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Competitive Edge Blog

  • alison28006

Death and Taxes

When someone dies, what tax returns need to be filed? Why are these returns required? When do they need to be filed?

Nothing in life is certain, except death and taxes! There are 4 considerations in how tax returns are handled after someone dies in Canada.

1) In the year that someone dies, a "Final T1 General Tax Return" is filed, which is basically a regular tax return for all the income in the year up to the date of death, plus a few differences depending on the deceased's particular situation.

2) When someone passes away before October 31, the due date for that year's tax return is the same, April 30 or June 15, 2023 if the person was a sole prop.

  1. If they passed between November 1 and December 31, 2022, the deadline to file is six months to the day after their date of death - so if Sally passed away on December 31 and was a sole prop her final tax return would be due on June 30th, instead of June 15th.

3) When a person has passed away, their tax return will be titled: The Estate of Jane Doe, rather than their legal name, like Jane Doe. In addition to notifying CRA of the death of your family member, someone also needs to be appointed as the legal representative of the estate with CRA to manage and close off the final affairs. This is usually the named executor if there is a will or the court appointment executor if/when probate is opened.

4) The last major difference is this one. It is very significant to note that Canadians can own a variety of assets that are not subjected to taxes on an annual basis but are subject to taxes at the date of death.

  • As in the year of death, we cannot take our assets and possessions with us. We pass them along to family or otherwise. But this means that death is a huge tax event, as everything we own such as our principal residence, TFSA, RRSP, RIF’s to name a few are deemed “disposed” of at the date of death and are included in the deceased taxpayers income for the year.

  • Each one of these items has a special tax treatment depending on who is inheriting the asset. I am not going to get into all the nuts and bolts here but of course advise you to seek a tax professional’s help to mitigate the overall tax burden the best that it can be.

  • Often times the majority of a person’s wealth is tied up in these kinds of long term assets, so while they were alive year to year they may have only be in a 20% marginal tax bracket, but now in the year of death having to include some or all of these other deemed disposed assets can suddenly 1. increase the taxable income amount as well 0as 2. increase the marginal tax rate to upwards of 50%. Thereby creating a many thousand dollar final tax bill for the deceased.

Final returns report income up to the date of death. However, the process does not end there, as income may continue to accrue on assets after death, which is when an estate is created, and the estate continues until the executor wraps it up. Any taxes owing on income earned after the date of death belong to the estate, and taxes must be paid by the estate prior to any residual being paid out to the beneficiaries.

There is no inheritance tax in Canada, but depending on the province of death, you may have to open probate. Proactive tax planning can be done to ease the tax burden on a family when someone is near the end of life. A family member can be added as joint tenant of the primary residence to ease probate; or an investment can be liquidated before death to avoid income being earned after death and the requirement for an estate tax return.

Taxes are predictable, but someone's passing isn't something we can fully prepare for in advance. With the help of a Certified Financial Planner and a tax accountant I recommend learning about your options, and how to possibly save or defer some taxes. You can reduce the tax burden for our loved ones by figuring out your estate planning, sooner.

Until next time,

Christine Walters

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