendar year). If the estate does file as a GRE, it may also elect to use a non-standard tax year, in which case the due date would be 90 days after the end of the estate's tax year. In addition, a graduated rate election expires 36 months after the death, so if the estate were still open at that point, you would need to file 2 returns for that year: one 90 days after the expiration, and a second one for the remaining period in the normal tax year (so due March 31).

Note that the CRA normally considers the estate's province, for tax purposes, to be where the executor resides (since that is presumably where the management and control is occurring).

Since the CRA does not collect and administer taxes for Quebec, if you are dealing with a Quebec estate, you may also need to file a Trust Income Tax Return (Form TP-646-V).

See T3 Trust Guide (Publication T4013) for more details.

Annual T4 Slips

If an estate employs anyone, it will need to deduct CPP and income taxes from related payments, submit those deducted amounts to the CRA, and deliver T4 slips by February 28 of the year following the payments. In Quebec, it will instead need to deduct QPP, and submit those amounts to Revenu Quebec. While you may initially think that this rule will be irrelevant for your estate, note that executor compensation falls into this category, and thus if you plan to pay executor fees, you will need to consider the estate the "employer", and follow the steps described in CRA: Employer's Guide (Publication T4001).

Annual Trust Tax Filings

If you are overseeing a trust (testamentary or otherwise), it must likely file income taxes every year by March 31 via a Form T3RET (see CRA: Who Must File a T3). Of course, managing a trust is the responsibility of the trust trustee, not the estate executor (see Trusts).

Annual Property Taxes

If the estate contains real property, you must pay any relevant property taxes until the property is either sold or distributed to the heirs. Property taxes are often due in two installments during the calendar year; due dates vary widely by jurisdiction.

One-Time Estate Taxes

There are no explicit federal estate taxes in Canada (although as mentioned above, any net gains in asset values over asset cost bases are considered income in the decedent's final tax return, and taxed accordingly).

There is also no inheritance tax: heirs do not need to report inheritances on their tax returns.

However, provinces do require probate fees, some of which are based on a percentage of estate value (so, a tax by another name). See Probate Costs for provincial details.

CRA Clearance Certificate

While not required, it is best practice to apply for a clearance certificate from the CRA after you have filed all final tax returns and paid any taxes owed (including those from any Notice of Assessments).

Such a certificate allows an executor to distribute estate assets without any personal liability for amounts the deceased or the estate might owe the CRA. The CRA will send an acknowledgement letter within 30 days of receiving your request, and if everything is in order, will issue you a clearance certificate within 120 days (although if the CRA decides to audit, it will take longer).

Regardless of any CRA interactions, if you are dealing with a Quebec resident, you must apply for an authorization certificate from Revenu Quebec before making most distributions. You can use Form MR-14.A-V to apply for this certificate.