Estate Taxes: Information for Executors

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When a taxpayer dies in Canada, a number of tax obligations can arise, including preparing and filing personal tax returns for the deceased and estate tax returns for the deceased’s estate. These obligations often become the responsibility of the deceased’s legal representative, the executor or administrator of their estate. Taking care of the taxes is one of the most important roles of an executor or administrator, however it is often one of the most misunderstood obligations.

This blog identifies some of the main tax obligations that executors and administrators need to turn their mind to when they agree to take on their role. These obligations should be discussed with your estate lawyer at the start of the probate or administration process, and with a tax accountant, so that the tax filings are well underway and the risk of delaying any distribution of the estate is minimized.

While this blog contains a general overview of taxes upon death, this should not be relied upon as a complete analysis of tax issues. Instead, executors and administrators should seek the advice of a tax accountant, and refer to guidance from Canada Revenue Agency, and the Income Tax Act, 1985, c 1.

Executor and Administrator liability

When taking on the role of executor or administrator, this role comes with many important duties and obligations, one being ensuring the taxes of the deceased are appropriately filed and remitted to the CRA.

When income taxes are not filed, interest, penalties and fines may accrue, thus increasing the debts of the estate. The executor or administrator of a deceased’s estate have a legal duty to act in the best interest of the estate and its beneficiaries. One aspect of this duty is making sure that the estate’s debts are paid, including that taxes and all other debts are paid. Executors and administrators must also try to minimize unnecessary expenses to the estate (for example, interest, penalties and fines on late taxes). In many cases, a prudent executor or administrator can easily avoid unnecessary interest, penalties and fines on unpaid taxes.

General tax obligations for a deceased person

Typically, the first income tax return that will become due is the terminal T1 (General) income tax return for the deceased. This return generally must be filed by the later of six months from the date of death of the deceased, or April 30 (the personal tax filing deadline) of the following year. In some circumstances, where the deceased was behind on filing and paying their taxes in previous years, there may be several tax returns required to cover any missed previous years, in order to catch up on the deceased’s taxes owing.

If the deceased owned or was a director or officer of a company, you may also need to ensure that the corporation’s tax obligations are being addressed as well. These obligations could include corporate taxes owing, as well as other remittances which can include GST, PST and employee remittances such as EI and CPP. If you are uncertain as to whether or not the deceased had an ownership interest in, or was a director or officer of a company, you should contact a lawyer as soon as possible.

General tax obligations for the deceased’s estate

As well, the executor or administrator is responsible for filing tax return(s) for the estate itself. A T3 (Trust) tax return must be filed within 90 days of each fiscal period of the estate (which begins on the date of death and must end no later than 365 after the date of death). Depending on how long it takes to wrap up the estate, the estate may have several income taxes to file. As this is a different type of tax return than a personal return, many executors find it beneficial to engage a tax accountant who can assist you in preparing and filing these tax returns properly, and within the appropriate time-frames.

Depending on the nature of the deceased’s income, the estate may be allowed to file other income tax returns, and it may be advantageous to do so. This is something to discuss with a tax accountant.

Clearance certificate

The executor or administrator should obtain a clearance certificate from the CRA before distributing any property to the beneficiaries or heirs. Generally speaking, a Clearance Certificate is available after the requisite returns have been filed and after amounts owing by the deceased to the CRA have been paid. If the executor or administrator distributes any part of the estate before obtaining a Clearance Certificate, they may be held personally liable for any taxes owing under section 159(2) and (3) of the Income Tax Act (Canada). It can take significant time to obtain a Clearance Certificate, therefore the process should be initiated as soon as possible with a tax accountant so that the distribution of the estate can occur in a timely fashion.

Other considerations

There are several exceptions to the filing deadlines mentioned above, as well as differing strategies with respect to filing these income tax returns to maximize tax credits and deductions. As such, it is important to speak to a tax accountant as soon as possible after the death of the deceased, so that the tax preparation can get underway, and various strategies can be discussed and employed to minimize the taxes payable to the estate.

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